Abstract
Subsidizing fuel products and electricity has a long history in Yemen. Falling hydrocarbon revenues and the increasing fiscal deficit in 2014 urged the government to adjust fuel prices and initiate subsidies reform. This chapter explores the distributional and fiscal impacts of different reform options including the actual increase in prices in August 2014, focusing on fuel and electricity subsidies. The distributional analysis shows that only kerosene subsidies are pro-poor, and that subsidies for other products are pro-rich. Full removal of the remaining subsidies on LPG, diesel, and gasoline is expected to generate a negative impact increasing poverty by 1.1 percentage points. Full removal of subsidies on electricity is not a feasible option to consider. Instead, a more realistic reform would be introducing more brackets and a progressive increase in tariffs partially removing electricity subsidies. In terms of political economy, the history of unsuccessful reforms in Yemen suggests that successful implementation of subsidies reforms depends crucially on the right timing and a sound compensation scheme with targeted benefits. In addition, adequate public campaigns are needed to inform the public about the benefits of reforms. Finally, introducing automatic adjusting mechanisms of domestic prices to international commodities prices by law may reduce the politicians’ ability to manipulate prices.
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- 1.
Electricity production benefits from fuel subsidies because the Public Electricity Corporation purchases mazut, diesel, and natural gas at subsidized prices compared to domestic and international prices (Vagliasindi 2014).
- 2.
A new household budget survey is in the field in the Republic of Yemen, and the plan is to have welfare aggregate in the middle of 2015.
- 3.
SUBSIM is freely available to download from www.subsim.org.
- 4.
Updating to 2014 prices would be preferable, but would require finalized information on prices, population, and GDP per capita growth, which were not available at this writing.
- 5.
For illustrative purposes, the subsidy on mazut used for electricity was higher than 4.5 times than retail price. Overall, the cost recovery price is about 0.3 cents per kwh, which is much higher than usually considered adequate to cover most of capital costs of 0.08 cents per kwh (Kamives et al. 2005).
- 6.
Expenditures on diesel and gasoline were obtained from data private cars’ weekly diaries. To separate them into expenditure on diesel and gasoline we used information on road sector gasoline and diesel consumption in the Republic of Yemen in 2009 from www.tradingeconomics.com. According to this website, diesel consumption in the country was 43 kiloton of oil equivalent, and gasoline consumption was 1,530 kiloton of oil equivalent in 2009. Using information on prices, share of diesel expenditures was about 1.4%, and it was applied to fuel expenditure on private cars from household budget survey.
- 7.
Figs. 8.3 and 8.5 were replicated for fuel products, including kerosene, and based on August 2014 prices. Results are shown in the annex. The role of fuel products in household budget does not change. The only important addition is that kerosene was more important for the poor than for the rich and subsidies on this product were pro-poor.
- 8.
It is also important to remember that many poor households in the Republic of Yemen do not have access to electricity.
- 9.
Issues with practical implementation of extending the number of brackets are beyond the scope of this paper.
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The author thanks peer reviewer Guido Rurangwa (senior country officer) and Paolo Verme (task team lead) for their useful comments and suggestions on how to improve the chapter. The author also thanks Lire Ersado, Jianping Zhao, and Amir Mokhtar Althibah for their advice and help.
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Annex
Annex
See Figs. 8.7, 8.8, 8.9, 8.10, 8.11 and 8.12; Tables 8.10, 8.11, 8.12 and 8.13.
Share of expenditures on fuel products in total budget across the distribution. Source World Bank calculation based on extrapolated HBS 2005. Note HSB household budget survey
Per capita subsidies on fuel products across the distribution based on August prices. Source World Bank calculation based on extrapolated HBS 2005. Note HSB household budget survey
Different electricity tariff structures, in Yemeni rials. Source World Bank compilation. Note kWh kilowatt hour; YR Yemeni rial (color figure online)
Distribution of households by tariff brackets. Source World Bank calculation based on extrapolated HBS 2005. Note HSB household budget survey; kWh kilowatt hour
Expenditures on electricity versus total consumption per capita. Source World Bank calculation based on extrapolated HBS 2005. Note HSB household budget survey; kWh kilowatt hour
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Atamanov, A. (2017). Energy Subsidies Reform in the Republic of Yemen: Estimating Gains and Losses. In: Verme, P., Araar, A. (eds) The Quest for Subsidy Reforms in the Middle East and North Africa Region. Natural Resource Management and Policy, vol 42. Springer, Cham. https://doi.org/10.1007/978-3-319-52926-4_8
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