Rising fuel costs in Egypt prompt inflation forecast adjustment

A boy sits at a center for buying and exchanging gas canisters, on the outskirts of Cairo. Asmaa Waguih / Reuters

Egypt’s fuel subsidy cuts this week have prompted the country’s biggest investment bank to raise its price inflation forecast because of the increased energy costs for businesses and consumers that will follow.

Fuel prices, including natural gas, rose by as much as 78 per cent over the weekend. Diesel, which is widely used in industrial transportation and irrigation and which accounts for 50 per cent of the fuel subsidy bill, rose by 64 per cent. Electricity prices have also increased.

Egypt’s fuel and food subsidies have weighed heavily on state finances for decades, preventing the government from spending money on the country’s crumbing schools and hospitals. Since the president Abdel Fatah El Sisi assumed power last month, the government has also implemented new taxes, including on capital gains in the stock market and on those who earn more than 1 million Egyptian pounds (Dh512,260) a year, as well as raising taxes on tobacco and alcohol.

As a result of the fuel hikes, Cairo-based EFG Hermes expects inflation to accelerate to 12.6 per cent in the fiscal year that ends June 30, 2015, from 10.1 per cent in the previous period that ended last month. The bank also downgraded its economic growth forecast for the country to 2.9 per cent in the 2014-15 fiscal year from 3.5 per cent because of the expected pinch on consumer spending growth in the short term.

Industries that will have their profits most crimped by the price increases include ceramics, cement and steel, the bank said.

“The government’s plan is definitely positive news for the economy in terms of dealing with long-neglected structural imbalances,” Mohamed Abu Basha, an economist at EFG, wrote in a report published on Wednesday. “We are, however, concerned about the inflationary impact of these measures taken simultaneously together.”

EFG Hermes noted that the savings for the government from the fuel and electricity subsidy reductions and increased tobacco and alcohol taxes, estimated at 46 billion Egyptian pounds, would help to put the country on a more sustainable growth path. That would allow it to fund educational and healthcare projects as well as boosting economic growth in the long term.

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