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Farah Halime

Farah HalimeEgypt scales back energy subsidy reforms

By Farah Halime, Rebel Economy

Over the weekend, Egypt released another “energy subsidy reform announcement” to add to the growing pile of releases that seem to disappear within days, with little follow-up.

Egypt is “working on a programme tocut the country’s energy subsidy bill by 50% over the coming five years and to compensate by raising Egyptian wages”, Ahram Online reported, citing the state-run MENA news agency.

And with the government expecting the full year bill on energy subsidies to amount to $16.3bn, a substantial proportion of the state budget, it’s no surprise that Egypt wants to make cuts. Especially since the system, as it stands, benefits the richest the most, rather than the country’s poorest who depend on cheaper fuel for their livelihood.

However, there is a big problem with this announcement: Egypt is effectively scaling back its energy subsidy reform plan.  

Egypt had aimed, for a substantial part of 2012, to cut its energy subsidies by up to a third over the coming year as part of an ambitious plan to reform the economy.

More specifically, as Heba Saleh from the Financial Times wrote in October:

“The reduction by EGP 40bn, or $6.5bn, in the current fiscal year, ending June 2012, is equivalent to roughly a third of the $17.2bn the government is estimated to have spent in the last fiscal year on fuel and electricity subsidies for industrial and domestic consumers.”

Even almost a year ago, on New Year’s Day, 2012, Egypt came out with its New Year’s Resolution, as Reuters’ journalists wrote back then:

“Egypt’s government will increase natural gas and electricity prices paid by heavy industries by 33% this month to narrow its growing budget deficit.

“Economists say cutting energy subsidies, which represent about 20% of total spending, is one of the few practical options the country has to cut the deficit.”

At the time, the higher rates were part of a plan to shave EGP 20bn ($3.3bn) off the deficit.  

But, unfortunately for Egypt’s already confused public, yet more mixed messages were to come. In September, Egypt’s government said it drafted a plan to reduce energy subsidies by EGP 25.5bn ($4.2bn). Here, again the cuts were suggested to come within a year.

At this point, determining which cuts the government will actually make, and how much it will shave off the energy subsidy bill, has become obsolete.

But what is clear is that the government last year had pencilled in quite substantial and swift reforms, and that is now changing.

For example, if the government cuts the energy subsidy bill by $4.2bn (according to the September announcement) that is equivalent to a 25% reduction of a $16.3bn energy bill.  

Cutting $6.5bn from the total bill (according to the October estimate and based on a total annual energy bill of $16.3bn), is equivalent to a near 40% cut of the total bill in a year.

So, if the government is suggesting cutting 50% of the bill but over five years, that’s a substantial markdown from earlier announcements, and should signal to readers that:

a) the government is realising the task of reducing subsidies quickly is much more difficult and contentious and is responding with softer plans, but more importantly,

b) while there is something to be said for a slow reform programme, Egypt is unlikely to recover quickly from its financial woes as long as energy subsidies exist in their current form, because they are such a huge weight on the budget.

So far, little real reform has been implemented. In November 2012, the Cabinet approved cutting subsidies from the high-end 95-octane gasoline used mostly by the middle and upper classes for luxury vehicles. But the more important coupon or smart card system that would see a nationwide impact on subsidy use is yet to be enforced.

Finally, we must consider the bigger picture in reforming energy subsidies. Right now, Egypt spends more on energy subsidies than on health and education combined.What if the government made real reforms quickly that meant Egypt’s poorest didn’t have to rely on the black market for their fuel needs, but also benefited from billions of dollars redirected into health and education—two vital pillars of a successful welfare programme?

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