Egypt to introduce further electricity, energy subsidy cuts

The government wants to reduce energy subsidies 26% and electricity subsidies 47%.
Sunday 13/05/2018
Electricity pylons and power transmission lines are seen along a road in Cairo.    (Reuters)
Bold measures. Electricity pylons and power transmission lines are seen along a road in Cairo. (Reuters)

CAIRO - Egypt is preparing to introduce additional cuts to energy and electricity subsidies to bring its budget deficit down and move ahead with development programmes.

The government has not announced a date to introduce new subsidy cuts but Cairo has been adamant about moving ahead with financial and monetary reforms, despite expected popular disapproval.

“The cuts are very important if we will be able to control the budget deficit and bring debts down,” said Mohamed Mo’eit, assistant finance minister for treasury affairs. “We need to have the necessary financial resources to move ahead with development and economic reform.”

Cuts were recommended by an International Monetary Fund (IMF) delegation that is reviewing Egypt’s economic reforms before dispensing $2 billion, the fourth tranche of a $12 billion loan that was agreed to in 2016.

IMF First Deputy Managing Director David Lipton said Egypt could not afford to delay reductions in costly energy subsidies or it would strain the budget at a time of high global oil prices.

Egypt’s budget deficit is expected to reach 9.4% of GDP by the end of the current fiscal year in July. The Finance Ministry plans to lower the deficit to 8.4% of GDP by the end of the next fiscal year and to 6.2% by the end of the 2019-20 fiscal year.

Egyptian Finance Minister Amr el-Garhy said the public debt increased fivefold in five years, reaching 107% of GDP. Egypt aspires to reduce debt to 80% of GDP in 2020.

To achieve these goals, maintain structural reforms in the economy and move ahead with development projects, the government must move towards eliminating subsidies.

Egypt specified $6.7 billion for energy subsidies in the fiscal year 2017-18 and $1.7 billion for electricity subsidies in the same fiscal year. The government wants to reduce energy subsidies 26% and electricity subsidies 47% in the new budget.

The move, economists said, would help the government reduce the budget deficit and move ahead with development while channelling more funds into health and education sectors.

“The current subsidy system rewards the rich at the expense of the poor,” said Farag Abdel Fattah, an economics professor at Cairo University. “This is why getting money off the subsidies that go for the rich and giving it to the poor is a necessary move.”

Egyptian Prime Minister Sherif Ismail last month said the government planned to improve services and living conditions of citizens with low incomes.

The government slashed electricity and energy subsidies twice in 2017, moves that significantly decreased the average Egyptian’s spending power at a time of rising commodity prices.

The subsidy cuts are part of reforms that have included the flotation of the Egyptian pound against foreign currencies and the introduction of a value added tax.

The flotation of the pound in November 2016 resulted in the national currency losing almost 50% of its value against foreign currencies overnight. For an import-dependent country such as Egypt, this was a major economic strain, although the government promised it would pay long-term dividends.

Those dividends are now coming in, officials said, as shown by improving growth and employment rates.

The economy is growing at 5% this year and the growth rate next year is expected to rise to 5.2%. Ismail has said the economy could grow at 9% annually in the foreseeable future.

The unemployment rate dropped to 11.3% and will decline to less than 11% next year, the government said.

A weaker pound is incentivising exports, especially agricultural and construction material exports and consequently stimulating production.

However, there are fears that subsidy cuts will lead to price hikes and more suffering for the poorest Egyptians.

“The fear is that the hikes can reach an uncontrollable level,” said Alia al-Mahdi, an economics professor at Cairo University. “This makes it necessary for the government to increase the funds it specifies for social protection programmes.”

Mo’eit said the Finance Ministry would set aside $34 billion in the new budget for social protection programmes.

“We will specify this money to mitigate the effects of the subsidy cuts on the poor,” he said. “We also have plans to prevent the same cuts from negatively affecting the middle class.”