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Subsidies dilemma
Published in Al-Ahram Weekly on 16 - 02 - 2012

While most experts agree on the need to cut energy subsidies, questions remain on how and when such cuts will take place. Nesma Nowar seeks answers
While petroleum subsidies are primarily set to target Egypt's low-income groups, the actual beneficiaries have generally been the rich. Studies show that 20 per cent of subsidies benefit 80 per cent of the country's poor, while the remaining 80 per cent benefit 20 per cent of those who are better off.
More than two thirds of total government subsidies are directed to fuel products, while food subsidies account for less than one quarter. In the 2011-2012 budget, energy subsidies cost the government an astounding LE95 billion. Many experts expect this figure to reach LE114 billion. Such a large subsidy bill leads to a wider budget deficit, while squandering many government resources.
Energy subsidies include natural gas, fuel oil, diesel, 80-octane gasoline, higher quality 90 and 92-octane gasoline, and the finest quality 95-octane, lead-free gasoline.
Artificially low petroleum product prices have been found to help generate unhealthy consumption and smuggling. Egypt's governorates currently suffer from recurring gasoline, diesel and butane gas cylinder shortages. And government officials have been consistently blaming such shortages on the black market and smuggling.
And while many studies conducted over the past 20 years have called for restructuring the subsidies programme, the Egyptian government has been consistently hesitant and reluctant to take serious steps towards making any change.
A professor at Cairo University, who asked not to be identified, attributed the government's hesitancy to what she called the "political economy factor".
The professor said most studies written on the subject have tended to propose technical and economic solutions to the problem, while neglecting the political aspect. She explained that after decades of offering subsidies to citizens, "they [the citizens] now consider it their right." To make matters worse, she noted, many Egyptians are not aware of the inefficiency of subsidies. It is therefore hard to convince them of the need to restructure them.
The solution, according to the same source, is public awareness. "People should know that petroleum subsidies are not benefiting the poor," she told Al-Ahram Weekly. She also said that the government should stress that any change to the subsidies system would favour the poor. "There is a problem of trust between people and the government," she added.
The source added that there are always obstacles and resistance to reform and that all change comes at a price. This is particularly true in this instance, as cutting fuel subsidies would have a huge impact on all sectors.
Consequently, in order to take such a decision, she said, it is very important for the government to choose the right time to implement its reforms. "People should be aware and prepared," she said.
According to the source, cutting fuel subsidies now is almost impossible. She said that no temporary government would be able to take this step unless it wants "to trigger another revolution".
She suggests that the government could start by lifting subsidies on high quality 95- octane gasoline. This would not save much money, but it could serve as a signal for policy direction.
Magda Kandil, executive director of the Egyptian Centre for Economic Studies, shares a similar view. She believes that a successful strategy for energy subsidy cuts needs to involve preparing the population for reform. This could happen through clearly identifying the size of the fiscal cost of subsidies, while highlighting the share of benefits going to higher-income groups, and identify better ways of protecting the poor.
Kandil added that the shock therapy approach would be a bad one. She is in favour of a sequenced and gradual approach. Such an approach would include the immediate adjustment of subsidies that benefit the rich -- for instance, subsidies on 95-octane gasoline -- and a more gradual adjustment for other products. This would allow industries to adjust.
Kandil added that it not logical to lift subsidies equally on all petroleum products as rates of consumption for each product vary. "Natural gas and fuel oil constitute 70 per cent of petroleum products consumption, so it is not fair to lift subsidies equally," she said.
"This would only add to the burden of the needy," Kandil added, at a seminar recently held in Cairo. "That would contradict the notion of social justice."
The best scenario, Kandil said, would be to adjust petroleum product prices, and redirect 50 per cent of energy subsidy savings to the poor. "This would not cost the government any additional expenditure as we would cut from a segment and give another segment."
Meanwhile for Tamer Abu Bakr, head of the energy committee at the Federation of Egyptian Industries, the only solution for the fuel subsidies dilemma is to substitute all petroleum products with cheaper natural gas products.
Abu Bakr appealed for a national plan to use natural gas in all sectors, including transportation, households, and industry. He pointed out that even if there is a need to import additional natural gas, it would still be cheaper than the alternatives currently in use.

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