Energy Subsidy Reform and Poverty in Arab Countries: A Comparative CGE-Microsimulation Analysis of Egypt and Jordan

This study simulates the macroeconomic and distributive impacts of real proposed (by local policy makers) energy subsidy reforms in Egypt and Jordan. To do that, we develop a dynamic CGE-microsimulation model that is able to reconcile the general equilibrium effects of the reform and the individual- and household-specific distributive effects. While the nature of the proposed reforms differs in the two countries, the study underscores the need, in both countries, for reform to generate fiscal savings to boost private investment and increase economic growth. It also shows that the reform alone would further exacerbate poverty through increased consumer prices. However, a modest reinvestment of fiscal savings into cash transfers creates a win-win scenario of reduced poverty without significantly sacrificing the fiscal and growth benefits from the reform. Impacts (prices, growth, fiscal savings, poverty) are greater in Egypt due to the extent of proposed reforms and the fact that a larger share of the energy products concerned are consumed directly by households, while in Jordan the major effects come from the increase in intermediate input costs which generate a fall in the aggregate demand and, so, in labor demand.