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Impact of phasing out water subsidies in Tunisia and Morocco on consumption: a general equilibrium approach Chokri Thabet, Ali Chebil and Aymen Frija
Morocco and Tunisia are considered among the countries where the scarcity of water resources may cause a serious constraint to the development of their economies. The agricultural sector is the most important consumer of water with more than 80% of the total. Moreover, both countries have shown an increase in the share of GDP accounted for by the nonfarm sectors, which imply an increase in residential water demand as well as manufacturing and service sectors. Consequently, if production growth in the non-farm sectors requires a proportional increase of water demand factor , then water can be a major constraint to economic growth in both countries.
The opportunity cost of water and economic concerns has become increasingly important. In order to cope with potential water shortages, both countries have undertaken a set of policies and technical measures at three levels. The first level, which still absorbs significant resources, is the investment in hydraulic infrastructure and the construction of dams in order to catch up a rising demand by increasing water supply. The second level of intervention is the implementation of rationalization measures aiming at controlling a steadily increasing demand, using water pricing instruments. The third level covers institutional organization reform towards more decentralized water management.
This overview focuses on the second level that is water pricing reform in Tunisia and Morocco. Both countries have made water available at low cost to farmers through public financing for reasons of food security, limiting rural-urban exodus and improving the agricultural trade balance. However, this policy has a drawback of not providing the right signal to stimulate water efficiency, such as the introduction of water efficient technologies or modernizing old infrastructures, which are currently responsible for huge losses. This situation led to the adoption of profitable, but water intensive crops. However, if present water policies continue to under-price the resource, this will increase the likelihood of severe water shortages and could even result in serious depletion. Governments have been compelled to revise their policies and engage in pricing reforms to improve cost recovery and to shift towards clear water demand management policies. Despite many previous attempts, progress has been compromised, given the key social role of agriculture in reducing social pressures. Thus, water pricing has usually been below full cost recovery.
The main objective of this case study is to explore the impacts of alternative domestic water policies in the form of a cut in irrigation water subsidies and/or increases in public expenditures on water mobilization needed to fulfill the expected water needs escalation by the different users. The evaluation of alternative policies is conducted on a comparison basis between Morocco and Tunisia, as similar policy instrument applied in two different countries can have different impacts. In fact, heterogeneous socioeconomic structures, different market features and economic policies, and various levels of natural resources endowments, explain the different impacts of same policies across countries.
An economy-wide analysis of water policies in Tunisia and Morocco is the most suited way to address the allocation and distribution issues of water resources facing policy makers. Those issues have high policy relevance as part of the efforts of policy makers to manage water resources in the long term and to reduce poverty in rural areas. Two dynamic Computable General Equilibrium (CGE) models have been built for the purposes of this study, and calibrated using two Social Accounting Matrixes of Tunisia and Morocco for the year 2005.
A reference scenario has been implemented. It assumes observed growth rates for both GDP and government consumption in 2006-2012. It also assumes a marked GDP deceleration in Tunisia related to the political unrest and a recovery of GDP at a rate of 5.5%/year by the end of the simulation period (2020). The reference scenario shows that maintaining the current level of water prices requires additional public spending by 0.8% in Tunisia and 1.1% in Morocco of GDP by the end of 2020.
Three alternative scenarios have been tested and compared to the reference scenario:
• Cutting subsidies on water price by 50%
• Doubling public spending on water mobilization progressively over the period 2014-2020
• Both above scenarios implemented simultaneously
In Tunisia, Removing 50% of water subsidies resulted in dissimilar effects. The first one is positive with an annual average improvement of public saving by 0.6%. The second is negative reflecting the deterioration of the rural household’s welfare. In addition, efficiency gains resulting from a better use of water is also found to be high, thereby offsetting the negative effects. Consequently, the overall impact becomes positive with an annual average increase of the GDP by 0.2%. In this scenario, total exports fall by 1.4% each year.
Increasing public investments in the mobilization and distribution of water resulted in an increase of GDP and exports of agricultural and agri-food commodities by annual averages of 0.5% and 1.7%. The cumulative impact of the implementation of the two previous scenarios is also found to be positive with an increase of all the economic variables of interest such as GDP (+0.3%), private and government consumptions respectively 0.4% and 0.7%.
In Morocco, removing 50% of subsidies on water resulted in a negative overall impact on the economic activity through a reduction in the level of GDP by an average annual rate of 0.4% showing clearly that the Tunisian agricultural sector has more flexibility to positively adjust to higher water prices compared to Morocco, where agriculture is more rigid. Three main reasons can explain this pattern:
• In Morocco, the level of water subsidy is much higher than in Tunisia (45% against 20%)
• The contribution of the agricultural sector to the Moroccan economy is much higher than Tunisia (15 against 9%, in 2012).
• Irrigated agricultural sector contributes much largely to the economic activity, given its higher multiplier effects.
The results show also that large public subsidies to water mobilization and distribution significantly affected the structure of agriculture production in both countries. Reducing public subsidies on water affects directly farm incomes in the short and medium terms, which drop by 20% and 12% in Morocco and Tunisia respectively. A reduction in the number of crops available for farming resulting from water tariff hike can also lead to greater technical and economic vulnerability of the agricultural sector in Tunisia and Morocco. Employment is also likely to be affected in both countries. However, the reduction in farmers’ incomes will be largely compensated by the saving in public expenditures, and also in a better and more efficient use of water resources. In the medium-long term, Tunisian and Moroccan farmers will adjust their activities to accommodate to the new public managements of water resources which will be manifested by a substitution among activities towards those that are more efficient in water uses.
In terms of policy recommendations, the reform of water subsidy can be implemented through an outright or a phased elimination. In case of outright elimination, the substitution of crops with less water intensive ones can be used as a flanking measure, if financial and technical support is provided by the authorities simultaneously with the removal of subsidies.
If phased elimination is chosen, authorities can direct crop selection to less water intensive crops without removing subsidies immediately, using incentive instruments which imply smaller threats to farmer’s income.
Chokri Thabet is Associate Professor and head of the Department of Rural Economics and Development at Institut Supérieur Agronomique de Chott Mariem, Tunisia; Ali Chebil is Associate Professor at Institut National de Recherche en Génie rural, Eaux et Forêt, Tunisia; Aymen Frija is Assistant Professor at Ecole Supérieure d’Agriculture de Mograne, Tunisia
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