Sunday,22 October, 2017
Current issue | Issue 1205, (10 - 16 July 2014)
Sunday,22 October, 2017
Issue 1205, (10 - 16 July 2014)

Ahram Weekly

Taking the plunge

After years of hesitation, the government took the plunge this week and partially cut fuel subsidies, writes Niveen Wahish

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eco01
Al-Ahram Weekly

For the past couple of weeks the government had been playing a game of hide-and-seek. News would leak out that fuel prices would increase, and people would line up at gas stations to fill their tanks, but then nothing would happen. But this week the government took people by surprise and increased the price of petrol, diesel and natural gas by 40 to 175 per cent.

“The decision could not be delayed any longer. Some petrol stations were already hoarding fuel in anticipation of the subsidy being lifted and any further delay would have caused disruptions in the market,” explained Yasser Sobhi, head of the macro fiscal policy at the Ministry of Finance.

The last time Egypt applied such comprehensive fuel subsidy cuts was in 2008. Limited reform was carried out in 2012, lifting subsidies on octane 95, the highest-quality gasoline on the market.

Although the timing of the move was sudden, it was a decision waiting to happen given the newly approved budget where the targeted deficit had been trimmed by LE48 billion to LE240 billion, or 10 per cent of GDP. The move was inevitable if the trim was to happen, and in the new budget allocations for energy subsidies have been cut by LE44 billion to around LE100 billion.

Successive governments have called attention to the need to cut fuel subsidies, which account for a quarter of the budget, but no specific steps have been put in place. Each government would refuse to take responsibility for fear of a possible public outcry.

“It is a step that needed political support,” Sobhi said. Newly elected president Abdel-Fattah Al-Sisi put his weight behind the decision since the day he refused to ratify the budget until it was trimmed down. He reiterated his support for the decision on Monday, saying that the need to tackle the energy subsidies was urgent.

The new measures have not gone down well with the public, given the expected ripple effect of increased fuel prices on all aspects of life. Brawls between the drivers of private transportation microbuses and taxis and the public have been common throughout the week.

While the government said that fares would increase by 15 per cent at most, most fares actually increased by around 50 per cent. “I paid LE1.5 instead of the usual LE1,” said Yasmine Samir, a shop assistant, “and that is only for part of the journey I make every day to work.”

The increases would eat up her salary, she said. “It is not just what I pay for transportation, but even the prices of foodstuffs will increase on the back of these hikes.”

One of the highest increases, reaching 64 per cent, has been that of diesel, which went up from LE1.10 to LE1.80. Diesel is mostly consumed by mass transportation vehicles, as well as transport trucks and agricultural machinery. The main reason the subsidy cuts have come under attack is that some think they will hit the poor the hardest.

Hossam Arafat, Head of the General Division of Petroleum Products at the Federation of Chambers of Commerce, said that the hikes were a bitter pill that had to be swallowed, however. “There is no appropriate time to implement this decision; it is already long overdue,” he said. But he regretted that there was not enough supervision in place to ensure that drivers or shop-owners did not take advantage of the situation to overprice goods and services.

In an attempt to alleviate the situation, officials have been paying field-visits to microbus stops in an attempt to ensure that divers are not overpricing fares, and the Armed Forces has sent out buses to the streets to provide commuters with an alternative to striking drivers. It has also announced that state-run supermarkets and army-owned outlets will sell food at low prices.

The price increases were “a one-off shock,” Sobhi said. Keeping the subsidies unchanged would have had a structural inflationary effect. Meanwhile, to offset any negative effects the government was working on reprioritising spending to focus on improving basic services such as health and education, he said.

Budget allocations for fuel subsidies are twice as much as what Egypt spends on education and four times what it spends on health, he added. The new plans include allocating funds for completing the underground metro network, adding some 1,000 new buses to the public bus fleet, and improving river transport.  

Cutting fuel subsidies has long been recommended by local and international experts as a measure to free up the budget to allow for more spending on improving such basic services. One of the main reasons cited for the need to reform fuel subsidies is that they do not really benefit the poor because 80 per cent of subsidised gasoline is consumed by the richest 20 per cent of the population.

The partial lifting of the subsidies was applied to all types of fuels simultaneously. “This was the right thing to do,” said Arafat, explaining that it was the best way to guarantee that consumers did not switch to cheaper subsidised products.
However, he feared that the price differential between octane 80, which sells at LE1.6, and the more refined octane 92, which sells at LE2.60, may entice consumers of the latter to switch to the former to achieve savings.

He said that octane 80 already attracts 55 per cent of fuel consumption and was worried that if more vehicles switched to it there might not be enough to meet demand.

The highest increase in price, 175 per cent, was for natural gas, which went from LE0.4 to LE1.10. “This is a huge leap in prices,” said Hatem, a driver of one of Egypt’s white cabs which mostly run on natural gas. However, he said that “thankfully the government has been quick to announce an increase in fares, and we will adjust our meters accordingly.”

The meters will now start at LE3, instead of LE2.5, and each kilometre will be charged at LE1.4 instead of LE1.25. But while the taxi drivers may be satisfied, passengers are not happy with the added expenditure. “If the government wants to increase prices, then it should increase our incomes as well,” said Noha Abdallah, who depends on taxis for transportation.  

Critics of the government decision argue that lifting the subsidies should have been accompanied by cash transfers to citizens, as was the case with other countries that have taken similar steps.

According to an Economic Research Forum policy perspective by Djavad Salehi-Isfahani, professor of economics at Virginia Tech in the US, “cash transfers are an important part of the reform package. They can reduce poverty and inequality while increasing the reform’s general acceptance.”

 Isfahani’s conclusions are based on studying Iran’s experience in implementing an ambitious subsidy reform programme for energy and bread in 2010, under which households were given a monthly cash transfer of about $45 per person.

“The compensation scheme was essential to the initial success of the programme and allowed the largest energy price reforms in history to go through without the social unrest that usually accompanies, and often derails, much smaller fuel price increases in other countries,” he said.

According to Sobhi, such policies were being applied in Egypt as well, though on a limited scale. He pointed out that 1.5 million families were receiving up to LE450 per month under the social solidarity pension scheme. “Plans are underway to double the number of beneficiary families in the current budget,” he added.

Sobhi is optimistic about the positive impact of this week’s decision. He said that the decision was also bound to have positive repercussions on the production of oil in Egypt.

As oil-extracting companies perceive that Egypt is getting its financials in order and that they will be able to receive their arrears, which amount to about $6 billion, they will be willing to make further investments, he said. And as investment improves, so will oil production, thus reducing the need for imports.

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