Monday,24 September, 2018
Current issue | Issue 1393, (10 - 16 May 2018)
Monday,24 September, 2018
Issue 1393, (10 - 16 May 2018)

Ahram Weekly

Aiding sustainable development

The government’s gradual removal of energy subsidies will contribute to sustainable development, helping to rationalise energy consumption and conservation, writes Aisha Ghoneimy

 

The government’s gradual removal of energy subsidies is a decisive and audacious step that reflects and ensures the transparency of its economic policy at a critical stage in Egypt’s economic reform process and in the framework of the 2030 UN Sustainable Development Goals (SDGs).

This is especially the case since the gap between energy supply and energy demand in Egypt is growing with the growth of the country’s population, the irrational use of energy, and the unprecedented levels of the energy subsidies.

The government started to remove subsides on energy gradually, with the goal being for their total removal by 2020. Removing the energy subsidies will create greater incentives for rationalising the consumption of energy due to the higher prices resulting from their removal.

As far as the political economy of such removal is concerned, governments are always reluctant to reduce subsidies in order to avoid popular backlashes even if they do not have anything to offer in terms of reducing social inequalities. Moreover, subsidies may be used as a political tool to attract popular support. However, they are a short-term remedy for chronic deficiencies in the proper distribution of incomes.  

Egypt is in the midst of an excessive budget deficit that has increased dramatically in recent years owing in part to the irrational use of energy supplemented by high demand for natural gas, oil and electricity. As a result, it has become urgent to diversify the country’s sources of energy and to rationalise public expenditure through redirecting subsidies to eligible beneficiaries and enhancing public services to end rampant corruption in the informal market. At the moment, most beneficiaries from the energy subsidies do so at the expense of poorer households.

There are obvious disadvantages of subsidies in that they add to the fiscal burden the government bears by supplying electricity, natural gas and petroleum at lower prices than those on world markets. This is in addition to the excessive and irrational consumption of energy that comes from subsidies and results in shortages of supply.
The public fears the expected surge in energy prices that will come from the removal of the energy subsidies and that will lead in the short run to increases in the price of public transportation, production costs and construction. As a result, it is essential to highlight the fact that these increases will vanish in the long run due to the expansion of the energy supply accompanied by natural gas discoveries and energy efficiencies as well as conservation.

This means that the removal of the subsidies will contribute to sustainable development. Higher prices for energy will make consumers more rational in their consumption and consolidate energy conservation.

The government has also wisely initiated policies aligned with the removal of the subsidies. In the short run, it seeks to redirect the money saved to public investment in education, health, transportation and infrastructure development, the expansion of social safety nets, food subsidies and cash transfers. All these things will help to compensate households for the short-term consequences of higher prices.

Moreover, the government’s National Strategy for the Green Economy was launched in 2016, and this contains a commitment to promoting the use of new and renewable energy sources and energy efficiency in all sectors of the economy in the long run. The recent discoveries of natural gas will also make Egypt into a regional energy hub.  

The government has adopted a longer-term plan for clean energy development through solar, thermal and wind projects, and it has set a target of 20 per cent of electricity being generated from renewable resources by 2020 and the reduction of oil consumption to cut CO2 emissions.

Its industrial development strategy promotes energy efficiency and conservation, green entrepreneurship, industrial efficiency, green technology in local manufacturing and raising the awareness of the public on the need to rationalise energy consumption.

The removal of the energy subsidies can thus be a valuable opportunity for the Egyptian economy to apply advanced technologies and to promote innovation with the aim of decreasing energy consumption by 30 per cent.

It is also essential to incorporate broader environmental and social criteria in investment decisions. More incentives should be created for the private sector and foreign direct investment to direct their investment towards renewable energy sources as well as energy-saving equipment in homes, institutions and broad economic sectors. There should be further investment in human-resource development, as well as research in technologies, practices and procedures concerning energy efficiency and conservation.

Finally, it is essential to bear in mind that there is no single best way of applying subsidy reforms, as each country has its own consumption patterns and economic growth rates. The elasticity of demand and supply in the energy market may vary from one country to another.

The gradual removal of energy subsidies is crucial for achieving sustainable development on the condition that the government provides poorer people with social safety programmes and direct cash transfers to guarantee that aid helps to reach its targets while decreasing the budget deficit.

The removal of the energy subsidies may lead to inflationary pressures in the short run, but the expansion of the supply of energy in the long run will act to decrease prices.


The writer is coordinator of international relations at the Faculty of Economics and Political Science at Cairo University.

add comment

  
 
 
  • follow us on