Egypt braces for new wave of price hikes after expected subsidies cut

The expected energy subsidy cut will end most of the government’s programme for pegging the price of fuel to international markets.
Sunday 14/04/2019
An Egyptian worker waits for a customer at a petrol station in Cairo. (AFP)
With an eye on inflation. An Egyptian worker waits for a customer at a petrol station in Cairo. (AFP)

CAIRO - The removal of subsidies on energy products will reduce pressure on the Egyptian national budget and give authorities a chance to channel subsidy money to health care and education but it will also lead to a surge in commodity prices, economists said.

“The rise in commodity prices will be a normal outcome of the removal of the subsidies on energy products,” said Sherine el-Shawarby, an economics professor at Cairo University. “This will also increase the suffering of ordinary people, especially the poorest.”

Egypt plans to remove subsidies on most energy products, now sold to consumers for 85-90% of their international market price, by June 15 as the country nears the completion of its economic reform programme, the International Monetary Fund (IMF) said.

The energy subsidy cut, the IMF added in a letter April 6, is part of a review of Cairo’s 3-year, $12 billion loan programme with the lender.

The subsidy removal will raise the prices of gasoline, diesel, kerosene and fuel oil. This, economists said, would take its toll on local commodity prices.

“This is why authorities have to increase support to the poorest classes of society and improve the services offered them,” Shawarby said.

The expected energy subsidy cut will end most of the government’s programme for pegging the price of fuel to international markets. The government started linking the price of the less-popular 95 octane gasoline to international markets in April.

The implementation of the subsidy removal planned for June is to start in September, Egyptian Finance Minister Mohamed Maait wrote in a letter sent to the IMF in January.

Egypt’s energy subsidy cuts over the last three years led to a gradual increase in commodity prices as well, causing financial hardship for the middle class and poor Egyptians.

Since the November 2016 introduction of the economic reform programme, commodity prices have almost tripled. Cairo increased spending on social welfare programmes to cushion the effects of subsidy cuts on the poor but many Egyptians are still suffering.

In his letter to the IMF, Maait said the government would institute a new mechanism to protect the poor against shocks in energy and other commodity prices.

Despite its negative effects on the poor, economists said, the subsidy removal would help the government redirect funds to fully implement universal health care and introduce radical changes to make education systems technology-based.

“This will ultimately benefit the poor and those within the middle class,” said Ashraf al-Arabi, a member of the Economic Affairs Committee in parliament.

The government allocated approximately $5.1 billion for fuel subsidies in the 2018-19 budget.

Reducing pressures on the state budget, economists added, will help Egypt meet economic growth targets for the 2019-20 budget, which goes into effect in July. Egypt looks to raise its economic growth rate to 6% of GDP in the new fiscal year, from around 5% in the 2018-19 fiscal year.

Although the increase does not seem much in percentage figures, in terms of economic growth it can be challenging for a country that faces difficulties in funding development projects, expects a huge budget deficit and plans to keep borrowing to meet its economic needs.

Egypt expects deficit in the 2019-20 budget to reach $25 billion and total spending was projected at $80 billion.

Apart from the deficit, which will be bridged by borrowing, the government will repay $21.6 billion in loan instalments and interest to international creditors. The government said it will borrow $47 billion to meet spending needs in the new fiscal year.

Attaining an economic growth rate of 6% in the new fiscal year would help the government reduce the unemployment rate to 9%, from 9.8% in 2018-19 and move ahead with development.

This economic growth rate, economists said, is feasible, particularly if more efforts are made to attract foreign direct investments.

“There is also a strong need for making more efforts in the fight against corruption,” economist Amr Hassanein said. “Investments always go to countries where corruption is low and transparency is high.”