Fuel subsidies lead to environmental damage through inefficiencies in energy use, they are a burden for public budget and moreover they are regressive, usually benefiting the already better off households. Despite, these negative qualities, energy subsidies are still implemented throughout the World. Post-tax energy subsidies in the World are estimated to be 5.3 trillion USD while fuel subsidies alone, are estimated to be 1.5 trillion USD, making up 1.8 percent of the global GDP in 2015. Reallocation of fuel subsidies can be an important tool for creating fiscal space for child grants in many of these countries. This paper specifically focuses on the case of Madagascar’s fuel subsidy reform. In Madagascar, the size of the fuel subsidies as of 2014 are estimated in this paper to be around 80 million. In June 2014, the government decided to eliminate fuel subsidies gradually in and the analysis in this paper was prepared to provide timely input to the policy discussion around fuel subsidy reform in Madagascar. The paper builds an ex-ante simulation model using Madagascar’s ENSOMD 2012 data set and looks at (i) different scenarios of price hikes and the impact on the poor and (ii) models the targeting and benefit incidence of universal cash transfer for children with the budget reallocated from regressive fuel subsidy spending. The benefit incidence analysis shows that in Madagascar, fuel subsidies are highly regressive. Gasoline and diesel consumption is very rare in the households in the bottom 60 percent while kerosene is commonly consumed by households from all income groups. We find that poor households are affected the least if kerosene price remain unchanged. Nevertheless, different price increase scenarios including a change in the price of kerosene do not increase poverty by more than 1 percentage points. Reallocating the gains from the fuel subsidy reform to a universal child grant (for children ages 0-4 or 0-14) is estimated to decrease poverty rates between 2.4 to 4.6 percentage points.

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). It’s 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 OMH’s 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
Côted’Ivoire
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

15. Thank You
16
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research@developmentanalytics.org
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