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Sugaring the economic pill
Published in Al-Ahram Weekly on 31 - 05 - 2018

In preparation for further electricity and fuel price increases, the government is working on plans to reinforce the country's social security net with a LE15 billion package starting in the new fiscal year in July.
The aim of the move is to soften the effects of the austerity measures on those with limited incomes. After two years of economic reforms that saw subsidies slashed, a new sales tax introduced, and a skyrocketing of inflation rates, the government has said it will further decrease fuel and electricity subsidies in the new fiscal year.
The social security package is expected to include a small increase in the monthly allowances given to cardholders to buy subsidised food as well as an exceptional raise for civil servants and extra allotments for the conditional cash-transfer programmes Takaful and Karama, according to press reports.
The percentage increase in electricity prices is unknown, but media reports put it at somewhere between 33 and 55 per cent, according to the recommendations of the Ministry of Electricity.
While there has been talk that customers will be categorised into four consumption brackets, there is speculation that even those belonging to the lowest brackets will have to pay more.
Electricity Minister Mohamed Shaker previously rejected a suggestion by MPs to exempt the working poor from the rises.
Cutting subsidies to reduce pressure on government spending is one of the country's main goals as it pushes forward with reforms to revive the economy and tighten the deficit. It is also a condition of a $12 billion deal that Egypt signed with the International Monetary Fund (IMF) in 2016.
Next year's budget includes LE89 billion in fuel subsidies, a 26 per cent reduction on the current year, and electricity subsidies of LE16 billion, or almost 47 per cent lower than in 2017/2018.
There have been two price hikes on fuel since November 2016. The first, which saw fuel prices increase by 47 per cent, took place hours after the Central Bank of Egypt (CBE) decided to float the local currency. The second was in July last year, eight months after the initial price hike when fuel costs went up by an average of 50 per cent.
The price of 92-octane petrol 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 was the 275 per cent jump in the price of cooking gas cylinders used mainly by the poorer segments of the population. These now sell for LE30.
The planned new social security package is not the first. In 2017, the government adopted a LE85 billion package before raising fuel prices by 55 per cent at the beginning of the 2017/2018 fiscal year. The package comprised pension increases, a hike in Takaful and Karama allowances, and a seven per cent raise for civil servants.
It seems the government will not roll out such a generous package this year because of inflated expenditure due both to increases in debt servicing and extra allocations for fuel imports The price of oil has increased to $80 per barrel compared to the $67 used in planning the new budget.
Every $1 increase in the price of a barrel of oil costs the government LE4 billion. The unexpected increase in the price of oil increases the possibility of further hikes in the price of fuel this year, analysts say.
The two recent fuel price hikes triggered across-the-board price increases, pushing inflation rates to unprecedented levels. While inflation has started to ease down, there are expectations it could soar again.
“The recent jump in oil prices has stoked fears that inflation will rise again. The government will now be forced to increase prices by more than it otherwise would have done in order to meet IMF-mandated fiscal targets. We estimate that fuel prices will have to rise by 60 per cent in July to keep the subsidy reform programme on track,” said research company Capital Economics.
There are fears that the announced LE15 billion social security package will not be enough to make things feel less difficult for the poor.
Heba Al-Leithi, a professor of statistics at the Faculty of Economics and Political Science at Cairo University and one of the authors of the government's income, spending and consumption survey, said that after the devaluation the official poverty line should have increased to about LE800 compared to LE482 in 2015 on the back of the higher cost of living resulting from the floating of the pound and rising prices.
This means that a larger segment of the population is falling into poverty, with Al-Leithi estimating that the poverty rate could be around 35 per cent compared to 27.8 per cent in 2015.
The value of food subsidies increased in November 2016 from LE15 per person to LE21, in conjunction with the devaluation of the pound. It was then increased with the implementation of the spending package last June from LE21 to LE50.
However, a report by the Egyptian Initiative for Personal Rights, an NGO, said that the increase in the value of the subsidised food available on ration cards had resulted in a rise in the prices of the food available to cardholders.
This meant that the amount of goods available after the increase in value has been less than targeted, it said.

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