8. Energy Subsidies Reform in the Republic of Yemen: Estimating Gains and Losses

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.