# **5.2. Complete elimination of subsidies**

# **5.2.1.Direct effects**

Recall that we are estimating the complete elimination of subsidies as of October 2014, after the 2014 reforms and when subsidies on gasoline had been already removed. Therefore, simulations concern petroleum products that still benefitted from some subsidies and the food products that were not affected by the 2014 reforms. The products considered are therefore LPG, diesel, sugar, flour and electricity.<sup>10</sup> The baseline data for these simulations are those in Table 6 (October, 1<sup>st</sup> , 2014).

The total impact of subsidies removal on households is estimated at 18.9 bn. MAD or 568 MAD per capita (Table 12). The impact rises with income groups from 2.3 bn. for the lowest quintile to 5.7 bn. for the upper quintile. By far, the largest contributor to this impact is LPG, which alone contributes for 11.8 bn., followed by electricity with 2.4 bn. In terms of household welfare, the elimination of subsidies reduces welfare by 3.3% on average with the impact being more than three times as large for the poorest quintile (-6.7%) as compared to the richest quintile (-2.0%).

**Table 12 – Welfare Effects of Subsidies Elimination (Direct effects)**

||**Q1 **|**Q2 **|**Q3 **|**Q4 **|**Q5 **|**Total**|
|---|---|---|---|---|---|---|
|LPG|-1,405.9|-1,844.9|-2,321.1|-2,641.6|-3,619.3|-11,832.8|
|Diesel|-0.6|-2.3|-10.5|-29.2|-257.2|-299.8|
|Sugar-piece|-232.0|-253.4|-252.5|-254.5|-217.7|-1,210.2|
|Sugar-cube|-0.1|-2.9|-9.6|-36.2|-129.7|-178.6|
|Sugar-granul.|-70.0|-97.4|-112.0|-125.8|-160.1|-565.4|
|Flour-free|-33.6|-91.1|-138.0|-233.1|-291.9|-787.6|
|Flour-nat.|-397.2|-451.5|-363.1|-285.4|-123.4|-1,620.6|
|Electricity|-197.9|-328.6|-444.4|-560.7|-917.0|-2,448.6|
|**Total**|**-2,337.4**|**-3,072.1**|**-3,651.2**|**-4,166.6**|**-5,716.4**|**-18,943.7**|

Source: Authors’ estimations using SUBSIM.

This reduction in welfare results, in turn, in a significant increase in the poverty level from an estimated 4.1% before the reform to 5.2 % after the reform. It should be noted here that the low poverty level observed before the reform is a rough estimate of the true poverty level using the same poverty line used for the last available survey (2007) inflated to 2014 prices. Thus the actual poverty level is probably inaccurate. But what is of interest here is the relative change in poverty which is estimated at +27% (5.2/4.1*100). This is a very large increase as compared to the initial poverty level. Over 42% of this increase is explained by the removal of subsidies on LPG alone. We can also observe an increase in inequality estimated with the Gini coefficient, from 42.4 to 43.3, a relative increase of about 2%. The removals of subsidies on certain products which are particularly pro-rich such as diesel contribute to reduce inequality but, on aggregate, inequality increases.

The elimination of subsidies would naturally save to the government the equivalent of total subsidies or 18.9 bn. MAD. However, it is instructive to see what would be the cost to the government of providing a universal cash transfer to all households that would be able to maintain the pre-reform poverty level unaltered. This amount is estimated at 10.4 bn. and would result in a total government savings of 8.5 bn. (Table 13). This should be considered as an upper bound for transfers. If the government is able to target

> 10 As discussed, the water sector does not receive water subsidies from the budget.

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