Since the January 25 Revolution, different governments have shied away from policies that might put new burdens on the Egyptian people, 40 per cent of whom live under the poverty line. This approach has cost the state a much-needed $4.8 billion IMF loan, which could have been obtained had the government approved suggested reforms, including cutting subsidies and increasing taxes. Instead, the country's fiscal deficit has kept widening, with the subsidies bill eating up almost a quarter of the state budget. Successive governments, especially those following the ouster of former president Mohamed Morsi last July, have tried to pacify potential social unrest by adopting expansionary policies that have seen the state injecting billions of dollars into the economy through stimulus packages. Interest rates have been lowered in an attempt to spur credit, and minimum wages for public employees have been raised. However, a package of policies revealed during the last couple of weeks now shows that the government is changing its approach. The most recent policy is the decision, announced on Sunday, to double the price of the natural gas piped into some homes and businesses starting next month, a move that will save the state LE0.8-1.0 billion annually. This decision came a week after Minister of Planning Ashraf Al-Arabi said that the price of electricity for the highest consumption bracket would have to increase and that petrol prices would be raised “very soon”. The government has said it has already distributed two million smart cards for petrol distribution in order to stop smuggling and leakages. Omar Al-Sheneety, a managing director of Multiples Group, a regional private equity firm, said that the changes were expected, as last year's expansionary policies were based on Gulf aid, which is unsustainable. Tough solutions had to be found to meet the country's chronic budget deficit, he said. Talking to Reuters on the sidelines of the IMF-World Bank meetings in Washington last week, Al-Arabi said that the energy subsidies system in Egypt was “unsustainable” and the country could not afford to continue it. “We don't have any time to waste... It's better for Egypt to start some of these measures at least before the presidential elections to pave the way for the coming president and to make his life easier,” Al-Arabi said. “Securing a healthier economic environment for the coming president by taking such steps is a part of the political mandate of the current transitional government, especially since the timing is suitable as the relatively more stable security and political situation can accommodate such moves,” commented Khaled Amin, a professor of economics at the American University in Cairo (AUC). According to Amin, the government was working on the coming fiscal year's budget and it was obvious that it was leaning towards a more austere budget than during the previous three years. Initial estimates put state expenditure in the new fiscal year at between LE750-800 billion. “This means a deficit of 14-15 per cent if the same current spending patterns remain,” Amin said. The government is trying to sugar-coat its decisions by stressing that they will not disproportionately affect the poor. Prime Minister Ibrahim Mehleb said on Sunday that while Egypt would begin the subsidies reform programme in July 2014, coinciding with the new fiscal year, the reforms would not affect the price of butane gas cylinders or electricity consumption charges for medium and low income segments of the population. Al-Arabi told Reuters that electricity price hikes would be gradual and the government had agreed to allocate at least 15 per cent of its subsidy savings to social programmes and the poor. “This will benefit the poor, because we will take money from the rich and reallocate it to the poor on social spending,” he said. “I believe we have a good story to tell the Egyptian people.” Energy prices in Egypt are currently among the lowest in the world, and artificially low prices for electricity, butane gas and fuel at filling stations encourage consumption. According to Reuters, under the new residential gas-pricing structure, those who consume 25 to 50 cubic metres per month will pay LE1 ($0.14) per cubic metre over 25 consumed. Those consuming over 50 cubic metres will pay a top rate of LE1.5 ($0.21) under the new pricing structure. By contrast, US householders paid an average of $0.36 per cubic metre of gas last year, according to US Energy Information Administration data. The link between subsidies and the pricing of electricity and gas should be broken if the government wants to reform the energy sector, according to Amin. “If the government wants to sell a kilowatt of electricity at a subsidised price, this does not mean obliging electricity producing companies to sell it at this price. The least that can be done is to provide them with the difference between the market price and the subsidised price of electricity.” “The low revenues of the companies affect the quality of the services they provide, especially at times of increased demand,” he added. Beside the energy sector reforms, the government is also working on restructuring the tax system to include a new five per cent tax on individuals whose income exceeds LE10 million annually and to introduce a value added tax. The coming fiscal year will see the implementation of the property tax and an upgrading of the tax administration to increase revenues. “In the light of the expected recovery in economic growth, revenues will definitely increase,” Amin said. By taking such hard choices, Egypt can start negotiations with the IMF, a step that will probably be postponed until after the elections when there are elected institutions to negotiate the terms of the loan. Signing an agreement with the IMF, Al-Sheneety said, would give the economy accreditation that would encourage foreign investors to invest in Egypt. Al-Sheneety and Amin said that the state also needed to plan its investments differently by withdrawing from non-productive projects like real-estate programmes and leave these to the private sector. The private sector is currently being “crowded out” by both the government and military investment, even when it comes to financing projects, according to Al-Sheneety. A big chunk of the liquidity in the banking sector since the revolution has been directed to buying high-yield treasury bonds and bills from the government, he said, a fact that limited the money available for lending to the private sector, pushing up interest rates on loans made to companies.
