Evaluating the Impacts of Subsidy Removal by Using a Linear-Quadratic Storage Model: the Case of Tunisian Sugar Industry

Abstract

The marketing of the Tunisian sugar industry is evolving under government budget pressures. This article sets out to evaluate the impacts of subsidy reforms in the Tunisian sugar industry using a linear-quadratic storage model. Pricing mechanisms and decisions to import and sell sugar are modeled using a partial equilibrium model. The resolution of the model allows us to determine the decision rules of imports of white sugar and those of brown sugar as well as sales according to their own lagged values, lagged variables of storage, and lagged prices. The null hypothesis of the absence of the role of storage in the decision rules is rejected. The structural parameters of the system of equations are estimated using the generalized method of moments. These parameters are, then, used to simulate the impacts of reforming the sugar pricing mechanisms. An econometric simulation exercise was carried out to study the different scenarios of the upward pricing of sugar, due to a gradual elimination of the subsidy. The simulation reveals that an increase in the selling price leads to a slight variation in the level of sugar imports and production. This is explained by the existence of the quadratic adjustment cost of imports and the inelastic demand for sugar in Tunisia. A rationalization of sugar consumption by Tunisian citizens and an encouragement of companies to refine activity are then imposed at this level. Indeed, a drop in consumption would reduce the difficulties in the sugar market in Tunisia. The Tunisian Office of Trade would import less and therefore reduce its costs and losses.