The Bretton Woods institution believes that the phasing out of energy subsidies can help resolve the macro-fiscal crisis, improve the financial viability of public enterprises and stimulate the green transition.
The World Bank has just published yesterday the Spring 2023 edition of the Monitoring Report on Tunisia’s economic situation. Entitled “Reforming Energy Subsidies for a More Sustainable Tunisia,” the document has two main parts.
Part A analyzes the impact of rising global commodity prices on the country’s economy. This increase has increased the trade deficit, in turn rising from 10.2% of GDP to 15% in 2022, when the share of energy and food represents 69% of the deficit. Global inflation has, for its part, led to an increase in subsidies granted to consumers, particularly in the field of energy, thus exerting pressure on the budget and the public debt. With limited access to international financing, the Central Bank of Tunisia continued to refinance the national banking sector through the purchase of Treasury bonds. Local debt financing remains a concern and inflation has reached its highest level in 30 years, again due to the global rise in prices.
As for part B, it insists on the importance of reforming energy subsidies, which are increasingly costly for Tunisia. The paper argues that reforming the energy subsidy system could help reduce tax costs, streamline imports, improve the financial viability of state-owned enterprises and boost the green transition.
Reform for a sustainable economy
Soaring global energy prices have put Tunisia’s energy subsidies under pressure, as most fuel, electricity, gas and liquefied petroleum gas (LPG) prices continue to be below collection costs. This system of subsidies has become increasingly costly for Tunisia to maintain, undermining macro-fiscal sustainability and putting pressure on the trade deficit, at a time when international energy prices are high. Over the period 2011–2021, the subsidy averaged 2.1% of GDP and jumped to 5.3 of GDP in 2022. The subsidy system has also created significant financial challenges for public enterprises in the electricity sector. energy, Stir and Steg, because the State is less and less able to mobilize the resources necessary to cover their losses. These financial difficulties have hampered the ability of public companies to plan and invest to guarantee security of energy supply. By affecting the financial viability of Steg and keeping energy prices artificially low, the subsidies also harm the green transition.
In this regard, the phasing out of energy subsidies can help resolve the macro-fiscal crisis, improve the financial viability of public enterprises and stimulate the green transition.
What impacts on the most vulnerable households?
However, it is essential to consider measures to mitigate the impact of the reform on the most vulnerable households. Apart from fuel subsidies, which mainly benefit wealthier households, other energy subsidies also benefit lower-income households. A mix of tariff increases and distribution of cash transfers could help neutralize transition costs for low-income households. In addition, accompanying subsidy reforms with programs to help businesses and households invest in energy efficiency and self-production can help contain inflationary pressure on households and businesses, and maintain business competitiveness while by supporting the green transition. Financial restructuring and modernization of public enterprises would be essential complements to subsidy reforms to enable them to restore their financial viability.
63% of total grants
Energy products are subsidized to varying degrees depending on government policy and international energy prices. While the composition of energy subsidies between products has varied over the years, petroleum products have generally accounted for the majority of subsidies. In 2021, they accounted for 63% of total subsidies, with the rest allocated to electricity and natural gas. Despite their dominant share, petroleum products (with the exception of LPG) are generally less subsidized — in proportion to the cost — than electricity and natural gas. In 2021, when the price of Brent was USD 70, around 15% of the fuel price was subsidized compared to 30-40% for electricity and natural gas. LPG for domestic use is the most subsidized, at 70%.
This subsidy regime has become increasingly costly for Tunisia to bear and maintain, undermining macro-fiscal sustainability and increasing the trade deficit, especially when international energy prices are high.
15% of public expenditure
Energy subsidies have been a major expenditure in Tunisia’s budget, averaging 6.4% of public expenditure and 2.14% of GDP over the period 2011–2021. But the recent increase in global commodity prices has pushed up energy subsidies, which accounted for 5.3% of GDP in 2022 and 15% of government spending, confirming the strong correlation of subsidies with the international price of oil and the exchange rate and highlighting Tunisia’s growing dependence on energy imports. While in 2010, only 7% of imports allowed the country to meet its energy demand, in 2022, imports accounted for 50% of demand. This translates into an energy import bill of 15 billion dinars, or 10.3% of GDP, which explains most of the increase in the current account deficit in 2022. For its part, the government estimates that energy subsidies should decrease by 26% in 2023, thanks to more favorable international prices and tariff adjustments, while they would still represent 5.7 billion dinars (i.e. 3.5% of GDP) . But the strong fluctuations in the international price of oil and the depreciation of the dinar mean that the actual subsidies are much higher than the subsidies budgeted on the basis of the initial projections of the price of fuel and the exchange rate, as was the case in 2022. And with increasingly tight fiscal space, the government has for several years struggled to close these gaps, leading to financial deficits and increased indebtedness of state-owned enterprises absorbing the cost of undisbursed subsidies.
Growing insolvency risks
Steg, for example, has been experiencing financial deficits since 2011. In 2021, its accounting deficit amounted to 377 million dinars, but its real deficit would have been higher without the 2.9 billion dinars of short-term loans and late payments to suppliers. The financial deficit and debt are expected to increase even more in 2022 given the surge in the international price of oil. These strategies for covering financial needs are costly both for public enterprises—because short-term loans are expensive—and for suppliers, whose cash flow remains uncertain. Growing deficits and difficulty in controlling cost risks reduce the ability of state-owned enterprises to plan and invest to ensure security of energy supply, while the financial viability of state-owned energy-related enterprises is not only fundamental to maintain the sustainability of public finances, but it is also essential to ensure the sustainability of the sectors. The Steg is a good example. The deep financial crisis that the company is going through due to the difficulty of the State to cover the losses related to the subsidies, including the liquidity constraints and the growing risks of insolvency, compromises its ability to invest. This situation may in turn compromise its ability to ensure a reliable supply of electricity to the country at a time when electricity consumption has increased at a high rate, with an average increase of 3% per year between 2010 and 2021.
The lowest production in renewable
Risks associated with Steg’s financial viability and maintaining artificially low energy prices and subsidies also undermine the green transition. In the case of private investments in renewable energies, the Steg is both the purchaser of electricity and responsible for integrating renewable energies into the transmission network. Its financial crisis therefore compromises its ability to buy electricity from independent producers producing renewable energies. In addition, low electricity prices associated with energy subsidies directly reduce private incentives to invest in renewable energy. In fact, for self-producers, the savings made thanks to the production of renewable energy are proportional to the prices in force. Partly because of these disincentives, the growth of Tunisian renewable production has remained sluggish. In 2021, Tunisia was among the countries with the lowest share of renewable energy in electricity production, registering very little progress over the last decade, unlike countries with similar geo-climatic conditions such as Tunisia. Morocco, Jordan, Turkey or Kenya. For similar reasons, low fuel prices have also stifled investment in energy-efficient and environmentally-friendly technologies, notably in the transport, building and industrial sectors, thereby undermining the overall green transition of Tunisia.