Thursday,23 November, 2017
Current issue | Issue 1137, 28 February - 6 March 2013
Thursday,23 November, 2017
Issue 1137, 28 February - 6 March 2013

Ahram Weekly

Reductions in fuel subsidies

The government has taken action to reduce energy subsidies in an attempt to curb Egypt’s growing budget deficit, reports Mona El-Fiqi 

Subsidies
Subsidies
Al-Ahram Weekly

With the economy in crisis, the government is under pressure to cap the country’s budget deficit that has been enlarged by energy subsidies that account for around a fifth of the country’s total budget.
The petroleum products subsidy bill reached LE55 billion in the first half of fiscal year 2012/2013 (from June to December 2012), according to figures from the Ministry of Petroleum and Mineral Resources.
In an attempt to cut the energy subsidy, the government decided last week to raise natural gas and mazut (heavy oil) prices for some sectors of energy-intensive local industries such as cement and brick factories.
The price of mazut, widely used by such industries, increased to LE1,500 per tonne from LE1,000 per tonne. Natural gas prices were also raised from $2 to $6 per million BTU.
The decision to raise prices, which came into effect on 20 February, included a provision to revise energy prices annually over the coming three years with a view to raising them to international prices.
Hatem Saleh, minister of trade and industry, said that the mazut price on international markets was above LE4,000 per tonne, but the government was still providing it to local industries at the subsidised price of LE1,500 per tonne.
In response to the decision, hundreds of workers from different brick factories, one of the industries affected, blocked roads in Cairo and other governorates in protest at the price rises. The workers have said that they will escalate the protests and move them to in front of the cabinet building in Cairo if the government does not back down and reverse its decision.
To discuss the implications of the decision, Saleh met representatives of the brick factories owners, saying that the government was keen to support local industries, particularly small industries including brick factories.
By paying the difference between subsidised energy prices and the international price the government was supporting the brick sector to the tune of LE5 billion a year, Saleh said.
He said that a comprehensive study would be conducted of brick factories using different forms of energy before discussions continued with the Ministry of Petroleum so that the factories could increase their total production while at the same time absorbing the hikes in energy prices.
Meanwhile, consumers expect another wave of hikes in construction product prices. Ayman Ali, a civil engineer, said that “due to the rise in energy prices the cement price increased this week to LE700 per tonne, compared to LE600 per tonne one week before and LE500 per tonne in December 2012.”
This increase, according to Ali exaggerated by local manufactures since the rise in energy rates had not been so high, would negatively affect many products needed for the construction sector since cement was used in many phases of the construction process.
“The final price of housing units is expected to go up during the coming period if the prices of construction materials remain high,” Ali said.
The rise in energy prices has not come as a surprise to many businessmen since the government planned to lift the subsidies for industry many years ago.
Representing the businessmen, Mohamed Fahmi, manager of the metallurgical industries division at the Federation of Egyptian Industries, told Al-Ahram Weekly that local industrialists were confident that the lifting of the subsidies on energy provided to local industries was necessary due to the serious economic situation Egypt was facing.
However, “the way the government implements the decision is very important. The application should be gradual, and a clear schedule for raising energy prices over the coming three years should be announced as soon as possible in order to help businessmen take suitable measures to meet such hikes in prices.”
 Another issue was the availability of petroleum products after the hike in prices. It would be illogical to expect energy prices to remain constant on the black market in the wake of the rises in the subsidised prices, Fahmi said.
As part of the moves to cut energy subsidy spending, the government also plans to start rationing subsidised petrol through a system of smart cards that was scheduled to be implemented in April 2013 but has now been postponed to the beginning of July.
“We are working to implement it at the beginning of the new fiscal year [in July],” said Osama Kamal, minister of petroleum and mineral resources, in an interview broadcast on the Egyptian channel CBC.
According to the new system, a quota of subsidised petrol would be provided to drivers through cards. Although the government is reported to be considering the amount of the quota allowed to each vehicle (around five litres for a private car and 30 litres for a taxi per day), officials said that the decision was final even if its application had been delayed.
Any extra petrol would only be available at market prices.
The smart card programme aims to rationalise the country’s energy subsidies, preventing the smuggling of energy products on the black market as well as redirecting the subsidies to the most needy categories of the population.
According to a study conducted by the Ministry of Petroleum, 80 per cent of the energy subsidy bill goes to 20 per cent of well-off individuals.
As a first step to control the energy subsidies, the government eliminated subsidies on 95-octane petrol, the highest grade available, late last year, prompting many drivers to switch to subsidised lower-octane fuel.
Moreover, the government is also considering new legislation that would severely punish those caught smuggling subsidised petroleum products in an attempt to discipline the markets.

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