Water constitutes the main constraining factor of agricultural development in Southern and Eastern Mediterranean countries and particularly in Tunisia and Morocco. The two countries are among the countries where the pressure on water resources is strong with an index of exploitation of renewable natural resources ranging between 50% and 75% indicating significant medium-term risks of structural stress. For both countries, the scarcity of water resources may cause a serious constraint to the development of their economies. This relevance has led Governments to design and implement ambitious policies aimed at water resources’ improvement. The opportunity cost of water has risen and economic concerns have become increasingly important in water resources management.
Public interventions also aim at improving the efficiency of water utilization in agriculture, i.e. to intervene on the demand side. An economy wide analysis of water policies in Tunisia and Morocco will permit addressing the allocation and distribution issues of water resource management facing policy makers. Those issues have high policy relevance as part of the effort of policy makers to manage water resources in the long term and to reduce poverty in rural areas. More precisely, this note, based on the findings of a study under final revisions for its publication in a refereed journal on water economics, presents some results on the impacts of alternative domestic water policies in the form of a cut on irrigation water subsidies and/or increases in public expenditures on water mobilization needed to meet the expected increase in water demand by different users.
Given that irrigation water subsidy policies adopted since the 1960s affected the choice of crops, farming of more profitable crops with higher irrigation needs has spread more widely which in turn leads to a higher consumption of water in both countries. Subsidies decrease production costs, but at the same time incentivize an inconsiderate use of water, promoting the farming of more water intensive crops – which can be more profitable for farmers, but arguably lead to water over-abstraction. Furthermore, subsidies negatively affects the price signals related to water consumption and, therefore, do not provide sufficient signals to stimulate water efficiency, such as the introduction of water efficient technologies or the renewal of old infrastructures, which currently are responsible for huge amount of waste. The current bilateral and multilateral negotiations on agricultural trade liberalization, in the context of the Euro-Med partnership agreement and the Doha round of the WTO, represent a new opportunity to rethink public supports to this sector in order to ensure competitive global and regional markets.
Increase in water prices is expected to lead to irrigation practices causing less water loss. However, the adoption of those practices may require significant investments from farmers. The reform of water subsidies can take several forms: It can either be achieved through an outright elimination or a phased elimination of the subsidy. In case of outright elimination, the substitution of crops with less water intensive ones can be used as a flanking measure - if financial support and technical advice aimed at such substitution is provided by the authorities to farmers simultaneously with subsidy elimination. Alternatively, if a phased elimination is chosen, authorities can direct crop selection towards less water intensive crops by providing financial support and technical advice without eliminating the subsidies immediately and wait for the impact on water consumption. This is due to result in a slower progress in improving water efficiency than the scenario where substitution of cultures is accompanied by an elimination of subsidies, since imposed substitution of cultures might not be feasible. Nevertheless, such an approach involves a smaller threat to farmers’ income. However, the total elimination of subsidy can lead to significant impacts on farmers’ income at least in the short and medium term.
3 simulations were conducted using dynamic CGE models for Tunisia and Morocco:
- SIM 1: Cutting subsidies on water prices by 50 % progressively over the period 2014-2020 (7.14% per year);
- SIM 2: Doubling public spending on water mobilization progressively over the period 2014-2020 (14.3% per year);
- SIM 3: Both above scenarios implemented simultaneously.
The results of the simulations show that cutting subsidies by half (S1) will affect negatively the rural welfare by about 1 percent by 2020 compared to the baseline scenario for both countries. Moreover, doubling public investment in mobilizing and distributing irrigation water (S2) will impact positively the welfare level of both households as expected. However, coupling a subsidies reduction with a larger public investment in water mobilization and distribution (S3) will improve welfare of both categories of households in both countries. Despite that the net effects depend also on the way how additional investments will be financed (increasing domestic taxes, domestic or foreign borrowing), the results show that the aggregate or net impacts on rural households’ welfare depend not only on the level of reduction of subsidies but also on other policies and technical practices employed by farmers to accommodate with the changes in water prices and availability. In fact, when subsidy reductions were implemented with an increase in public spending on water mobilization and distribution, welfare of rural households rose as a result of combined effects: efficiency and size.
Figure 1. Changes in households’ welfare by areas (deviations from the baseline in 2020 in %)
Source: simulations using dynamic CGE models for Tunisia and Morocco
Moreover, the overall impact on the economy depends also on the macroeconomic management of the savings to be attained/ realized from either the reduction in subsidies or the sources of additional public spending. Negative impacts can be addressed through either of: 1) Flanking measures that support the elimination of water subsidies, reducing the negative impact this elimination might have on farmers’ income 2) Compensatory measures that make up for the farmers’ loss in income following the elimination of water subsidies in sustainable ways. Measures that address negative economic impacts through production changes (e.g., adoption of new technologies and production processes, introduction of new cultures with crop replacement and crop diversification) that improve farmers’ competitiveness and, consequently, support farmers’ income should be preferred to the ones that address primarily farmers’ income. This is so since the former tend to be transitory, enabling the individuals to recover or improve their initial income without further support in the medium term, whilst the latter tend to delay the adaptation to the new conditions.
