Friday,14 December, 2018
Current issue | Issue 1399, (28 June - 4 July 2018)
Friday,14 December, 2018
Issue 1399, (28 June - 4 July 2018)

Ahram Weekly

Painful cuts

The latest round of fuel and electricity subsidy cuts will increase production costs for most businesses, with the increases being passed on to consumers, reports Nesma Nowar

 The fuel price hike is thought to have an inevitable impact on some industries
The fuel price hike is thought to have an inevitable impact on some industries

With the government announcing further fuel and electricity price hikes as it presses ahead with its economic reform programme, many people are bracing themselves for a new wave of increases in the prices of goods and services. 

There has been a rise in the prices of butane gas canisters, hiked from LE60 to LE100 for commercial use, accompanied by a 50.7 per cent rise in diesel prices, the regular fuel for heavy transport vehicles.

This is in addition to raising the prices of electricity by an average of 26 per cent from July. 

The increases will affect some industries more than others. Mahmoud Al-Masry, an economist at local investment bank Pharos Holding, said that industries which rely on fuel in their production will be affected the most. These include the fertilisers industry as well as cement and steel companies that still rely on fuel to run their factories.

However, a lot of these factories have started to convert to coal in recent years to avoid the impact of subsidy cuts, Al-Masry said.

Research consultant Dina Al-Kayali said that the majority of cement factories used coal or renewable energy to run their factories.

All the factories use electricity to run their filters and internal lighting, however. “But these consume little electricity, so raising electricity prices should increase production costs by at most two to three per cent,” Al-Kayali said.

She added that the factories could work on reducing their electricity consumption through applying green solutions to lighting systems. 

The fuel price hike will have an inevitable impact on transportation costs, however. Al-Kayali said these could be reduced by factories converting their transport fleets to run on natural gas instead of fuel oil. 

Other industries that will be mostly affected by the subsidy cuts are those that rely on transportation to distribute their goods, such as the food and beverage industries, Al-Masry said.

Transportation or distribution costs represent five to seven per cent of total production costs, meaning that the recent fuel price hikes will cause a 1.5 per cent rise in production costs for these industries, he said.  

Despite this, the subsidy cuts should not affect the industries adversely because they will pass on the rise in costs to the consumer. “The burden will be borne by the consumer,” Al-Masry said

He added that the rise in fuel prices alone would push inflation up by 1.5 per cent, and when accompanied with other factors would likely increase by around three per cent in July.

This would cause a drop in the purchasing power of consumers, but the decline would not be equal to the hike in prices “because demand in Egypt is inelastic and people will still have to buy essential items,” Al-Masry said. 

Transportation services have inevitably raised their prices, with ride-hailing apps Uber and Careem increasing fares for different services. Meanwhile, the ride-hailing app service for white taxis Egy Taxi said it was suspending its services indefinitely on the back of the latest fuel price hikes.

The government also raised taxi fares by 10 to 20 per cent following the subsidy cuts.

Some other goods and services will be less impacted by the cuts. There should be no increases in the price of subsidised bread because most bakeries use natural gas to run their ovens, head of the Bakeries Division at the Cairo Chamber of Commerce Attia Hammad said. 

Prime Minister Mustafa Madbouli said last week that bread prices would not be affected by the hike in diesel prices as the Ministry of Supply would bear any extra cost to bakeries to ensure that the price of the country’s main staple remained unchanged. 

Hammad said that some unregistered bakeries used butane gas canisters, however, indicating that these could still pass on price increases to consumers.

Ahmed Refaat, a restaurant owner in Cairo’s Dokki district, said that prices on his menu would not see large increases as the restaurant used natural gas and not butane gas canisters. “Prices will only increase because of the hike in electricity prices, which will lead to larger electricity bills,” Refaat told Al-Ahram Weekly. 

He added that he would likely raise home delivery fees to accommodate higher fuel prices.

Service industries, such as tourism and financial services, are not likely to be affected by the subsidy cuts, Al-Masry said.

For the fourth time since 2014, the government raised fuel prices on 16 June as part of a $12 billion loan deal from the International Monetary Fund signed in late 2016. 

95-octane petrol prices went up from LE6.6 to 7.7 per litre, and 92-octane was hiked to LE6.75 from LE5 per litre. 80-octane increased to LE5.5 from LE3.65, while diesel went up to LE5.5 from LE3.65 per litre. 

Petroleum Minister Tarek Al-Molla said this week that cutting energy subsidies would help save up to LE50 billion in subsidies in the 2018/19 budget.

In its new budget, the government is targeting cuts to fuel subsidies of 19.1 per cent to LE89 billion, down from LE120 billion in the current year. Al-Molla added that the total cost of oil products subsidies over the past five years had hit $517 million. 

Despite the fresh round of subsidy cuts, Ministry of Petroleum Spokesperson Hamdi Abdel-Aziz said the state still subsidised fuel by between 20 and 25 per cent of its true cost.

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