Egypt Subsidy Withdrawal

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.

Egyptian Center for Economic Studies

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.

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