The partial lifting of energy subsidies last week has triggered an outcry because of the inflationary impact that it is thought will accompany the energy price hikes. But there are also long-term advantages to the move, one of them is its impact on potential investment. According to a 2010 World Bank report entitled “Egypt: Improving Energy Efficiency,” Egypt's economy is one of the most energy intensive among the developing countries due to its macroeconomic policy and energy policy. The report attributes the increasing share of industry to total GDP, as opposed to the services and agricultural sector, to increases in the energy intensity of the economy. According to an April 2014 paper by the Federation of Egyptian Industries, the industrial sector uses up to 37 per cent of the country's total energy consumption followed by household and transportation, each at 16 per cent. Iron and steel and cement and aluminum alone consume around 30 per cent of the total electricity consumed by economic activities in Egypt. The tendency to attract such energy-intensive industries, according to one expert who preferred to remain anonymous, goes back to the days when surplus electricity was produced by the Aswan High Dam in the 1960s and 70s. “This started the trend to invest in heavy industries consuming a lot of energy,” he said. With the new price structures for energy which have increased prices by between 50 to 150 per cent depending on the type of fuel and the type of industry consuming it, investing in energy-intensive industries is unlikely to be the same in future, he added. The recent cuts were not the first, since for the past three years these industries have witnessed several cuts in the fuel subsidies they receive. Economist Amirah Al-Haddad believes that this could be all for the best. “This is a move that will reflect the real resources of the economy, which is the right path for development. If an industry was surviving only because it was dependent on cheap energy, such as brick kilns, then this industry should be allowed to die out,” she said. Al-Haddad added that she hoped the trend to cut fuel subsidies would mean less investment in capital-intensive industries and more focus on labour-intensive industries to create jobs. High-value-added industries such as technology and services such as banking should also be focused on, she said. Mohamed Farid, CEO of Dcode Economic and Financial Consulting, said that structural distortions created by the continuation of the subsidies had killed investment in sectors such as renewable energy or waste recycling as “cheap energy made these sectors unattractive.” Farid also said that cuts in the budget deficit as a result of subsidies reform would mean less pressure on the banking sector, which the government had leaned heavily on to finance its budget deficit. “The government has been crowding out the private sector,” Farid said, adding that the move will free up funds that might now see their way to the private sector. Farid did not see capital-intensive industries leaving Egypt, since he believes that the size of Egypt's economy makes the country attractive regardless of the energy subsidies. “To them, energy availability is more important than subsidies,” he said, adding that “energy is expensive everywhere around the globe, yet that has not stopped investment.” Farid stressed that investors were keen to have clarity on the government's economic vision for the country. “They need to be sure that the government is serious about dealing with this long-standing issue,” he said, adding that they wanted to be informed of decisions rather than being taken by surprise. Another international expert who preferred to remain anonymous agreed. He said that Egyptian industry would have to learn to cope with energy price increases. “They are not hanging onto energy subsidies, but they want clarity and stability in order to be able to plan ahead,” he said. He did not foresee foreign direct investment being affected by the energy price hikes. In his opinion, the drivers of investment were not only cost factors, even for energy-intensive industries where prices were a large part of input costs. “Most investment decisions will not be deferred,” he said. He also said that investing in renewable energy could now become more worthwhile. However, he stressed that any potential reversion to coal for energy should be tackled carefully. It might be important from an energy-security perspective, he said, until adequate electricity generation capacity was developed, but it was a terrible policy in the long term. He was referring to announcements that the government would allow coal to be used to produce energy for energy-intensive industries like cement. “This should only be considered as a stop-gap procedure for the short term of two to three years,” he said. Reforming fuel subsidies was not easy, he said, as most countries undertake this reform when their economies are in good shape which helps ease side-effects. “For Egypt, it is more difficult because the economy is not doing too well, and the impact on businesses and households will be higher.”
