Saturday,23 June, 2018
Current issue | Issue 1349, (15 - 21 June 2017)
Saturday,23 June, 2018
Issue 1349, (15 - 21 June 2017)

Ahram Weekly

Further cuts in subsidies?

Further cuts in electricity subsidies are expected to lead to higher inflation, putting a greater squeeze on those on low incomes, writes Hisham Salah

Electricity prices might witness another hike in the new fiscal year
Electricity prices might witness another hike in the new fiscal year

SUBSIDIES have been cut in many public sector services since 2014, especially affecting the prices of electricity, gas, oil, water, transportation and other utilities. The effects have included increases in inflation that have affected all segments of Egyptian society from the upper to the middle and lower classes.

The Ministry of Electricity and Renewable Energy has now announced that it will likely implement another tranche of cuts in subsidies to electricity this month, putting further burdens on many. The planned cuts will also not be the last, according to a government plan to remove the highest subsidies by fiscal year 2018/2019.

The ministry has not said how far prices will need to rise, but media outlets have stated the rise will be between 10 and 15 per cent.

According to ministry spokesperson Ayman Hamza, the government is studying the possibility of changing the schedule for the subsidy cuts, or removing the subsidies entirely by 2021 or 2022.

Economic experts and investors agree that the cuts add significant new burdens to many. But economist Hani Genena believes that implementing the new cuts is necessary because of the government’s commitment to its economic reform programme and because the ministry has debts to the Egyptian General Petroleum Corporation (EGPC) of some LE100 billion.

Postponing the cuts would mean more debt for the ministry, which it could not support, he said.

People would need to tolerate the new cuts in subsidies because “there is no other option,” Genena said. He said the inflation rate would also increase due to the effects of electricity prices on inflation.

Egypt’s annual inflation rate was 30.57 per cent in May, according to the Central Bank of Egypt’s (CBE) monthly report.

Genena said the CBE would probably raise interest rates further in a bid to control inflation, adding that there was a need to rein in the money supply.

The CBE raised its key interest rates by 200 basis points on 21 May. It increased its overnight deposit rate to 16.75 per cent from 14.75 per cent and its overnight lending rate to 17.75 per cent from 15.75 per cent.

The government would also need to increase the production of certain goods and to guarantee stable exchange rates, one of the most important factors in controlling inflation, Genena said. He said further increases in interest rates were likely next year.

Former dean of the Faculty of Economics and Political Science at Cairo University Aliaa Al-Mahdi said that the new cuts in electricity subsidies would mean an increase of 15 per cent over current prices. She added that if the price of oil increases by July, this will place a double burden on people already suffering from the consequences of the floatation of the Egyptian pound in November.

Higher oil prices would mean higher costs for production and services, including transportation, she said, putting an additional squeeze on those on lower incomes.

“Unfortunately, Egypt’s economy is not seeing high growth rates in terms of GDP, and this is making the situation worse,” Al-Mahdi said, adding that in her view not enough was being done to lighten the load on vulnerable sections of the population.

Head of the 6 October City Investors Association Mohamed Khamees Shaaban said that the decision to cut subsidies further was important because not enough had been done rationalise the system and properly target the subsidies.  

He suggested that the government increase the consumption tranches of the poorest segments of the population, such that they did not pay more for electricity.

He said that the consumption of electricity varied between the different fields of industry, adding that some industries consumed more than they needed to. Companies should rationalise their consumption, according to the electricity law issued by the Ministry of Finance last year, he said.

He also emphasised that investors would now need to recalculate costs as a result of the increases in electricity prices and that there would be pressures to raise the prices of finished products to reflect the higher rates.

“The government must reach out to the people who are eligible for the subsidies and target them more effectively. It must make more efforts to target all the money it spends in subsidising bread or gas or oil,” Shaaban said.

The decision to further cut the electricity subsidies has led to protests on social media. Mohamed Mahmoud, a 27-year-old cashier in Cairo, said that prices were already too high for many people. “Enough is enough with the increasing prices,” he said.

Hanan Suleiman, a 32-year-old teacher, said that wages were not increasing to keep pace with the increases in prices, meaning that soon people would no longer be able to buy the goods or services they needed.

The writer is a freelance journalist

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