Egypt to cut fuel subsidies further in final phase of IMF programme

Washington-based lender has made $12bn available to Egypt over three years

The Cairo skyline. Egypt received a $639 million credit facility from the Arab Monetary Fund. Reuters

Egypt will remove subsidies on most energy products by June 15, it told the International Monetary Fund in a letter released on Saturday, as it nears the end of a three-year, $12 billion (Dh44bn) loan programme with the Washington-based lender.

Cairo will increase the consumer price of gasoline, diesel, kerosene and fuel oil under the plan, which are now at 85-90 per cent of their international cost, according to the letter, which is dated January 27 but only released by the IMF on Saturday.

“We will make additional increases to achieve our objective of 100 per cent cost recovery by June 15, 2019 -- excluding liquefied petroleum gas and fuel oil used for electricity generation and bakeries,” the letter jointly signed by Egypt’s central bank governor and finance minister said.

Fuel prices in Egypt have increased gradually in the past three years. In December, Egypt’s Prime Minister issued a decree to link lesser-used Octane 95 gasoline to international prices from the end of December 2018, with the first price adjustment at the end of March 2019.

In its January letter, the government said it would introduce indexation for other fuel products by June 5, with the first adjustment by end of September 2019. Reform of electricity subsidies will continue as planned to achieve full removal by 2020-21.

The letter was included in an IMF staff report dated January 28 and published following the disbursement in February of the $2bn fifth tranche of the loan package intended to spur Egypt’s recovery after years of economic decline. The IMF did not give the reason for the delay in publication.

North Africa’s largest economy suffered major setbacks due to political turmoil after the Arab Spring, with economic growth slowing, capital outflows increasing and inflation skyrocketing. The country is implementing widespread economic reforms to drive growth and boost private sector's contribution to the country's gross domestic product.

Egypt’s reform of fuel subsidies “is on track to be completed in 2018-19” and while the government in letter said it has put in place a hedging mechanism to protect against oil price shocks, the IMF in its report “advised caution” in doing that.

Egypt’s macroeconomic situation has “improved markedly” since the start of the programme, according to the IMF. “Growth has accelerated; external and fiscal deficits have narrowed; international reserves have increased, and public debt, inflation, and unemployment have declined.”

The outlook is favourable, with the continued strengthening of tourism and construction, and rising production of natural gas, expected to help raise GDP growth to 5.5 per cent in 2018-19. Growth is projected to rise further to 6 per cent over the medium term as ongoing structural reforms are fully implemented, the IMF noted.

Egypt’s current account deficit is projected to gradually narrow to under 2 per cent of GDP in the medium term, while the overall deficit is set to narrow to 8.3 per cent in 2018-19 from 9.8 per cent in the last fiscal .

The 2018-19 budget is also on track to reach the targeted primary surplus of 2 per cent of GDP, which will complete the programmed three-year fiscal consolidation of 5.5 per cent of GDP, the report said.

However, there are risks linked to a more challenging external environment including the tightening of global financial conditions leading to capital outflows, pressure on Egypt’s external accounts and higher borrowing costs, the lender said.

“The objective of our program is to further strengthen macroeconomic stability by reducing inflation and public debt, promote inclusive growth, employment creation and private sector development, and protect the poor and vulnerable,” Egypt said in its letter to the IMF.

“We will monitor economic developments and performance and stand ready to take additional measures that may become necessary to achieve our programme goals.”