Egypt to cut energy subsidies further after securing IMF loan

Electricity ministry is to change its electricity tariffs and the new prices will take effect from July 1 next year

Luxor, one of Egypt’s tourist hot-spots, has struggled to attract visitors, leading to a rise in unemployment. Ed Giles /Getty Images

Egypt plans further energy subsidy reductions, raising electricity prices from next summer, after securing billions of dollars in funds from the IMF.

Mohamed Shaker, Egypt's electricity minister, said in Abu Dhabi that the devaluation of the Egyptian pound was going to affect the country's power sector. "We're moving to change the electricity tariff now so definitely there will be some extra costs," he told The National on Wednesday.

On November 3, Egypt allowed the pound to trade freely against the US dollar and other foreign currencies, ending a policy of tight foreign exchange controls amid efforts to shore up the pound. The move was a key factor in unlocking a US$12 billion loan from the IMF – authorised on Friday last week – needed to offset a depletion in its foreign currency reserves thanks to a tourism slump and softening business activity. Other reforms had already been undertaken including, in August, raising electricity prices by between 25 and 40 per cent as part of a five-year strategy.

The pound has fallen by 44 per cent against the dollar since.

The power sector is affected by the devaluation since all of the components of electricity are purchased in foreign currency, such as equipment and fuel.

“That means the electricity sector should secure extra local currency to buy the foreign currency,” said Lamya Hady, the head of private sector projects for the Egyptian Electricity Transmission Company.

As a result, the electricity ministry has gone back to the drawing board to amend its electricity tariffs, with the new prices taking effect from July 1 next year.

“The plan is under review now because before the change in the exchange rate, we knew what the rate would be. But now we’re having to adjust our tariff,” Mr Shaker said.

Electricity consumption has been increasing by 5.6 per cent annually and its 34 gigawatts (GW) of estimated capacity isn’t sufficient to meet this increase in demand, according to Arab Petroleum Investments Corporation (Apicorp).

The multilateral development bank estimates that Egypt will need to invest $28bn in power generation and an additional $15bn in transmission and distribution.

“We are self-sufficient now with the plans that we’ve done to introduce a lot of power generation to the network,” said Mr Shaker. “We can maintain that for the next five years.”

He said that the power projects under construction, such as Siemens’ €8 billion plan to build three natural gas-fired combined cycle power plants, adding 14.4GW of capacity, were being funded. “The power projects under construction, the costs are in euros and we’re paying,” Mr Shaker said.

Dietmar Siersdorfer, the chief executive of Siemens Middle East and UAE, said on Wednesday that Egypt was paying in a basket of currencies. “The financing of this project was secured well in advance and the country has taken precautions to do so because this is one of the most important infrastructure projects in Egypt,” he said.

Apicorp said that uncertainty around the pound’s outlook could stall some projects, pointing to Italy’s Enel pulling out of Egypt’s renewable energy market in July.

The major issue is over the terms for electricity produced to be paid for in local currency. Mr Shaker said that payment for 30 per cent of the power produced will be calculated according to the former controlled dollar exchange rate, at about 8.88 pounds. The remaining amount will be based on current exchange rates. Yesterday, it was trading at about 15.7 to the dollar.

“So if the dollar goes up twice as much, power producers will be paid twice as much [Egyptian pounds],” the minister said.

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