Egypt Lifts Cooking Gas Prices, Why it’s Trivial

How fitting that on April Fool’s Day, the Egyptian government attempts to deceive us all by claiming that its plans to raise the price of state-subsidised cooking gas for the first time in two decades will actually make any difference to the country’s energy subsidy spending. 

In fact, it won’t, and it is unlikely that the IMF delegation visiting Cairo this week will see it this way. 

According to Reuters:

The government  increased the price of cooking gas cylinders sold for domestic use by 60% to 8 Egyptian pounds [That’s from 5 pounds] a bottle, and doubled it for the bigger bottles used by businesses, an official at the supplies ministry said.

Although it marks a big rise, Egyptians had grown used to paying as much as 50 pounds a bottle last year on a black market where the state-subsidised gas bottles are sold at a mark-up. Those prices have now fallen to 10 to 15 pounds a bottle, according to Egyptian media reports.

There are a number of holes in the policy that fit in well with the Egyptian government’s ad hoc approach to economic policy. Moustafa Bassiouny, economist at the Signet Institute explains:

A) Raising the price of a gas cylinder from LE5 to LE8 is unlikely to result in any substantial savings for the government who are struggling to meet demand for fuel. [Rebel Economy: It’s really just symbolic].

B) This type of fuel is predominantly used by the poor, while the wealthier have natural gas piped straight to their homes, while Egypt continues to heavily subsidise petrol which is, by definition, only used by the richest segments of the society (i.e., those who own cars). [RE: Egypt is effectively lifting subsidies to the wrong people].

C) This new policy change is fundamentally weak, regressive and ineffective, and still does not come as part of a comprehensive reform plan. So it fails financially and morally, in my opinion. [RE: Couldn’t have put it better myself].

The biggest flaw in Egypt’s energy subsidy system (and many others around the world) is that it is a class-blind system that pays out more to support wealthier households whose fuel consumption is higher than in needier ones.

By lifting a subsidy specifically used by the poor, the Egyptian government is acting foolishly. The charts below show clearly how Diesel dominates the structure of subsidies, with LPG (used in cylinders) is a much smaller portion.

[caption id="attachment_1438" align="aligncenter" width="580"]Egyptian Center for Economic Studies Egyptian Center for Economic Studies[/caption]

The Morsi administration would be well advised to follow through with its plan to introduce a new fuel rationing system from July 1 to raise prices of fuel used by the well-off.

But like most policy changes in Egypt, this could easily be delayed for months and even into next year.

One Comment

  • sinan yilmaz
    Posted April 4, 2013 at 2:47 am | Permalink

    Price subsidies/controls are the least effective form of social policy. Here in Turkey most of the price controls have been lifted, what is being done is either income subsidisation and/or direct material aid to the economically disadvantaged. The aqwan should perhaps analyze the Turkish model more colesely, after all we have had IMF step in back in 2001 and step out in 2007. Altough we have long ways to cover in tax equitiblity the tax base has been tremendously expanded and tax revenues increased, which in my opinion, as a measely business admin PhD is the correct way to go. The problem with the leventan economies seems to be based on the states inability to generate tax income…..

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