In an attempt to slim down the energy subsidies bill, which is expected to reach more than LE130 billion by the end of the current fiscal year, the government resorted to raising the prices of electricity for the richest 20 per cent of its citizens as of July, and approved a new pricing system for natural gas for households that will take effect as of May, coinciding with the near-term fiscal year. It has pledged that the rises will not affect the poor or low-income segments of the population. For years, successive governments have delayed efforts to embark upon reforming the energy subsidies system, frightened that raising energy prices could ignite turbulence. But facing a chronic energy crunch, the government appears to have no other options. And obviously there is no way to urge Egyptians to rationalise their consumption while energy prices remain low. On Sunday, Finance Minister Hani Kadri Demian said in a phone interview to private channel CBC that Egypt's budget deficit would linger around 14.5 per cent of its gross domestic product by the end of the 2014/2015 fiscal year unless plans to cut back on state-subsidies and restructuring the tax system were employed. Last year, Egypt paid LE120 billion in fuel subsidies, about a fifth of its total budget. Minister of Planning and International Cooperation Ashraf Al-Arabi demonstrated a sense of urgency when he confirmed earlier this month on the sidelines of the IMF-World Bank meetings in Washington that Egypt could not afford to continue with its present energy subsidies system. He stressed that the price hikes would be gradual and could take three to five years to apply in full. The current government has promised to cut the budget deficit to 11-12 per cent of GDP by the end of the fiscal year, to implement a property tax, to raise income taxes on the wealthy and to replace sales taxes with a Value Added Tax (VAT). The introduction of VAT, effective in the second quarter of the coming financial year, will be reflected in the prices of a large number of services. Economic experts have criticised recent government decisions, naming other options such as imposing a gradual tax and a wealth tax as priorities for the government in order to increase revenues. Overall household gas consumption is in the range of five per cent of total gas consumption, they say, and the majority of subsidised gas goes for consumption for industrial purposes. “If the aim of the energy prices hikes is to plug the hole in the budget, tackling the energy subsidies dossier shouldn't be the only issue at stake. The public budget is flawed and other alternatives should be taken into consideration as well,” said Samer Atallah, a professor of economics at the American University in Cairo. “The energy subsidies programme shouldn't be treated in isolation of other problems in the state budget.” The government should have started by lifting energy subsidies to the industrial sector, especially energy intensive industries such as cement, steel and fertilisers, and then moving to home consumption, he added. Many goods, especially ones depending on electricity, gas or diesel in manufacturing or transportation, as with most services and commodities provided to Egyptian consumers, would witness a substantial increase in prices. Attallah warned that lifting the energy subsidies, especially of diesel and gasoline, could lead to a wave of inflation that would be difficult to manage and would severely impact consumer purchasing power.
