Post-25 January Revolution governments were reluctant to reform Egypt’s inefficient energy subsidies. However, the interim administration recently announced bold plans to finally reduce the aid, but it heightened the controversy.
Strained by a gaping budget deficit, the Egyptian government has recently taken some socially unfriendly measures to rein in its fiscal deficit. After years of reluctance, Ibrahim Mehleb’s government has finally moved to cut back on energy subsidies which eat up a quarter of the state budget and is expected to reach some LE130 billion by the end of the current fiscal year which ends on 30 June.
In April, the government decided to increase the prices of piped natural gas and electricity, its decision coming into effect at the end of May. The government increased the price of piped gas, used for cooking and heating water, to LE0.4 per cubic metre compared to LE 0.1 for users of less than 25 cubic metres per month. Those consuming 25 to 50 cubic metres per month will pay LE1 compared to LE0.5, while those exceeding the 50 cubic metre threshold will be charged LE1.5, up from LE0.5. Natural gas price hikes are applied to household and commercial use, but not to the electricity sector, the largest consumer of gas in Egypt.
These increases, which will save the government from LE800 million to LE1 billion, are not set to affect the low-income brackets, with the government saying that around 70 percent of households use less than 15 cubic metres a month. Besides gas, the government would raise the electricity tariffs for the richest 20 percent, but the details of the increase have not yet been released. Egyptians pay for electricity usage according to six consumption brackets, with kilowatt per hour price ranging from LE0.05 to LE0.67.
While the government announced plans for hiking the price of gas and electricity, it has not decided on raising fuel prices. 80 Octane, 90 Octane and diesel are heavily subsidised and are sold at a fraction of their cost. An official source stated recently that the government has two scenarios for raising fuel prices. The first would be increasing the prices of fuel as soon as the new budget comes into effect, on 1 July. This will involve LE1 increase in the prices of 80 Octane and 92 Octane fuel, which in turn would save the government some LE6 billion a year. This scheme would also entail a rise in diesel prices by LE1, saving LE16 billion annually.
A litre of Octane 80 gasoline is currently priced at LE0.9 ($0.12), while Octane 92 sells for LE1.85 ($0.30). In November 2012, the government lifted subsidies on the finest quality of fuel, 95 Octane, selling it for LE5.85, up from LE2.75 per litre. A litre of diesel is currently priced at LE1.1 ($0.16).
The second scenario would be that the government would wait until it has finished the distribution of smart cards to car owners by the end of this year. The government has pressed ahead with this new smart-card system for distribution of fuel which aims at rationalising subsides and preventing the smuggling of subsidised petroleum products. Under the new scheme, car owners will get a specified amount of subsidised fuel and should they need to consume more they will have to buy it at cost price. In May, it was reported that the government had issued two million fuel smart cards to be ready for use in petrol stations nationwide.
source: Ministry of Finance
Though rationalising energy subsidies has long been a top priority for economic reform in Egypt, hikes in fuel prices have always triggered fears that it would lead to a spike in commodity prices after transportation fees increase as a result of increased fuel prices. But experts believe that fuel constitutes only 15 per cent of production inputs, a percentage that should not significantly impact the commodities’ prices.
They also believe that a decision to raise fuel prices should be accompanied by firm state government supervision of the market to prevent inexplicable price hikes. The last time fuel prices were hiked was in 2008, when the parliament agreed to a 30 percent increase in fuel prices with the exception of 80 Octane gasoline.