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Fuel Subsidy Reforms : Lessons from the Literature and Assessing the Price Shock for Different Sectors through an Input-Output Table in the Case of Angola

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  • Bao We Wal Bambe
  • Chadi Bou Habib
  • Joaquin Marandino Peregalli

Abstract

Global oil prices have surged in recent decades, significantly hurting household living standards. In response to rising prices, many governments introduced fuel price subsidy to protect the most vulnerable populations. The literature is almost unanimous that fuel price subsidies are inefficient and generate significant socioeconomic and environmental costs. However, it is also acknowledged that subsidies often represent a significant proportion of poor households' income, so removing them can have devastating effects. Moreover, given that fuel is a key input to economic activity, removing subsidies would alter the cost structure of specific sectors, with impacts on employment, competitiveness, and, ultimately, households’ welfare. One important question then is how policy makers can reduce the distorting effects of fuel subsidies while implementing effective measures to curb the adverse effects of price rises on the economy and poor households. This paper reviews the literature on this issue, discusses alternative policies to fuel subsidies, and provides scenarios that simulate cost and price shocks and fiscal savings for fuel subsidy reforms in Angola. Using an input-output table, the analysis estimates that gradual removal of the subsidies until full removal would result in a cumulative price increase of around 5.0 percent. The highest increases would be in fisheries and transportation (20 percent on average). Fully compensating for the price increase in the two sectors would absorb around 30 percent of the savings (around 1.0 percent of gross domestic product), notwithstanding the form and channel this compensation would take. This sector granularity is crucial to anticipate the potential negative effects of subsidy removals for various social and economic groups involved with a given sector as users or as producers.

Suggested Citation

  • Bao We Wal Bambe & Chadi Bou Habib & Joaquin Marandino Peregalli, 2024. "Fuel Subsidy Reforms : Lessons from the Literature and Assessing the Price Shock for Different Sectors through an Input-Output Table in the Case of Angola," Policy Research Working Paper Series 10939, The World Bank.
  • Handle: RePEc:wbk:wbrwps:10939
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    References listed on IDEAS

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    1. Mr. Robert Gillingham & David Locke Newhouse & Mr. David Coady & Mr. Kangni R Kpodar & Moataz El-Said & Mr. Paulo A Medas, 2006. "The Magnitude and Distribution of Fuel Subsidies: Evidence from Bolivia, Ghana, Jordan, Mali, and Sri Lanka," IMF Working Papers 2006/247, International Monetary Fund.
    2. Mr. David Coady & Mr. Taimur Baig & Mr. Joseph Ntamatungiro & Mr. Amine Mati, 2007. "Domestic Petroleum Product Prices and Subsidies: Recent Developments and Reform Strategies," IMF Working Papers 2007/071, International Monetary Fund.
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