At times of crisis, the impossible becomes inevitable. Egypt’s unaffordably low energy prices had long been considered politically untouchable, even as they drained the treasury and led to rampant consumption, dried up exports and caused an electricity crisis. But now the new government under the president Abdel Fattah El Sisi has moved suddenly to increase fuel prices — prompted by its international donors, by business at home and by economic reality.
During his time as president, Anwar Sadat was nearly overthrown when he tried to reduce food and fuel handouts. Hosni Mubarak did not dare to touch them during his 30-year tenure, and his administration introduced the pricing system that is at the root of the current gas and power shortage. Mohammed Morsi’s short-lived government increased gas prices to industry but otherwise made little headway.
But on July 4, the oil ministry announced a sudden, sharp set of price rises: the standard 92-octane petrol up 40 per cent, and diesel up 64 per cent. Electricity subsidies will be eliminated over the next five years. The new budget cuts energy subsidies from 134 billion Egyptian pounds (Dh68.63bn) in 2013-14 to 100bn pounds this fiscal year. The price increases brought complaints, strikes from taxi drivers and worries about stoking inflation.
Even with the price rises, Egyptian fuel remains remarkably cheap — diesel is about a quarter of world market levels, petrol about a third. Only the higher-quality 95-octane petrol (equivalent to the UAE’s “Special”) is around international prices. Almost half the budget deficit is still accounted for by energy subsidies.
The continuing energy crisis has impacts beyond the government’s budget. The national oil company loses money on fuel sales, so it cannot refund oil companies their costs, preventing them from investing in sustaining production. Gas has to be sold to the state utility at low prices, which means new fields in deep water off the Nile Delta are uneconomic to develop. So Egypt, from being a major liquefied natural gas exporter, is now contemplating importing expensive LNG as well as gas from its disliked neighbour Israel.
Low electricity prices mean wasteful consumption and dreadfully inefficient generation, which uses almost twice the fuel of the best modern plants. Power cuts damage industry and anger the public.
So subsidy removal is essential for restoring Egypt’s battered economy. The deficit needs to be cut, inflation reduced and spending redirected to more productive needs. This means education, to improve the pathetic literacy rate — a quarter of Egyptians cannot read and write — and fixing the country’s shabby infrastructure.
That will do more to help the poor than lavish energy subsidies that mostly go to the wealthy, who have air conditioners and big cars. Poorer Egyptians need compensation, ideally in direct cash handouts, or if not then in rations and affordable public transport.
International donors, particularly Saudi Arabia and the UAE, will not be prepared to pour their money into a bottomless pit. They expect economic reform to put the country back on its feet.
Subsidy reform carries a heavy political cost, making any government reluctant to pursue it beyond immediate necessity. Donors can break the domestic political logjam by making their aid conditional on reform. But these conditions need to be set intelligently, and in consultation with the Egyptian side. The Egyptian government has to commit to the programme, so it cannot claim it was implemented under duress.
The UAE is taking its own steps towards reducing energy subsidies. As a fellow Arab country, a major donor and an energy exporter, its recommendations to Egypt can be more acceptable than those from an outside organisation such as the IMF. To turn its aid to the new government into sustainable support, guidance on subsidy reform should be tough, but intelligent.
Robin Mills is the head of consulting at Manaar Energy, and author of The Myth of the Oil Crisis
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