Energy subsidies Reform in Tunisia: A combined macroeconomic and microeconomic simulations

Energy subsidies are among the most pervasive and controversial fiscal policy tools in Tunisia. Their reform continues to be difficult, from a political, economic and social perspective, due to the original objectives of these measures—such as the need to protect the most vulnerable households, enhance economic growth and to foster domestic industrial growth. Due to the unsustainable budget implications, a new strategy has been initiated by the Tunisian government to reform the subsidy system in the energy sector while striking a balance between improving fiscal and equity considerations without increasing social tensions. The model shows that reducing energy subsidy generates a fiscal space for the Tunisian government. In the first bunch of simulations we supposed that this ‘saved’ amounts are totally directed to the reduction of fiscal deficit. This policy enhances the fiscal sustainability and reduces indebtment but have a negative impact on growth and job creation. The fiscal incidence by decile shows that the poorest groups benefit of energy subsidies more that the richest groups. This result shows the large reliance of subsidies as instrument for redistribution.