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Ex-ante Simulation for Fuel Subsidy Reallocation and the Expansion of a Universal Child Grant in Madagascar
- 1. International Conference on Universal Child Grants 6-8 February 2019 | Geneva 1 Ex-ante Simulation for Fuel Subsidy Reallocation and the Expansion of a Universal Child Grant in Madagascar Dr. Meltem A. Aran, Development Analytics
- 2. International Conference on Universal Child Grants Motivation 2 Poverty increased in Madagascar in the last two decades as opposed to an overall decrease in Sub- Saharan Africa (Poverty headcount ratio at 1.90$ a day) Madagascar is a low income country in Sub-Saharan Africa, located in the Indian Ocean. Poverty is extremely high in the country. In 2012, 77.6 percent of the population lived below 1.90$ a day poverty line. Source: World Bank, World Development Indicators 68.9 65.4 63.9 72 78.5 77.6 58.9 58.2 57.7 50.7 46.6 43.8 0 10 20 30 40 50 60 70 80 90 1993 1997 1999 2005 2010 2012 Povertyheadcountratioat1.90$aday Madagascar Sub-Saharan Africa
- 3. International Conference on Universal Child Grants Motivation 3 In Madagascar, households with children are more likely to be poor 71.5 75.5 80.7 52.7 56.5 62.6 0 20 40 60 80 100 Overall poverty headcount ratio Poverty headcount ratio for households with children (0-14) Poverty headcount ratio for households with children (0-4) povertyheadcountratio(%) Poverty (at national poverty line) Extreme poverty (at national extreme poverty line) Source: ENSOMD 2012, authors calculations
- 4. International Conference on Universal Child Grants Motivation 4 Access to basic services in Madagascar is below the average levels in Sub-Saharan Africa Source: World Bank, World Development Indicators Access to education and health services is lower for children in the bottom quintiles 46.4 58.3 64.3 73.1 81.6 62.5 34.7 32.0 36.0 42.9 53.9 39.7 0 20 40 60 80 100 Q1 (Bottom) Q2 Q3 Q4 Q5 (Top) Overall percentofchildren % of children aged 5-14 registered to school % of sick children aged 0-14 visiting a doctor/a hospital Source: ENSOMD 2012, authors calculations 44.3 64.0 51.5 12.0 22.9 48.8 72.7 67.6 29.7 42.8 0 20 40 60 80 100 Births attended by skilled health staff (% of total) Measles immunization rate (% of children ages 12- 23 months) Improved water source (% of population with access) Improved sanitation facility (% of population with access) Electricity (% of population with access) Health Infrastructure %withaccess Madagascar Sub-Saharan Africa Note: Births attended by skilled health staff is for year 2013 for Madagascar, for year 2011 for Sub-Saharan Africa; measles immunization rate is for year 2014 both for Madagascar and Sub-Saharan Africa; access to an improved water source and access to an improved sanitation facility are for 2015 for both of them; and access to electricity is for year 2016 both for Madagascar and Sub- Saharan Africa.
- 5. International Conference on Universal Child Grants Motivation 5 Madagascar has post-tax subsidies on fuel products (Post tax subsidies as a % of GDP) Source: IMF, 2013 (Energy subsidy reform in Sub-Saharan Africa: experiences and lessons) 1.00 1.21 1.51 1.11 1.48 1.66 0.00 0.50 1.00 1.50 2.00 Kerosene Diesel Gasoline USD/lt Target price Pump price Prices at the pump are lower than OMH*s target prices, hence effectively fuel products are subsidized (USD/lt) Source: OMH is The Hydrocarbon Office of Madagascar (Office Malagache des Hyrocarbures). Its an agency under the Ministry of Energy and Hydrocarbons (MEH) and the Ministry of Finance and Budget (MFB), responsible for the regulation of the oil sector. According to OMHs statistics, fuel prices at the pump is taxed but not taxed at the targeted level (latest report available is for June 2014 in http://www.omh.mg/codes/simh2014.php). -7 -5 -3 -1 1 3 5 C担tedIvoire EquatorialGuinea Gabon Chad Congo,Republicof Cameroon Nigeria Angola Malawi Senegal Mauritius Seychelles Namibia Swaziland SouthAfrica CentralAfricanRepublic Mozambique Rwanda Guinea-Bissau Tanzania BurkinaFaso CapeVerde Uganda Zambia Niger Guinea Mali Comoros Burundi Lesotho Madagascar Congo,DemocraticRepublicof Kenya Togo Benin Botswana Gambia,The SierraLeone Ethiopia SaoTomeandPrincipe Ghana Zimbabwe Oil exporters Oil importers %ofGDP
- 6. International Conference on Universal Child Grants Data 6 In order to see the household consumption of fuels and the benefit incidence of fuel subsidies we use ENSOMD 2012-2013 dataset for Madagascar. ENSOMD survey was collected from households in 2012 and 2013 and aims to measure the progress in achieveing MDG targets In this respect, ENSOMD has information about household expenditures, durables, education and health outcomes etc. It covers 16,920 households ENSOMD is representative at the national, urban, rural, and regional level.
