The welfare effects of unprecedented electricity price hikes in Zambia

Abstract This paper simulates the real household expenditure effects of large electricity price increases in Zambia. First, we find that electricity subsidies are highly regressive. The richest household quintile receives over 60% of the subsidies, while the poorest quintile receives less than 1%. Second, our partial equilibrium simulations of the welfare effects of a 75% electricity price increase show that the poorest households would experience a 3 times larger percentage loss in real expenditure compared to the wealthiest households. Naturally, these adverse effects lead to an increase in poverty. However, we find that transferring the fiscal savings realised from the complete elimination of electricity subsidies to the poor reduces extreme poverty significantly. This budget-neutral strategy is particularly attractive for Zambia, and other sub-Saharan economies currently battling the twin challenges of widening budget deficits and high extreme poverty.