Poverty and social impact analysis of increased natural gas prices and selected social guarantees in Ukraine

To date, prices of gas and other energy used by households in Ukraine have been generously subsidized by the Government. However, suppressed energy prices lead to excessive use of gas and an inefficient level of investment into energy savings. In addition, Ukraine’s dependence on imported gas contributes to trade imbalances and growing pressure on the devaluation of the national currency. Thus, the issue of raising gas prices remains critical for the population of Ukraine. In particular, this step was also envisaged in an ambitious reform agenda announced in mid-2010 aimed at restoring stable and high economic growth. However, this policy may have an unprecedented impact on the welfare of population. This paper presents the main findings from the simulation of gas price shocks, provides an overview of social support programs in Ukraine and analyses their efficiency. Based on the analyses, the paper draws two major conclusions. First, increases in gas prices result in welfare losses in all household categories, with a more profound impact on urban households. Second, the current social welfare programs are not very efficient in targeting the poorest households. Reform of the social welfare system is thus required to ensure a safety net for poor households in times of gas price hikes. In order to assist national decisionmakers in solving these issues the paper presents general policy recommendations.