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Prospective government faces daunting energy subsidies reforms

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Slashing energy subsidies is one of the requirements set by the International Monetary Fund (IMF)to secure the proposed $4.8bn loan package.

Egyptians in Tahrir square celebrating the ouster of President Mohamed Morsi (Photo By: Mohamed Omar)

Egyptians in Tahrir square celebrating the ouster of President Mohamed Morsi on July 03,2013
(Photo By: Mohamed Omar)

After deposed president Mohamed Morsi’s embattled government was repeatedly criticised for slashing the state’s energy subsidies, the prospective government will face the daunting task of tackling energy subsidies without sparking public uproar.

In an interview with Daily News Egypt on 25 June, interim prime minister Hazem El-Beblawi stressed that rationing fuel subsidies is the solution to lessen the economic harm they add to the state’s budget.

“People have tounderstand that they must accept some of the consequences; the cancelling of subsidies requires sacrifices from the public and therefore necessitates their acceptance,” he said.

“Subsidies have exceeded reasonable limits, and take up more than 25% of the budget, which contributes to a broadening budget deficit and forces us to borrow from other countries with interests as high as 25% of the budget. So in reality, subsidies represent about 50% of the total budget, which deepens the deficit,” he explained.

The government of former prime ministerHeshamQandil had launched a smart card programme in a bid to guide the allocation of subsides to areas of greatest need. At the time the government hoped a system that recorded the consumption of subsidised fuel would combat fuel smuggling, as it aimed to ration the country’s energy subsidies based on collected data, decreasing them from EGP 120bn to EGP 100 bn in 2013/2014.

Slashing energy subsidies is one of the requirements set by the International Monetary Fund (IMF)to secure the proposed $4.8bn loan package.

However, cab driver Atef Sayed denied seeing the smartcard system being implemented.

“We keep hearing the same news over and over again without seeing any of the government’s plans being implemented,” Sayed said.

Despite this, Managing Director at Pioneers Fund Mohsen Adel expects the new government to cancel the smartcard subsidies system and avoid decisions that may result in public disapproval.

He predicted that the new cabinet will decrease subsidies on products, but not directly on consumers.

“It’s an economic-rescue government, which I believe will obviate any austerity measures regarding subsidies and taxes, and instead implement plans for subsidies and energy rationing,” Adel said.

Alaa Mostafa, economic expert and CFO at El-Sewedy Cables Company, agreed, saying that rationing energy subsidies is currently “the right approach to mitigate the effect of fuel subsidies on the Egyptian budget.”

“The subsidies will be converted to cash support, where each segment in the society will get the suitable percentage of the subsidy,” he said.

“This percentage will match the economic needs and the personal income of this segment,” he added.

Mostafa also stated that plans to ration the subsidy will not lead to increases in the cost of transportation, as some Egyptians fear.

El-Beblawi has said in the interview that rationing subsidies “can only be achieved though a relationship built on trust between the ruler and his people, in which the public believes in the ruler’s capabilities and intentions.”

However, despite experts’ reassurances, economic benefits and El-Beblawi’s recipe for achieving it, it may not be enough to win the public’s agreement.

RanaHatem, 22, voiced her disapproval to any change in fuel subsidies.

“I believe this will seriously affect the income level of many Egyptians; not all those who have cars come from a privileged social and economic background,” she said.

Hatem added that fuel subsidies are “part of a social contract between the government and the citizen, and that amid the high rates of inflation, subsidies are the only tangible benefits citizens get from the government.”

Severaldays before the military deposed former president Mohamed Morsi, fuel shortages and mayhem at petrol stations were widespread across all governorates.

Despite a public outcry last December over a number of austerity measures announced by Morsi, Qandil stated that these measures should be implemented to address the budget deficit and reduce it 9.5% in the upcoming 2013/2014 fiscal year. Such measures included slashing fuel, agriculture and food subsidies, raising indirect taxes on goods and amending income and property tax laws.

The government, in addition to introducing the smartcard system, amended the income tax law, keeping the lowest bracket of earners who receive under EGP 5,000 exempted from taxes, while raising taxes on those making more than EGP 250,000 per year from 20 to 25%.

The ousted Morsi and Mubarak governments had both announced plans to raise the nation’s income from sales taxes by transforming it into the value-added tax (VAT).

Commenting on the Morsi government’s plans of imposing high taxes to solve the budget deficit, Adel emphasised that the newly appointed technocratic government will launch the VAT that would be extended to virtually all products with a handful of exceptions.

Adel said that the new government may reconsider the taxation plan which was embraced under Qandil’s government, but it would be hard to apply.

“In the long term, the new cabinet is expected to reconstruct tax plans, and then it will present a new plan that could be passed to the coming parliament, the Shura Council and the interim presidency,” he said.

Adel pointed out that the new cabinet will depend more on the implementation of individual taxes and construction taxes, in order to bolster sales-tax revenues, which reached EGP 226bn in June 2013.

Furthermore, to increase the nation’s revenues the government will try to reach a tax settlement with investment companies. It will also collect delayed taxes and is considering facilitating tax payments with some companies, Adel said.

Since Morsi was elected president in 2012, a number of austerity measures were announced and implemented to secure the proposed IMF loan. Aside from the measures, the loan itself sparked controversy among the public.


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