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Bitter medicine
Published in Al-Ahram Weekly on 06 - 07 - 2017

A week ago, Egyptians woke to find various fuel prices had increased between 40 to 100 per cent. The move had been expected, but not so soon, especially since the new fiscal year had not yet begun and the minister of petroleum had denied a day earlier that an increase in prices was impending.
This is the second cut to fuel subsidies in eight months and it comes as a part of the reform programme that Egypt embarked upon in 2014 and that qualified it to clinch a $12 billion bailout with the IMF in November.
Egypt is struggling to revive its economy since January 2011 and the political turmoil that followed it that shook investor confidence and drove tourists and foreign investors away.
The latest price increases mean that the consumer now pays about 60 per cent of the cost of production, rather than 43 per cent previously, Minister of Petroleum Tarek Al-Molla had told the press.
The news was a slap on the face for Egyptians, awakening them from the holiday slumber of Eid. Higher fuel prices would hit them directly in their pockets when they need to fill up on gas, should they own cars, and would mean higher transportation costs for everyone else using public transportation, be it taxis or microbuses. Only government-run public transportation would not increase in price.
Higher fuel costs will also translate into higher prices for basic goods such as fruits and vegetables and other services, because their cost of transportation has increased as well. The minister of finance said the move would add five per cent to the country's inflation rate. The rate recently passed 30 per cent, its highest in 30 years.
Nonetheless, this is the short-term price that has to be paid for long overdue reforms.
Slashing subsidies have been recommended by international lenders like the IMF and The World Bank as well as economists as a means to rationalise consumption.
Also, fuel subsidies do not target the poor, as consumers from the richest income brackets consume more fuel and thus benefit more from the subsidies. However, no previous regime had been brave enough to deal with the problem head on.
With this latest reform, Egypt has proven that it is committed to reforming this problem once and for all. This is the third fuel subsidy cut to take place; the first was in the summer of 2014 and the second in November 2016, immediately after the floatation of the pound.
If this step had not been taken, spending on fuel subsidies would have reached LE150 billion in the current 2017-18 budget. The savings from the cuts to fuel subsidies would be directed towards increasing social spending, be it recent increases in allowances for ration cards, the Takaful and Karama programme, or bonuses for government employees and pensioners.
Two weeks ago, the government in what seems now as a preparatory step to ward off social unrest because of the fuel subsidies cut — revealed a LE45 billion social spending scheme on income taxes cut and raises for public employees. This was followed by another decision to more than double the value of subsidised goods that holders of ration cards get monthly from LE21 to LE50 starting July.
Some observers see the step as a message to the world that Egypt is serious about reform and is on track to implement the reform programme it agreed upon with the IMF. Over the duration of the three-year programme, all fuel subsidies should be eliminated. Egypt is also on track with other reforms such as the implementation of an increase in the Value Added Tax (VAT) by one per cent to reach 14 per cent. The upcoming fiscal year will also see a 30-40 per cent cut in electricity subsidies as a part of a five-year plan to phase out energy subsidies that started in 2014.
With all these reductions in subsidies, the minister of finance has said that 80 per cent of the difficult reforms had been accomplished. The fiscal consolidation targeted by the government will impart confidence in the economy, in the government's decision-making process, and support investment. Now there needs to be work undertaken in parallel towards establishing an environment that would attract domestic and foreign investment.


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