Wednesday,26 September, 2018
Current issue | Issue 1398, (21 - 27 June 2018)
Wednesday,26 September, 2018
Issue 1398, (21 - 27 June 2018)

Ahram Weekly

Unwavering reform

The new government is pressing ahead with economic reforms initiated by its predecessor. Earlier this week it decreased subsidies on fuel products and announced new prices for electricity that go into effect as of July. This is in addition to increases in water prices.

The drive to cut subsidies is part of a larger programme of structural reforms to unlock Egypt’s growth potential. The programme, which the government began to seriously implement in November 2016 with the backing of a $12 billion extended fund facility from the International Monetary Fund, targets fiscal consolidation and reinstating confidence in the Egyptian economy.

The problem with fuel subsidies is not only that it represents almost 20 per cent of the government’s expenditure; it is the kind of expenditure that does not generate revenues and it encourages increased consumption of energy that is currently mostly imported. Another important shortcoming in the structure of energy subsidies in Egypt is that most of it is directed to those who consume energy more — i.e those who belong to the higher income brackets — and not those who are really in need.

By cutting spending on subsidies, the government hopes to also now direct those funds at vital sectors such as health and education, to provide a better service to citizens.

The government is targeting to cut fuel subsidies 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 instead of the 9.8 per cent projected to be the deficit in the fiscal year that ends 30 June.

The budget for fiscal year 2018-2019 aims at increasing the economic growth rate to 5.8 per cent compared to 5.2 per cent, the estimate for FY 2017-2018.

Though the government is to be praised for its unwavering reform drive, citizens have not had it easy. They are still recovering from price hikes that resulted from the floatation of the pound and two deep fuel price hikes since 2016. The reforms since 2016 caused inflation to shoot to an all-time high of 33 per cent in July 2017. Only in recent months did it cool down, dropping to 11.4 per cent in May. Estimates are that inflation will climb back up again with the new price hikes.

However, the government has taken some measures to help citizens cope with the increases. Last month it revealed a LE15 billion social spending package to reinforce the country’s social security net. In addition to a small increase in ration card allowances, the package includes a 15 per cent increase in pensions for state employees and army personnel as of 1 July. In addition, employees who fall under the Civil Service Law of 2016 will receive a seven per cent increase in their basic salaries while employees who do not fall under the Civil Service Law will get a 10 per cent pay rise.

The government has the difficult task of balancing between trying to please its citizens and accomodating external factors that could affect its reform efforts. The threat of higher global oil prices could mean trouble for the government; it could distort government fiscal targets for the new fiscal year 2018-2019. Had the government not put in place this week’s price hikes, it would have needed to pay some LE180 billion to cover the fuel subsidy bill instead of the targeted LE89 billion. The government had calculated $67 per barrel in its 2018-2019 budget, whereas crude oil has climbed to hover around $80 per barrel.

Some analysts believe that a new wave of subsidies reductions might be in the making due to escalating oil prices amid global political tensions. According to the calculations of the London-based research company Capital Economics, each $1 increase in the price of oil is translated to a LE4 billion increase in the Egyptian government’s expenditures.

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