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Burning up energy subsidies
Published in Al-Ahram Weekly on 02 - 11 - 2017

Since the floatation of the Egyptian pound on 3 November 2016, the government has increased the price of fuel twice by lifting subsidies to decrease the budget deficit as part of the reform programme that allowed it to secure a $12 billion loan from the International Monetary Fund (IMF).
Food and energy subsidies represent 25 per cent of the state's expenditures, a burden the ailing economy can no longer shoulder as it strives to lower a budget deficit of almost 11 per cent.
The first hike, which saw fuel prices increase by 47 per cent, took place hours after the Central Bank of Egypt decided to float the local currency. The second was in July, eight months after the initial price hike when fuel costs went up by an average of 50 per cent. In 2014, the government raised fuel prices by up to 78 per cent, the first time fuel went up after the 2011 Revolution.
According to the two changes, the price of 92-octane gasoline increased from LE2.6 to LE5 per litre. Diesel and 80-octane, the most commonly used kinds of fuel, surged by 100 per cent and 120 per cent respectively to reach LE3.65 per litre.
The most aggressive increase, however, is the 275 per cent jump in the price of cooking gas cylinders used mainly by the poor. The cylinders are now sold for LE30.
The value of subsidies allocated for energy — including different fuels and electricity — in the current fiscal year 2017/2018, amounts to LE110 billion against LE64 billion in the 2016/2017 budget. Fuel subsidies in the current fiscal year's budget have been estimated at LE57 billion, up from LE35 billion during the previous fiscal year. Subsidies reduction saved LE35 billion that would be directed to social spending.
The amount of government subsidies directed to energy in the current fiscal year could increase dramatically as the pound is currently worth LE17.75 against the dollar, while the LE110 billion worth of subsidies for fuel and electricity were calculated based on LE16. Additionally, international oil prices have increased to $57 per barrel, while the national budget was estimated based on a price of $55.
Fuel Subsidy
“This means the government would move fuel prices up again in a few months to avoid going beyond the planned subsidies,” said Fakhri Al-Feki, former assistant director of the IMF. The Ministry of Petroleum announced there will not be other increases in fuel prices this year. Experts including Al-Feki predict it could happen before the end of the current fiscal year in June 2018.
According to a report issued by investment bank Arqaam Capital, the government shoulders around 65 per cent of the cost of petroleum products which means there is room for more aggressive reductions in subsidies.
The most subsidised product is butane cooking gas cylinders with the actual cost being around LE115 per cylinder while it is currently sold at LE30.
The government will continue with its economic reform plan, Al-Feki added, especially that the most difficult decisions of devaluing the pound and decreasing subsidies have already been taken. According to Al-Feki, a current visit to Egypt by an IMF delegation to review its economic reforms will most likely be followed by a recommendation to give Egypt another installment of the $12 billion loan.
Egypt received the first tranche of the IMF loan worth $2.75 billion in November 2016, and the second came in July 2017 with a value of $1.25 billion. The third installment, worth $2 billion, is expected between December 2017 and January 2018.
The government is also moving according to a plan approved in 2014 by the cabinet to reduce subsidies on electricity over a period of five years that was supposed to end in 2019 but was extended to 2022 as announced in July 2017 by Mohamed Shaker, minister of electricity and renewable energy.
Fuel Subsidy
The latest increase in electricity prices was a 33 per cent hike in July 2017 in all seven consumption brackets. Although the increase was not related directly to the IMF loan and economic reforms are being taken as stressed by Shaker, such reforms, mainly the devaluation of the pound, have led to the cost of electricity production increasing, and consequently the subsidy bill. The previous increase was in August 2016 with an average of 40 per cent.
The average cost of electricity production per kilo watt doubled following the depreciation of the pound to reach LE1.02, according to Shaker, leading the value of subsidies allocated for the electricity sector in the fiscal year 2016/2017 to jump to LE52.7 billion from LE29 billion in 2015/2016.
If the electricity subsidy was to be lifted completely by 2019, taking into account the increased value of government subsidy following the devaluation of the pound, it would mean that sharp increases in the price of electricity should be implemented. To avoid that, the Ministry of Electricity decided to extend the deadline to 2022.
Hikes in energy prices have fed inflation which followed an upward trend after the devaluation to reach a 30-year high of 33 per cent in July. It has started to ease down the last two months.
Since the increases in fuel and electricity prices have a direct impact on consumer products and transportation costs, a number of government decisions were taken in June 2017 to try to ease the burden on lower income citizens. According to the Ministry of Finance, about LE85 billion has been allocated for so-called social security procedures to protect the poorer social class from the inflationary effects of economic reform. These will benefit more than 90 per cent of Egyptians according to the Finance Ministry by increasing monthly food subsidies and increasing civil servant pensions, among other procedures.


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