Exploring the Aggregate and Disaggregate Impacts of Oil Subsidy Reduction: A Dynamic CGE Analysis of Tunisia

The study aims to examine the economic and social impacts of oil subsidy reduction in Tunisia. The study uses the Tunisian social accounting matrix for a dynamic general equilibrium model. It then simulates a 27% drop in the oil refining subsidies and records the impact on GDP, private consumption, sectoral value-added, and investment. The findings confirm a decline in GDP and household consumption, which diminishes in the following periods. The investment also exhibits a decline, which further falls sharply in the second period but stabilizes in the following periods. Exports and imports undergo a sharp decline initially but then trend towards stabilization, resulting in a modest cumulative increase in exports and cumulative decrease in imports over the five-year horizon. The study also confirms that the subsidy reduction in the oil sector spills over to all economic sectors. However, the initial sharp increase in value-added tends to reduce and move towards adjustments. The study contributes to the current literature in two ways. Methodologically, it employs a recursive-dynamic CGE model integrated with an investment accelerator, calibrated to a current, disaggregated 2017 social accounting matrix for Tunisia. Empirically, it focuses on a specific reduction in oil-refining subsidies rather than comprehensive fuel-price adjustments, facilitating a thorough evaluation of both macroeconomic and sectoral adjustment trajectories. The findings suggest that policymakers should utilize various fiscal and monetary policy tools and reduce oil subsidies to facilitate a smooth transition for sectors and stabilize demand and prices.