SEARCH

Breakfast Wrap: Egypt Scales Back Energy Subsidy Reforms

Over the weekend, Egypt released another “energy subsidy reform” announcement to add to the growing pile of releases that seem to disappear within days, with little follow-up.

Egypt is “working on a programme to cut the country’s energy subsidy bill by 50% over the coming five years and to compensate by raising Egyptian wages,” Ahram Online reported, citing the  the state-run MENA news agency.

And with the government expecting the full year bill on energy subsidies to amount to $16.3 billion, a substantial proportion of the state budget, it’s no surprise that Egypt wants to make cuts. Especially as the system, as it stands, benefits the richest the most, rather than the country’s poorest who depend on cheaper fuel for their livelihood.

However, there is a big problem with this announcement. Egypt is effectively scaling back its energy subsidy reform plan.  

Egypt had aimed, for a substantial part of 2012, to cut its energy subsidies by up to a third over the coming year as part of an ambitious plan to reform the economy.

More specifically, as Heba Saleh from the Financial Times wrote in October:

The reduction by E£40bn, or $6.5bn, in the current fiscal year, ending June 2012, is equivalent to roughly a third of the $17.2bn the government is estimated to have spent in the last fiscal year on fuel and electricity subsidies for industrial and domestic consumers.

Even almost a year ago, on New Year’s Day, 2012, Egypt came out with it’s New Years Resolution, as Reuters’ journalists wrote back then:

Egypt’s government will increase natural gas and electricity prices paid by heavy industries by 33 percent this month to narrow its growing budget deficit. 

Economists say cutting energy subsidies, which represent about 20 of total spending, is one of the few practical options the country has to cut the deficit.

At the time, the higher rates were part of a plan to shave 20 billion Egyptian pounds ($3.3 billion) off the deficit.  

But, unfortunately for Egypt’s already confused public, yet more mixed messages were to come. In September, Egypt’s government said it drafted a plan to reduce energy subsidies by 25.5 billion pounds ($4.2 billion).  Here, again the cuts were suggested as within a year.

At this point, determining which cuts the government will actually make, and how much it will shave off the energy subsidy bill have become obsolete.

But what is clear is that the government last year had pencilled in a quite substantial and quick reform and that is now changing.

For example, if the government cuts the energy subsidy bill by $4.2 billion (according to the September announcement) that is equivalent to a 25% reduction of a $16.3 billion energy bill.  

Cutting $6.5 billion from the total bill (according to the October estimate and based on a total annual energy bill of $16.3 billion), is equivalent to a near 40% cut of the total bill in a year.

So, if the government is suggesting cutting 50% of the bill but over 5 years, that’s a substantial markdown from earlier announcements, and should signal to readers that:

a) the government is realising the task of reducing subsidies quickly is much more difficult and contentious and is responding with softer plans, but more importantly,

b) while there is something to be said for a slow reform programme, Egypt is unlikely to recover quickly from its financial woes as long as energy subsidies exist in their current form, because they are such a huge weight on the budget.

So far, little real reform has happened.  In November 2012, the Cabinet approved cutting subsidies from the high-end 95-octane gasoline, used mostly by the middle and upper class for luxury vehicles.  But the more important coupon or smart card system that would see a nationwide impact on subsidy use is yet to be enforced.

Finally, we must consider the bigger picture in reforming energy subsidies. Right now, Egypt spends more on energy subsidies than on health and education combined.  What if the government made real reforms quickly that meant Egypt’s poorest didn’t have to rely on the black market for their fuel needs, but also benefited from billions of dollars redirected into health and education – two vital pillars of a successful welfare programme?



2 Comments


  • Nasser Gamal Eddin
    Posted February 3, 2013 at 10:36 am | Permalink

    “but also benefited from billions of dollars redirected into health and education”

    1. Where will those billions come from exactly? I thought cutting off subsidies was meant to decrease/eliminate n% of budget deficit (as you mentioned earlier)….and that the IMF loan and related packages were needed to keep us AFLOAT and enable us to just “recover” to pre-uprising levels because current situation is unsustainable (and it was unsustainable under Mubarak as well but much more so now)…or are you saying that after the IMF’s $14 billion package we will be borrowing again? considering we currently have 25% of our budget earmarked for debt servicing (and that’s before the IMF) I don’t see how is this going to work out

    2. How can we talk about reforming subsidies before reforming the system itself and about eliminating corruption which is the reason subsidies don’t go where they are supposed to go in the first place…

    3. Subsidies in themselves can not be conceptually bad..otherwise why the EU and US pay HUGE subsidies for their farmers…

  • Posted February 3, 2013 at 10:41 am | Permalink

    Nasser,
    1) The assumption is that if Egypt considerably reduces the amount it spends on energy subsidies, it will have much more freedom to allocate investment/cash to health and education. This does not mean Egypt will spend the same $17 billion dollars it spent on energy subsidies last year on health and education, it means that the money wasted on keeping fuel prices cheap for the rich can be better spent. There is no question – energy subsidies must be reformed one way or another.

    2) Yes, I agree. And many people make this point when we talk about any kind of reform in Egypt. But by addressing a problem we are at least making some headway. Reforming the system is a combination of many steps – one being tackling energy subsidies which the state has talked about reforming for literally decades with no success.

    3) This post does not suggest subsidies are bad. They have to be reformed so that they reach those who need it. At the moment, that’s not necessarily the case.



Post a Comment

Your email is kept private. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>