“Energy subsidies” has become a phrase synonymous with the Middle East’s feeble efforts to reform and rightside budgets.
Governments across the region, including Egypt, Jordan, Morocco, and to some extent even oil-rich Gulf states like Saudi Arabia, have struggled to address their addiction to subsidies that provide cheap fuel to sate the masses. They want to scrap expensive energy subsidies but fear they will provoke riots if they do.
But as huge international institutions like the International Monetary Fund and the International Energy Agency muscle in with their expertise on how to end this costly system that will cost $600 billion this year, a substantial error has been overlooked.
These multinational organisations claim they have the technical expertise to help the Arab world with its most costly problem, but in fact have no standard way to measure energy subsidies, according to energy consultancy OpenOil.
Stephanie Heerwig, writing for OpenOil, explains:
The IMF, IEA, EIA, OECD, UNEP, you name it – use either different methodologies or different assumptions or both and routinely come up with wildly different estimates for the same country in the same year.
Not only are the data swilling around the public domain confusing – I might expect that – but the methodologies and assumptions on which it is based are incoherent most of the time. And what is particularly striking – there is no consensus on how to measure the subsidies. How could that be, given their huge impact on carbon emissions and government budgets?
So while the definition of energy subsidies is easy, there are hundreds of mechanisms that could fall under “an energy subsidy”.
What I have found out, especially when reading a brilliant paper by Doug Koplow, is that not only do major organizations often use different methodologies, they may use different underlying assumptions to arrive at radically different results even with the same methodology.
For instance, according to estimates by the International Energy Agency the total amount of subsidies on oil products in Egypt amounted to $9.2 billion in 2007. The IMF, however, estimates a figure of $3.8 billion, for the same year using the same methodology! That is a difference of about 58 percent! What a statistical margin of error.
Koplow, in the paper, compares 2007 estimates for total amount of subsidies on oil products from two of the biggest organisations, the IEA and the IMF (in billions of US dollars):
Heerwig goes into some detail on how these organisations come to such conflicting data. The conclusion is clear, however: If “experts” can’t even agree on the level of subsidies in each country, how can we expect the Egyptian government which is going through a monumental transition, to come up with a better alternative?
No, this doesn’t mean Egypt is off the hook. But the nation, and others in the same boat, must seek as many different opinions as possible to come to a sound solution. This argument inevitably ends at the same conclusion for Egypt: be more inclusive and do not continue to mistake that working in isolation is a mark of power.
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More than a year and a half after the beginning of uprisings across the Mena region, which toppled dictators and liberated societies, Europe’s development bank has made its first investments in Morocco, Jordan and Tunisia and said it was preparing to invest up to 200 million euros (160.9 million pounds) by the end of the year in the region.
The European Bank for Reconstruction and Development (EBRD) also soon hopes to get approval from shareholders for investments in Egypt. It’s not clear who these “shareholders” are.
Egypt’s prime minister was on a rare hour-long conference call with investors yesterday where he repeated the mantra that the country is working to jumpstart the economy and revive important sectors such as tourism.
He also reaffirmed that there would be no currency devaluation “at the moment”. Instead he said “we are aiming within three months to create quick wins on the ground“.
Rebel Economy has warned before that “quick-wins” are never successful or sustainable. A case in point is the “Morsi-meter”, established to show President Morsi’s performance in his first 100 days, but shows only 4 promises out of 64 have actually been achieved after 80 days in power.
Aside from crippling the country’s balance sheet, racking up millions of dollars in debt and failing to spread subsidies equally to those who most need it, Egypt’s energy subsidies are also having a commercial impact.
There is consensus that slashing subsidies for energy intensive industries by a third, announced at the beginning of this year, is one of the few practical options Egypt has to cut its deficit. After all, energy intensive industries devour the largest chunk of subsidies.
However for many companies impacted, it is crucial that this doesn’t happen too quickly. The Egyptian Federation of Industries, which represents the entire industrial sector in Egypt, recommended earlier this year the gradual removal of energy subsidies over the next five to seven years.
