This year's budget is seeing unprecedented restructuring in the subsidies programme. Nesma Nowar investigates how the government intends to implement the changes For the first time in 30 years, Egypt's proposed 2012/2013 budget is targeting an overhaul in the structure of subsidies. Minister of Finance Momtaz El-Said stated that fuel subsidies will be cut by LE25 billion to stand at LE70 billion compared to LE95 billion in the current financial year. For years, the government has resisted cutting subsidies for fear of igniting inflation and the wrath of citizens. The LE25 billion in savings are set to result from rationalising energy subsidies. The plan includes a 30 per cent increase in prices of natural gas used by energy-intensive industries, in effect starting this year, which is expected to save LE6 billion. This is in addition to saving LE4 billion from distributing butane gas cylinders through coupons, starting next month. Further, the new budget targets cutting subsidies on fuel by LE10 billion. However, questions remain on how these plans will be put into effect. The government has announced that it is considering distributing subsidised fuel -- used by private cars -- through coupons or smart cards, in a bid to better target the needy. The Ministry of Petroleum denied the possibility of distributing fuel by coupons in the coming financial year. It said that the coupon system could not come into effect before at least two years. Meanwhile, the ministry has submitted a proposal to the Cabinet that suggests producing a new type of gasoline, 85-octane gasoline, to substitute for 80-octane. A litre of 85-octane gasoline would be priced at LE1.25 ($0.2). The ministry said that the proposal comes in the wake of government plan to rationalise subsidies. A litre of 80-octane gasoline is currently priced at LE0.9 ($0.15). Originally, the Egyptian General Petroleum Corporation (EGPC) requested LE108.9 billion to meet its needs in the new financial year. The government spends LE50 billion in subsidies on diesel, LE21 billion for fuel and from LE18 to LE20 for butane gas cylinders. "There is no question about the need to restructure energy subsidies," said Wael Ziada, head of research at EFG-Hermes. "However, questions remain on how we can do it." Ziada believes that reforming subsidies is doable, especially that such reforms are necessary to rein in Egypt's widening budget deficit. However, the ability to restructure subsidies depends on a number of factors, according to Ziada. He highlighted the importance of timing when it comes to reforming subsidies. He said that setting priorities and the appropriate type of subsidy reform is very important. He argued that it is logical to start with reforming subsidies that would not affect the bulk of the population, such as slashing energy subsidies used in hotels. "It is all about timing and when is the right time to carry out a certain subsidy reform policy," Ziada told Al-Ahram Weekly. Beside the timing factor, Ziada stated that political and social stability as well as political will are essential for pursuing subsidy reforms. "With these factors in place, reforming subsidies are doable." "Of course, reforming subsidies is doable," said one professor at Cairo University, who preferred to remain anonymous. "Egypt is not the first or the last country to reform its subsidy programme." However, she said, it is important to understand the context in which subsidies operate in Egypt, and thus develop suitable polices for reforming the programme and mitigating the negative impact for some of scaling back subsidies. The Cairo University professor added that recent discussions on the inefficiency of subsides have made people more willing to accept the idea of cutting fuel subsidies. However, she said, the government has not yet introduced concrete measures to reduce subsidies on fuel. She further argued that the government should publicly announce what it is going to do with the money saved by cutting subsidies. The government has announced that savings from reduced subsidies would be directed towards spending on health and education. To the professor, this is not enough. She said that the government should specify in which aspect of health and education it is going to spend the money. "People should know the outcome of injecting that money into health and education," she said. "The government should show the people that it is [restructuring subsidies] for their own welfare."
