Sunday,19 May, 2019
Current issue | Issue 1397, (7 - 20 June 2018)
Sunday,19 May, 2019
Issue 1397, (7 - 20 June 2018)

Ahram Weekly

Oil pains

Hikes in global oil prices might force the government to raise fuel prices further to meet its fiscal and budgetary targets, writes Nesma Nowar

Oil pains
Oil pains

The government might soon find itself between a rock and a hard place as a result of the rise in global oil prices. 

The increase in oil prices means that the government will need to pay more for fuel imports, thus increasing the amount needed to buy the same amount of fuel. This could distort government fiscal targets for the new fiscal year 2018/2019. 

In the new budget, currently being discussed in parliament, the government is targeting cuts to fuel subsidies of 19.1 per cent to LE89 billion, down from LE120 billion in the current year’s budget. It has also set the budget deficit at 8.4 per cent. 

However, the plan assumes an oil price of $67 per barrel. Benchmark Brent crude prices have risen 19.3 per cent since the beginning of 2018 to almost $80 per barrel, and on Tuesday it was trading at $74.21 per barrel. 

Every $1 increase in the price of a barrel of oil costs the government LE4 billion, and the unexpected increases in the price of oil raise the possibility that the government will need to raise fuel prices by more than it had planned in the next round of fuel subsidy cuts to meet its fiscal targets. 

The subsidy cuts are expected to take place by the beginning of the new fiscal year, which starts on 1 July.  

Last week, the government published a document giving the cost of fuel imports at an oil price of $75 per barrel. According to the document, it bears a total cost of LE103.798 billion for fuel imports, the difference between import costs and local selling prices.

The document said that the government sells octane 92 petrol locally at LE5 per litre, while importing it at LE10.84. This means it must bear LE10.225 billion in costs. Imports of 92 octane totalled 1.751 billion litres this year.

Octane 80 is sold locally at LE3.65 per litre, while it costs LE9.66 to import. With imports totalling 2.068 billion litres this year, the government bears LE12.532 billion in costs.

For diesel, the government sells this locally at LE3.65 per litre, while importing it for LE11.14. With imports totalling 6.780 billion litres this year, the government bears LE50.782 billion in costs.

For fuel oil, the government sells this locally at LE2,510 per ton, while importing it at LE8,098. With imports totalling 0.66 million tons this year, the government bears LE3.688 billion in costs.

Cutting subsidies to reduce pressures on government spending is one of the country’s main goals as it pushes forward with reforms to revive the economy and tighten the deficit. It is also a condition of the $12 billion deal that Egypt signed with the International Monetary Fund (IMF) in 2016. 

Mahmoud Al-Masry, an economist at Pharos Holding, an investment bank, said that the higher oil prices might not prompt the government to increase fuel prices in the short term as Egypt has signed long-term contracts for importing oil at reduced oil prices. 

These contracts secured Egypt’s imports until the end of the 2018, Al-Masry said.

The problem would emerge should oil prices remain high and the government find itself obliged to sign new contracts at the higher prices, he said. “In this case, the finance ministry will raise the oil price it has been assuming in the mid-year review,” Al-Masry told Al-Ahram Weekly. 

This might result in steeper cuts in fuel subsidies by the end of the year in order for the government to meet its targets and abide by the timeline for eliminating subsides completely by the end of fiscal year 2018/2019.

However, Al-Masry said it was unlikely that there would be a need for new contracts in the coming fiscal year, as imports for the year have been secured through long-term contracts not affected by the hike in oil prices. 

The current higher oil prices might prompt the government to apply the subsidy cuts sooner than expected to save money on oil imports, he said.

Ihab Al-Dessouki, head of the Economics Department at the Al-Sadat Academy for Administrative Sciences in Cairo, said the increase in oil prices would push the government to increase fuel prices more than it had originally planned in order to maintain its targets and commit to slashing fuel subsidies completely by 2019. 

He said that rising oil prices would burden the budget, as the cost of imports would increase, especially since Egypt imports 50 per cent of its petroleum needs. Further increases in fuel prices would also prompt a higher rate of inflation, which Al-Dessouki expected to surpass 30 per cent following the subsidy cuts this summer.

The two recent fuel-price hikes triggered across-the-board price increases, pushing inflation rates to unprecedented levels, though inflation started to ease afterwards. Annual inflation dropped to 13.1 per cent in April from 13.3 per cent in March, in line with the Central Bank of Egypt’s (CBE) inflation target. However, there are expectations it could soar again after the expected subsidy cuts.

Though analysts said the impact of the fresh round of subsidy cuts on inflation would be limited, higher oil prices will most likely exacerbate it. Al-Dessouki said the government would have to find ways to increase its revenues though amending the tax system and rationalising consumption to offset the impact of higher oil prices on fiscal targets. 

A recent research note by London-based research group Capital Economics estimated that fuel prices would have to rise by 60 per cent in July to keep the subsidy reform programme on track. It said the government would be forced to increase prices by more than it otherwise would have done to meet IMF-mandated fiscal targets. 

A recent report by Naeem Brokerage, an investment group, said that oil prices remaining high was one of the key risks that had emerged lately for Egypt, and that this could prolong the period of economic restructuring and external support.

It also warned that social instabilities re-emerging because of another round of inflation could coax the government to revert to policies aiming to assuage popular discontent.

However, the government has been trying to take pre-emptive moves to mitigate the negative effects of the imminent subsidy cuts on those with limited incomes. It is working on plans to reinforce the country’s social security net with a LE15 billion package starting in the new fiscal year in July.

The package is expected to include a small increase in the monthly allowances given to cardholders to buy subsidised food, as well as an exceptional raise for civil servants and extra allotments for the conditional cash-transfer programmes Takaful and Karama, according to press reports. 

On Monday, parliament approved a 15 per cent rise in pensions for state employees to take effect on 1 July. The government has also approved a LE40 increase in the salaries of state employees.

There have been two price hikes on fuel since November 2016. The first, which saw fuel prices increase by 47 per cent, took place hours after the CBE decided to float the local currency. The second was in July last year, eight months after the initial price hike when fuel costs went up by an average of 50 per cent.

Egypt is not the only country pressing ahead with plans to raise fuel prices. Jordan recently announced hikes in fuel and electricity prices, but protests have caused Jordanian King Abdullah to freeze the hikes for a month. 

Argentina also increased petrol and diesel prices this month by five and 4.5 per cent, respectively. 

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