CAIRO: Fuel prices in Egypt jumped between 40 percent and 78 percent for petrol, and 175 for natural gas overnight in early July, following a decision by President Abdel Fatah al-Sisi to reduce subsidies. In June 2013, when faced with fuel shortages, lines of cars snaked around blocks adjacent to gas stations. The change last month was met with less fanfare; save for a few talking heads blasting microbus drivers for speculation, the Egyptian public has taken this change in stride, although many experts warn that the full ripple effect of price increases in goods from food to mobile phones has yet to occur.
“We had to take these decisions, they are like a bitter pill,” Sisi said in a July speech, adding that the decision to partially lift fuel subsidies was in the interest of all Egyptians, and asking the people to share the burden.
Food and energy subsidies eat up a quarter of state budget; Sisi said he rejected the 2014/2015 budget he inherited from predecessor Adly Mansour because it would have included a deficit of more than 300 billion EGP ($42 billion,) with the government paying an average of 600 million EGP daily on loan interests and similar figure for wages, in addition to 400 million EGP for subsidies.
Egypt’s budget deficit reached 189.4 billion EGP (around 9.3 percent of GDP) during the first 11 months of the fiscal year 2013/14, compared to 204.9 billion EGP (11.7 percent of GDP) during the same period in the previous FY, the Ministry of Finance stated in his Economic Performance Report for July.
In June, Sisi approved a revised and tightened budget for the 2014/15 fiscal year, after the deficit was reduced to 240 billion EGP ($33.57 billion), 10 percent of GDP, while the budget draft foresaw a 292 billion EGP shortfall.
In the new budget, energy subsidies were cut by 10 percent to 100.3 billion EGP, compared to 144 billion EGP in the Mansour budget.
The government plans to remove energy subsidies completely within three to five years, Minister of Finance Hany Kadry said in a press conference June 30.
“Unpopular decisions must be carried out by a popular man… Sisi’s decisions concerning taxes and wages were not to be taken by anybody else, but it will of course hurt his popularity, especially among businessmen, government’s leading officials and advisors, banking, public as well as petroleum sectors,” Hany Tawfik, head of the Egyptian Private Equity Association posted on his Facebook page July 4.
During his one-year rule, Islamist former President Mohamed Morsi and his administration were unable to apply any austerity measures to help the country’s limping economy, battered by low revenues from tourism and foreign direct investments since the January 25 Revolution which toppled former president Hosni Mubarak.
Morsi’s government led by Prime Minister Hisham Qandil tried to negotiate with the International Monetary Fund (IMF) to obtain a $4.8 billion loan with the aim of reinstating investors’ confidence in a country hit by political upheaval, but the talks reached an impasse over IMF demands that Egypt implement economic reforms including tax increases and increasing subsidies.
“We did not fail in getting the IMF loan, but we have (Egypt) rejected the IMF conditions for the loan as it does not achieve the interests of the Egyptian people,” Morsi said in an interview with Al-Jazeera in April, 2013.
“We have ongoing talks with the IMF to achieve the future interests of the citizens without harming them in the current time through price hikes,” added Morsi.
Addressing the energy crisis was a key policy challenge that many believe Morsi failed, and fuel shortages helped inflame protests against his regime on June 30 before the military deposed him on July 3.
Reducing subsidies will result in price hikes, unemployment and other consequences of austerity measures, Tawfik wrote, urging President Sisi to gradually apply such steps in light of the current political situation and security instability.
“The solution is based on cash aid for the low-income people to avoid their anger, besides a Value Added Tax (VAT) on the incomes and salaries of employees rather than cutting their wages to achieve revenues without harming the State administrative body,” added Tawfik.
Capital market expert Dr. Abdel Rahman Taha said Sisi’s economic vision seemed “more clear” in his recent speech marking the 62nd anniversary of the July 23, 1952 Revolution.
“Sisi has never relied on his popularity. If so, he would increase the budget deficit and increase the subsidies rather than cutting them down, and let the country sink dramatically, for fears of arousing public anger against him,” said Taha.
“Sisi spoke about an economy that promotes Egyptians and achieves their welfare. Sisi said Egypt is in no need of an economy which steals their [Egyptians’] freedom, meaning there is independence in political as well as economic decisions,” Taha told The Cairo Post.
The price hikes are hitting an Egyptian population that has yet to reverse a steady rise in unemployment. Over 13 percent of Egyptians were unemployed in the first quarter of 2014, according to the state-run statistics body CAPMAS, compared to a pre-2011 revolution rate of between 7 percent to 8 percent, and youth represent the around 25 percent of the current jobless.
Transportation fares jumped more than 25 to 50 percent following the fuel price hike, adding a new burden to Egyptians suffering from food prices which also surged in late June ahead of the Muslim fasting month of Ramadan.
Economists expect inflation rates to go higher as the cost of manufacturing, building materials and food products will increase along with higher fuel costs.
In an attempt to control inflation, which amounted to 8.2 percent by June-end, the Central Bank of Egypt (CBE) raised the overnight deposit rate, overnight lending rate and the rate of the CBE’s main operation by 100 basis points each to 9.25 percent, 10.25 percent, and 9.75 percent respectively July 17.
The discount rate was also raised by 100 basis points to 9.75 percent, according to CBE’s official website.
“The absence of the government’s executive role and control over the markets along with individuals’ role in motoring the prices and the State Administrative Body triggered such soaring prices,” said Taha.
Revolution and bread
Egypt is the world’s biggest wheat importer according to the Food and Agriculture Organization, importing around 5.5 million tons of wheat for bread subsidies annually, an estimated 50 percent of its needs. In the new budget, bread subsidies were reduced by 13 percent to 18.5 billion EGP, down from 21.3 billion EGP in the previous FY.
The Ministry of Supply plans to apply reforms to its bread subsidy program along with improving wheat storage system in order to cut its import by 30 percent, Minister Khaled Hanfy said in a press conference last month.
In April, the ministry launched a new smart card system to monitor bread distribution in subsidized bakeries, where a loaf is sold for 5 piasters (less than 1 cent) compared to the market price of 25 piasters to 50 piasters ( $0.03 to $0.05) to control waste. The new system is aimed at overcoming the black market for flour, and it is scheduled to be implemented nationwide by October.
Under the new system citizens will use their smart cards to purchase approximately 20 different subsidized goods at grocery stores across the country, in addition to bread.
The government in collaboration with the UAE is also planning to build new silos to improve storage conditions and increase capacity for increasing local wheat purchases.
The UAE announced in October it planned to build 25 silos with a storage capacity of 1.5 million tons to help the government reduce its wheat imports.
“With the completion of the new system our imports will fall around 30 percent,” Minister Khaled Hanfy told Reuters.
To help the people cope with the upcoming price increase, the government should launch a number of mega projects, such as the recently launched enterprises around the Suez Canal to offer job opportunities for the youth to help them gain new money, Amr Hassanein, Chairman of Middle East Rating and Investors services (MERIS), told The Cairo Post.
“Such projects could help Egyptians take Sisi’s bitter pill, as it will revive economic sectors,” Hassanein said.