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Consumers will bear the real burden of gasoline price increase
Published in Daily News Egypt on 26 - 07 - 2006


Comprehensive energy policy still absent
CAIRO: With no warning, the government decided to increase the prices of gasoline and other oil products last Thursday.
The state-owned Al-Ahram newspaper announced the decision the following day, at the start of a long weekend.
Fuel prices at the pump immediately increased in line with the announcement. The price of 90-octane fuel rose from LE 1.00 per liter to LE 1.30 per liter and the price of diesel rose 25 percent from LE 0.60 per liter to LE 0.75 per liter.
The timing was undoubtedly deliberate.
Summer is a quiet season, says economist Samir Radwan, managing director of the Economic Research Forum.
The government has been expected to increase oil and gas prices as part of its effort to revamp the subsidy system and rationalize the usage of budgetary resource.
Oil and gas is sold to domestic buyers at preferential prices set by the government. These prices have generally been fixed at the same level for years.
With the rising price of oil on international markets, the opportunity cost of this preferential treatment is enormous.
This decision should have been taken a long time ago, admits Yasser El-Ga abiny, finance manager of National Food Company. Globally, we are one of the cheapest countries for gasoline.
On the whole, the government spends LE 40 billion (nearly 15 percent of its total budget) on energy subsidies, either implicitly through preferential pricing or explicitly by supporting the importation of certain petroleum and natural gas products.
Minister of Finance Youssef Boutros-Ghali estimates that only 20 percent of these subsidies really benefit the poor.
Meanwhile, the government has been in an uncomfortable budgetary situation, with the deficit expected to reach 9 percent of gross domestic product this fiscal year.
Many economists therefore agree that fuel subsidies do little to alleviate poverty and that the private sector can sustain an increase in energy costs, even though low energy prices are a key competitive factor of Egyptian industry.
If an industry is intensive in using fuel and is not competitive unless there is this fuel subsidy, we may reconsider shifting to another activity, Hanaa Kheir El-Din, executive director and director of research at the Egyptian Center for Economic Studies, previously told The Daily Star Egypt. We do not need to go on subsidizing inefficient industries forever.
However, some observers were surprised that the decision to increase prices was not included in the state budget for the coming year.
The parliamentary discussions on the budget have just started [and] this was not mentioned in the budget, says economist Abdel-Fattah El-Gibali of Al-Ahram Center for Political and Strategic studies.
It should have been part and parcel of the budget package, adds Radwan.
Domestic inflation is also a significant concern. Boutros-Ghali said in March that the reduction of subsidies would be done in a selective and gradual manner in order to minimize the inflationary impact.
Nevertheless, the government s latest actions will inevitably increase prices since producers are likely to pass the increased cost on to consumers.
Industries that don t have substantial energy costs can absorb this cost increase ... [but] the end consumer will ultimately take on most of this burden, says El-Ga abiny.
The increase in gasoline prices may even cause the price of commodities that are not directly affected by Thursday s decision to rise.
Petrol is very pervasive in everything, says Radwan. When the government increased the price of diesel [in September 2004], people who weren t using diesel increased their prices.
In such a situation, producers take advantage of a condition of derived demand by increasing their prices when an alternative good or service becomes more expensive.
El-Gibali adds that the government s action will exacerbate the current market condition in which the prices of many commodities are already high.
The nature of the Egyptian market is that it is controlled by a small number [of businesses]. Therefore, prices will increase by an even higher proportion, says El-Gibali.
The price of energy in general continues to be favorable in Egypt relative to the international market, and despite the latest increase the government still heavily supports industrial energy consumption through implicit and explicit fuel subsidies as well as inexpensive electricity.
We do not have a clear energy policy so far, probably because we were so happy to have large discoveries of natural gas, says Radwan. The strategy for energy should focus on industrialization and how to relieve the burden on the poor.


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