Egypt to slash subsidies, raising concern over backlash
Cairo - Egypt’s new government says it will save billions of pounds on energy subsidies as part of a plan aiming at delivering the grants to needy social classes. The government plans to curtail annual energy subsidies, which total about 100 billion Egyptian pounds ($12.4 billion) by 70% over three years.
New Egyptian Prime Minister Sherif Ismail said recently the government would reduce subsidies to about $7.6 billion this fiscal year. Economists warn, however, the move will cause commodity prices to rise sharply.
“When the government slashed the energy subsidies late last year, commodity prices rose to new levels, which at the end of the day rose consumer inflation,” economist Rashad Abo said.
“By the same token, any curtailment of the subsidies will have direct impact on prices, which will cause even more public anger.”
Energy subsidies have been an issue for the Egyptian government for decades. Autocratic president Hosni Mubarak could not reduce the subsidies during his three decades of rule in fear of public outrage. Economists say the subsidies are such indispensable lifelines for rich and poor Egyptians that no one in decision-making circles dared to touch them.
However, faced with mounting financial pressures, Egyptian President Abdel Fattah al-Sisi about a year ago took the unprecedented move of cutting subsidies from $18 billion to the current $14.5 billion.
Former petroleum minister Osama Kamal says the Egyptian government used to pay $1.80 for each litre of gasoline and then sell the same litre for a fraction of that amount to local consumers. He also revealed that subsidies actually cost the government $37.5 billion, not $18 billion it claimed.
Egypt, which consumes 75 million tonnes of oil every year, no longer enjoys the economic luxury to be buying such large subsidies.
In a matter of ten years, the country turned from a net producer of oil to a net importer, which means that it has to pay in unavailable dollars for its oil imports. That has contributed to a budget deficit of about $30 billion — 10% of Egypt’s national income –this year.
That led to the plan to restructure the subsidy system, reduce spending, impose new taxes and even borrow from international institutions such as the World Bank, economists say. Egypt says it is in talks with the World Bank to borrow $3 billion-$4 billion, which has triggered nationwide debates on whether the move is necessary.
Some economists say a World Bank loan is indispensable, while revenues from tourism and the Suez Canal continue to slide because of deteriorating international economic conditions. Also, Arab states that gave Egypt billions of dollars in aid after the army’s ouster of Islamist president Muhammad Morsi in 2013 seem to be incapable of maintaining their financial support because of declining international oil prices and the cost of the Saudi Arabia-led war on Yemen’s Shia Houthis.
Fear is rife that measures taken by the government to make up for the budget deficit will backfire when it comes to the life of the poor; some of them are no longer able to put food on the table for their families, which can translate into political unrest.
Economist Saeed Abdel Khaliq describes the government’s plan to reduce energy subsidies as a “bitter medicine” for the ailments of the economy.
“But the government needs to take measures to ensure that the poor are not exposed to the negative effects of this plan,” Abdel Khaliq said. “These measures should include a tighter supervision over the markets to prevent unreasoned price hikes, make commodities available to prevent the hikes and ensure that all the poor are included in an effective social solidarity scheme.”
Price hikes following the first phase of subsidy reductions in late 2014 have resulted in public anger and, some observers say, has had a toll on Sisi’s popularity.
From August 2014 until August 2015, commodity prices rose by almost 30%, economists said, who add that this disproportionately affected the poor.
Sisi might have got a taste of this growing public anger during the first phase of parliamentary elections, which took place in 14 provinces on October 17th and 18th.
Only 26% of the 27 million registered voters participated in the elections. Some observers described the turnout as a “silent uprising” against deteriorating economic conditions.
“Reducing the energy subsidies will inevitably reflect on the price of everything,” Mukhtar al-Sherif, an economics professor from Mansour University, said. “The problem is that after all the political changes that occurred in their country, Egyptians are waiting for their economic conditions to improve, not the reverse.”