Egypt moves to reform fuel subsidy system

Indications are that the elimination of subsidies will only affect 95-octane, which is primarily used by richer Egyptians to fuel the most expensive cars.
Sunday 27/01/2019
Sensitive commodity. A worker gestures for cars to move as others fill up at a petrol station  in Cairo.        (AFP)
Sensitive commodity. A worker gestures for cars to move as others fill up at a petrol station in Cairo. (AFP)

CAIRO - Egypt has moved to lift subsidies on 95-octane petrol, bringing it in line with international prices in a move to reform the country’s fuel subsidy system.

“We do not want the fuel subsidies to end up going to the rich,” said Egyptian Petroleum Ministry spokesman Hamdi Abdel Aziz. “We want the poor only to benefit from the subsidies.”

Egyptian Prime Minister Mostafa Madbouli earlier established a special panel to investigate fuel subsidies and tasked it with reviewing 95-octane petrol prices every three months.

Egyptian Petroleum Minister Tarek al-Mulla said changes to the price of petrol would be made by early April, assuring the public that the increase on the current price would not exceed 10%.

This is the latest in a series of measures by Egypt’s financial planners to reduce the burden on the state budget from fuel subsidies. Cairo allocated approximately $5 billion for fuel subsidies in the 2018-19 budget, which ends in June. That was a $1.2 billion reduction from the subsidies in the 2017-18 budget.

Nevertheless, the subsidies create much pressure on the state budget, which suffers a huge deficit.

“This is why the decision to link the price of 95-octane petrol to international prices will remove considerable pressure on the state budget,” said Mukhtar al-Sherif, an economics professor at Mansoura University. “The subsidies allocated to fuel should be channelled to more needy sectors, such as the education and health sectors, which benefit the poor more.”

Egypt sells three levels of petrol to motorists — 95-octane, 92-octane and 80-octane. The 95-octane grade is the most expensive, with 1 litre selling at $0.48. Because of government subsidies, this is almost 50% lower than fuel prices in the United States and Europe.

Egypt is among the countries, including Venezuela, Saudi Arabia, Iran, Algeria and Kuwait, where the price of petrol is kept artificially low. This reliance on subsidies, analysts argue, has proven debilitating to the national economy, not just in terms of petrol but electricity and water prices as well.

Egypt has been struggling to reduce its budget deficit, keep production levels high and implement national infrastructure projects to attract investments.

The budget deficit for fiscal year 2017-18 was 9.8%. The government hopes to reduce the deficit to 8.4% in the current fiscal year.

The panel formed by the prime minister includes representatives of the Ministry of Petroleum, the Ministry of Finance and the state-run Egyptian General Petroleum Company.

Indications are that the elimination of subsidies will only affect 95-octane, which is primarily used by richer Egyptians to fuel the most expensive cars. The cut in 95-octane petrol subsidies is considered a test case to gauge public reaction for reductions that might affect for 92-octane and 80-octane petrol at some later time.

In June, the government slashed subsidies on all petrol levels and diesel by 17.5-66%. That was the third fuel subsidy cut since November 2016 when the economic reform programme started. It included liberalisation of the Egyptian pound, the elimination of electricity, water and fuel subsidies and the introduction of a value added tax. These were all conditions to secure a $12 billion loan from the International Monetary Fund (IMF).

Economists attribute the move to link the price of 95-octane petrol with international prices to conditions by the IMF for Egypt to eliminate fuel subsidies. Egypt is to receive its fifth tranche of the IMF loan in the next few weeks, Central Bank Governor Tarek Amer said. The $2 billion loan instalment had been scheduled for December but was postponed.

“We’re agreed on everything, agreed with the mission on Egypt’s performance during this phase,” Amer told Bloomberg News. “The reform programme is on schedule and we are committed to completing it successfully.”

“We are committed to ensuring that the market is free and clears itself but, at the same time, we have reserves that help us to confront any speculators or disorderly market practices,” he added.

Despite such reassurances, Egyptians who rely on fuel subsidies worry that they will be unable to afford fuel if Egypt eliminates the system and links prices to the international market.

“There is a need for linking salaries given local workers with international prices, too,” said Souad al-Deeb, a consumer protection advocate. “Almost everybody is suffering in silence in the hope that things will get better in the future.”

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