Cairo – Decypha: The Egyptian government has been taking several sharp measures over the past few months within its plan to reform the country's economy. The flotation of the Egyptian pound in November 2016 was one of the main highlights of these decisions. The decision has resulted in a sharp rise of the prices of commodities and services. In April of the same year, the value added tax (VAT) was increased to 13%, by July it was pushed to 14%, resulting in a similar increase of prices.
Similarly, subsidies were not exempt from the package of economic reforms, especially energy subsidies, where on June 29; Egypt's government made a decision to cut energy subsidies, which resulted in an increase of the prices of different kinds of fuel; a decision considered the second of its kind for the second time in less than a year. The state has followed these actions with a hike in electricity prices.
With about 30% of the Egyptian population living below the poverty line, according to data from the World Bank, these decisions are of significant impact on the Egyptian state, both in the short term and the long one. Regarding the former, subsidies took the most attention due to their significant impact on most end-use commodities, thus, affecting all households.
The Dilemma of Energy subsidies
In the last week of June, the Egyptian parliament approved the draft general budget for fiscal year 2017/2018 and referred it to the state council to be approved. About EGP 145 billion were allocated for fuel subsidies.
Following the decision, Prime Minister, Sherif Ismail, said that the cost of fuel subsidies is nearing EGP 150 billion, which is a lot of pressure of the budget, according to Al Ahram. The aim of cutting fuel subsidies, according to Ismail, is to take the allocated amount down to EGP 110 billion in fiscal year 2017/2018. He stated that this cut in energy subsidies will allow the state's funds to be redirected towards procedures that will protect the segment of citizens with lower income as well as to other more needy sectors.
"We will not allow any greed and exploitation of our citizens," Ismail told Reuters, referring to post-cut procedures, where he stated that officials will monitor the prices of the market.
The Minister of Petroleum, Tarek El Molla, has also recently stated that the government has a five-year program prepared to gradually scrap fuel subsidies, adding that it is "inevitable and must not be delayed as any delays would represent a heavy burden on the state budget", according to what he told Al Aharam.
The first scrapping of fuel subsidies took place in early November 2016 when fuel prices increase by 34.6% to 46.9%, according to Egypt Oil and Gas, and with the recent scrapping, the price of 80-octane gasoline rose from EGP 2.35 to EGP 3.65 per liter, 92-octane gasoline jumped from EGP 3.50 to EGP 5, and the price of gas cylinders doubled, jumping from EGP 15 to EGP 30, as per state-owned Al Ahram.
The prices of fuel oil provided to cement factories will increase by 40%, reaching EGP 3,500 per tonne, compared to a previous number of EGP 2,500, according to Reuters, however, the prices of gas provided to the industrial sector are expected to remain without increases.
The recent cut is expected to further increase the annual inflation rate from 30.9% to about 35%, according to DPA International.
The financial losses caused by energy subsidies were estimated at EGP 700 billion throughout the past 14 years, from fiscal year 2002/2003 until 2014/2015, according to Egypt Oil and Gas.
The Egyptian government has a plan to completely remove fuel subsidies within three years, according to Arab Finance. In terms of electricity subsidy, it also has plans to carry out changes electricity prices in August, according to Al Ahram, which reported that about 24.5 million Egyptian citizens benefit from the electricity subsidy. The prime minister noted that these expected new increases will take the lower-income citizens into account. These increases are expected to result in increases in the fees of public transportations by 5-15%, according to Abu Bakr El Guindy, head of Accountability State Authority.
On 6 July, the Egyptian government announced increasing electricity prices by 15-42% for household consumption as a result of a new cut in electricity subsidy, according to BBC. The Minister of Electricity stated that the government has a plan to remove electricity subsidy completely by 2021. The plan to liberalize electricity prices began in 2014.
The household sector in Egypt, of 30 million users, consumes the largest amounts of electricity in the country, BBC said. "The funds allocated for the electricity sector in the state's budget this fiscal year is estimated at EGP 47.3 billion," the Electricity Minister said.
Where is the State Going?
The Egyptian Minister of Planning, Hala Al Saeed, has stated at the beginning of 2017 that the government has a plan to increase the gross domestic product growth (GDP) by nearly 5% in FY 2017/2018, according to Arab Finance. The current economic growth rate is 4% and the state aims to take the percentage to 6%-6.5% by 2020. Moreover, the government plans for the deficit to reach 9.1% deficit out of GDP.
To counter all these ongoing changes, the government has launched a social protection package to help poorer classes cope with the price increases. According to Egypt Oil and Gas, the Minister of Finance, Amr El Garhy, said that the social protection package will take up to EGP 84 billion in the budget of the new fiscal year after the changes carried out to subsidies, pensions and allowances. The package is expected to help government employees and other segments deal with the changes.
Moreover, the government has launched several new measures to ensure that the allocated food subsidies reach the segments who are truly in need for them with the new smart card scheme for food commodities, including bread, oil, sugar and rice, according to Arab Finance. This scheme started in 2014.
What do Experts and Businessmen Say?
A temporary increase in inflation may be expected as a result of cutting fuel subsidies, however, inflation is taking a downward trend, said Jason Tuvey, Middle East economist at Capital Economics, according to NY Daily News. "We think the general trend over the next 12 months will be towards weaker inflation as the effects of the pound's devaluation start to fade," he added.
"Now that the fiscal reform plan has moved ahead, economy's policy's emphasis needs to shift how to simulate growth," said Moamed Abu Basha, a senior economist at EFG Hermes Investment Bank, according to Arab Finance.
As for Egyptian business owners, there are concerns amongst them that they may have to bear the increased costs following the fuel subsidy cut, according to Reuters. Hani Berzi, Edita Food Industries chairman, said that his company plans to absorb the increase taking place in costs. "My expectation is costs will go up between 3-5% but I have no intention of increasing prices. The market can't stand it," he said.
By Reem Hosam El-din