Companies in Egypt had been pinning their hopes on a phased cut of energy subsidies to counter the big costs for more expensive fuel. Of course, it is in the industry’s favour to lobby for an extended delay on completely removing energy subsidies.
But companies are already experiencing difficulties after a hefty cut in fuel subsidies.
Centamin, the London-listed gold miner which owns the Sukkari gold mine in Egypt’s Eastern Desert, yesterday released its financial results with a bumper cost addition.
It has spent $16.4 million paying international energy company Chevron to ensure a continued supply of fuel after the Egyptian government suddenly stopped offering fuel. Here is what the company said in its statement:
“Given the challenging political and fiscal conditions that Egypt is currently experiencing it was necessary during Q2 to continue to advance funds to our fuel supplier Chevron based on the international price of fuel to ensure continuous operations whilst negotiations are ongoing with the Egyptian Government on the path forward for fuel subsidies.
Management are treating these fund advances as prepayments being calculated at the international fuel price approximately 85 cents/litre and at this stage are not expensed, however they represent roughly half of our fuel supply for Q1 and all the usage for Q2.”
Centamin, which normally benefits from the subsidy for diesel, has been forking out the extra cash to buy fuel on the international market since March.
The higher fuel prices, which meant second-quarter cash costs were $729 per ounce, were being treated as prepayments, Centamin said, as it has been talking to the Egyptian government about recovering the extra cost.
However it did note that if these prepayments were “expensed… the cash cost for Q1 would increase by US$108 to US$717 per ounce and for Q2 would increase by US$164 per ounce to US$729 per ounce and for the half year would increase by US$141 per ounce to US$725 per ounce.”
The company ends by saying that it “does not believe that an instant move to international fuel prices is a reasonable outcome”.
If Egypt wants to scrap these subsidies it has to do it properly and reforms will therefore need to be carefully designed and communicated.
Or perhaps take a leaf out of a neighbour’s method. The Egyptian Center for Economic Studies refers to Jordan’s gradual subsidy reform in 2005 as an example of going some way to successfully cutting energy subsidies (albeit not completely).
In three years, Jordan raised fuel prices by between 33-66%, adopted an automatic pricing mechanism that adjusts prices monthly in line with international prices and had a committee overseeing the whole process composed of representatives from ministries and the refinery industry.
Finally, some good economic news from the Arab world.
Jordan secured a $2 billion loan from the International Monetary Fund last week, a vital barometer of reassurance for international donors. Moody’s said the move was “Credit Positive” (Full research note: Jordan Reaches Preliminary Stand-By Arrangement with the IMF, a Credit Positive)
After all of Egypt’s dithering over it’s own $3.2 billion agreement with the IMF, Jordan’s exceptional feat got a round of applause from Moody’s.
Jordan’s economic problems are similar to Egypt’s woes. Both rely on imports, both have used up large amounts of foreign reserves and both countries are stuck in a vicious subsidy cycle that shelters a big chunk of the population from higher energy prices, keeping demand artificially high.
“Jordan imports almost all of its hydrocarbon needs. Throughout 2011, saboteurs repeatedly damaged the gas pipeline that links Egypt to Jordan, requiring Jordan to seek alternative energy sources. Because Egypt’s gas is cheaper than oil imports, those alternatives created negative balance of payments for Jordan. Compounding the situation is that Jordan’s subsidy system shelters much of the population from higher energy prices, thereby keeping demand artificially high. Increased external payments have reduced official reserves, raising Jordan’s external debt metrics.”
Even though the $2 billion loan package covers only a little more than one month of imports – not necessarily enough to make a decisive difference to the country’s balance of payments – it is an important turning point and vote of confidence that will encourage other donors to come through on their aid pledges.
“As is always the case, we will play the catalyst role that we always play,” said Christine Lagarde, head of the IMF in April, regarding Egypt’s agreement with the IMF.