How to enlarge the fiscal space and gain efficiency when adopting automatic fuel pricing mechanisms? The Tunisian case

Abstract

In small open transition economies, where the fiscal sustainability is threatened by the world oil price and exchange rate stochastic shocks, the macroeconomic fragility due to fluctuations may be reduced by implementing an automatic adjustment rule (AAR) of the retail fuel price. Given the resistance of social stakeholders to structural reforms, only partial reforms could be envisaged in the transition phase. By offering for the first time a formalized fuel price structure which can also be used for other analytical purposes, a fuel distribution scheme, and especially the forward-looking price forecasts for the Tunisian case, our findings are as follows. First, the implementation of the AAR for only the gasoline expands the fiscal space by reducing the public deficit by 10%, and makes the fluctuations smoother compared with the full pass-through situation. Second, unlike the applied literature, we adopt the RBC approach to dating the cyclical fuel price fluctuations and show that the previous subsidy intervention was desynchronized with fluctuations, and the AAR should be adopted on the basis of a forward simulation process, and accompanied by an additional new distribution’ mechanism we propose to improving the distributive efficiency. Finally, some additional policy recommendations are proposed.