- 7. International Conference on Universal Child Grants Methodology 7 Benefit incidence analysis and price increase simulations In order to calculate the subsidy level, we used the price increase necessary to reach target prices, assuming household fuel consumption will not change with price changes For price level used in the analysis we took the price at the pump in June 2014, converted it to USD using Ariary/USD exchange rate for the same month. Total subsidy = (Price at the pump in June 2014)*(Necessary increase to reach the targeted prices (%))*(Total annual amount of fuel consumed by households (in liters)) Table. Prices at the pump and prices estimated after the targeted price increase (in USD/lt) Gasoline Diesel Kerosene Price at the pump in June 2014 (in USD) 1.51 1.21 1.00 Targeted level after the price increase (in USD) 1.66 1.48 1.11 % increase 10.11% 21.68% 11.25%
- 8. International Conference on Universal Child Grants Methodology 8 Impact of price increases to target levels We tried 4 different scenarios to see the impact of fuel price increases on poverty headcount ratio, poverty gap, public budget and household budget: Scenario 1. All prices increase Scenario 2. All prices increase but the price of gasoline Scenario 3. All prices increase but the price of diesel Scenario 4. All prices increase but the price of kerosene In these scenarios transport prices are assumed to increase through diesel price increases. The pass- through is assumed to be 50%. A possible change in food prices and inflation are not accounted for.
- 9. International Conference on Universal Child Grants Fuel Subsidies 9 Average annual per capita fuel consumption is significantly higher in the top quintile (Average annual per capita fuel consumption (in liters)) Yet, average share of fuel consumption in household budget is as high as top quintile for the bottom quintile due to kerosene consumption (Average share of fuel consumption in households annual budget (%)) 6.2 5.2 1.6 3.9 2.2 2.2 6.9 0 5 10 15 20 Q1 (Bottom) Q2 Q3 Q4 Q5 (Top) percapitaconsumption(lt) Gasoline Diesel Kerosene 1.2 0.8 3.3 2.3 2.0 1.6 1.0 0 0.5 1 1.5 2 2.5 3 3.5 Q1 (Bottom) Q2 Q3 Q4 Q5 (Top) %shareinhouseholdbudget Gasoline Diesel Kerosene
- 10. International Conference on Universal Child Grants Effects of Removing Fuel Subisides 10 Poverty headcount ratio (at national poverty line) Poverty gap (at national poverty line) Poverty headcount ratio (at national extreme poverty line) Poverty gap (at national extreme poverty line) Increase in public budget (in million USD) At current level of prices 71.51 32.77 52.72 19.81 Sc. 1 All prices increase 71.61 32.87 52.85 19.90 80.1 Sc. 2 All but gasoline 71.61 32.87 52.85 19.90 60.9 Sc. 3 All but diesel 71.58 32.85 52.82 19.89 52.2 Sc. 4 All but kerosene 71.53 32.80 52.74 19.82 47.2 Poverty rate is the lowest when only gasoline and diesel prices are increased, but public budget increase is also at the lowest level in this scenario (Sc. 4) Table. Poverty rate and increase in public budget following the price increase scenarios
- 11. International Conference on Universal Child Grants Subsidy Reallocation 11 Children are concentrated more in the bottom 60% (% of all children) A higher share of the bottom quintiles are children (% of each quintile) 25.2 22.5 20.6 17.9 13.8 26.1 22.2 20.4 18.3 12.9 Q1 (Bottom) Q2 Q3 Q4 Q5 (Top) 0 20 40 60 80 %ofchildrenineach quintile Children aged 0-14 Children aged 0-4 59.4 53.2 48.7 42.4 32.7 21.3 18.2 16.7 15.0 10.5 0 20 40 60 80 Q1 (Bottom) Q2 Q3 Q4 Q5 (Top) %ofthequintilewhoare children Children aged 0-14 Children aged 0-4 Any uniformly targeted child-related policy will have more progressive targeting than Fuel Subsidies Source: ENSOMD 2012, authors calculations
- 12. International Conference on Universal Child Grants Subsidy Reallocation Scenarios 12 We tried 2 different basic reallocation scenarios with previous price increase scenarios (Note that possible change in food prices and inflation are not accounted for.) 1. Distribute all the fuel subsidy to children aged 0-14 2. Distribute all the fuel subsidy to children aged 0-4 Price increase scenario Subsidy scenario Annual subsidy per child (in USD) Sc. 1 All prices increase Subsidy to all children 0-14 8.2 Subsidy to all children 0-4 23.7 Sc. 2 All but gasoline Subsidy to all children 0-14 6.2 Subsidy to all children 0-4 18.0 Sc. 3 All but diesel Subsidy to all children 0-14 5.3 Subsidy to all children 0-4 15.5 Sc. 4 All but kerosene Subsidy to all children 0-14 4.8 Subsidy to all children 0-4 14.0 Table. Annual subsidy per child in each price increase and subsidy scenario
- 13. International Conference on Universal Child Grants Poverty Estimates with Subsidy Reallocation 13 71.5 71.6 67.1 66.9 71.6 68.9 68.4 71.6 68.8 68.8 71.5 69.1 69.1 64 65 66 67 68 69 70 71 72 current rate without child subsidy +child subsidy 0-14 +child subsidy 0-4 without child subsidy +child subsidy 0-14 +child subsidy 0-4 without child subsidy +child subsidy 0-14 +child subsidy 0-4 without child subsidy +child subsidy 0-14 +child subsidy 0-4 Sc 1. All prices increase Sc 2. All but gasoline Sc 3. All but diesel Sc 4. All but kerosene povertyheadcountratio(%) Poverty rate is the lowest when all of the gain from fuel subsidy is distributed to children (Poverty headcount ratio at national poverty line (%))
- 14. International Conference on Universal Child Grants Conclusion 15 This Case Study in Madagascar highlights one way in which fiscal space can be created for child grants: through the reallocation of fuel subsidies In this case study, reallocating the gains from the fuel subsidy reform to children uniformly decreases poverty rates significantly. Children are concentrated more heavily in the households in the bottom 60 percent, making any uniform subsidy distribution targeting children naturally ending up progressive. Simulation results show that reallocating subsidy gains to children aged 0-4 decreases poverty most when the prices of all fuel products increase. Even abolishing subsidies on kerosene (the most progressive of fuel subsidies) and reallocating the gains to children ends up being more progressive than keeping kerosene subsidies