Is this Déjà vu? Or does it feel like the Egyptian government is repeating the same mantra on energy subsidies almost daily?
The upside of this announcement, which would garner skepticism for a reader that may have seen similar plans announcement over the last few months, is that the plan outlined by petroleum minister Osama Kamal is more detailed than we’ve seen before.
It would mean both rich and poor receive the same allocation of the subsidised fuel and would then pay a higher price for additional amounts consumed. It is a backtrack from the coupon system that was discussed only last week.
The government “is committed to subsidising petrol for only one car per family”, Kamal was quoted as saying.
Each car with a maximum 1.6 litre engine would be allocated around 1,800 litres of subsidised fuel a year, enough to travel 60 km (40 miles) per day, he said, a “suitable estimate for average daily consumption of private cars in Egypt”. Private cars are 80-, 90- and 92-grade gasoline, while prices of higher-grade 95 gasoline would be raised to what the government pays for it.
However the report does not give any timeline for implementing the plans or what constitutes a “family” for the purposes of the subsidy allocation.
The above programme is similar to Iran’s 2010 subsidy enforcement where “clusters” of society were handed out cash payments according to their income. Most people received the same amount, and those who needed more, would pay for more. However, the pressure on the economy from a combination of economic sanctions and poor economic management have forced Iran to rethink the second phase of subsidy reforms.
Here are a few key risks and challenges to Egypt’s subsidy plan, taking Iran as an example:
- Protests may take place if the government does not communicate its plan well. Those that need subsidies the most may panic and take to the streets blaming the government for looking out for its own debt rather than its people.
- If cash payments are used, how will these be distributed when most of the real economy is informal? How will millions of people register and make sure they get the right allocation? When Egypt’s bureaucracy struggles to digitise key statistics such as exports, how will it formalise all the plus-80 million living in Egypt? Egypt must come up with a reliable centralised system that represents a real gauge of its population.
- Related to the above, if there is no reliable centralised system of data sharing that creates a reliable gauge of family income, how will the government ensure payments are allocated to all and to where it is needed? Even with a centralised system in place in Iran, cash payments began to be funnelled through various welfare institutions because not everybody registered themselves. Some of the payments got lost somewhere before being redistributed to people.
- The risk of misappropriation and the development of a black market is extremely likely, especially considering today we see a black market of gas cylinders even very cheap fuel available. The need to ensure everyone gets the payment they are entitled is crucial.
- Finally what Egypt proposes is not a targeted subsidy, which is an easy way to solve a big problem but disregards the massive income differences in Egypt.
Egypt must therefore do it right and learn from Iran’s mistakes.
Iran’s got enough troubles of its own without having to renege on energy subsidy reforms, which it’s now doing.
Yesterday Iran said it would seek to cut imports of non-essential goods and urged its citizens to reduce their use of foreign-made mobile telephones and cars, as the country struggles to cope with Western economic sanctions, Reuters reported.
A few days earlier, Iran was blamed for cyber attacks against the US. Iranian hackers with government ties have mounted cyberattacks against American targets including US banks and foreign energy firms in recent months, escalating a low-grade cyberwar, the Wall Street Journal quoted US officials as saying.
To top it off, the Economist Intelligence Unit rates Iran as the least-attractive business location of the 82 countries it covers.