Egypt’s removal of fuel subsidies rids the state budget of a heavy burden, instead transferring the burden to tens of millions of consumers.
“The fuel subsidy removal will likely have inflationary effects,” said economist Abdel Qadir Ramadan. “This means that the prices of a large number of commodities and services will rise as a result, which will be painful to the poor and those with limited incomes.” Egypt raised the prices of car and home fuel on July 5, removing almost all energy subsidies. Gasoline and diesel fuel prices were raised by almost 22%. The price of butane gas cylinders was raised by almost 25%.
This is the fifth energy subsidy-cut since Egypt started applying aggressive economic reforms in November 2016, in light of a deal with the IMF. Apart from curtailing energy subsidies, the loan deal also made it necessary for Cairo to introduce enormous monetary reforms, including the liberalization of the exchange rate of the Egyptian pound against all foreign currencies, and the introduction of a value-added tax.
Egypt expects to receive the last portion of the $12 billion loan, around $2 billion, later this month. This last tranche will pull the curtains down on the economic reform program for this stage, but Cairo is mulling further reforms, or another agreement with the international lender in its bid to further strengthen its economy, attract investments, and move from economic reform to economic takeoff.
The reforms have paid off in terms of economic indicators. The foreign currency reserves are increasing, the unemployment rate is going down, the inflation rate is dropping, and exports are going up.
Egypt’s imports are also spiraling down, its economic growth rate is spiraling up, and more investments are flowing into the country. Egypt last removed energy subsidies in June 2018. Fuel subsidies used to be a heavy burden on the state budget, which is crippled with intense pressures already. Egypt spent 517 billion Egyptian pounds (roughly 31 billion USD) on energy subsidies in the last five years, according to the Ministry of Petroleum.
“Our government subsidized fuel for many decades in the past, but this has had very negative effects on the economy and the state budget,” said Ahmed Abdel Hafez, an economics professor at October 6 University on the outskirts of Cairo. “The problem was that the fuel subsidies had never reached the people who deserved them.”
This could be true, but the repeated energy subsidy cuts have had the strongest effects on the tens of millions of Egyptians with limited incomes. Commodity prices, especially those of food, have almost tripled since Egypt started its economic reform program in November 2016. There is a new commodity price rise after every subsidy cut. The latest energy subsidy cut was no exception.
Commodity prices have already risen by between 20% and 30%, rendering more and more Egyptians incapable of coping.
The administration of Egyptian President Abdel Fattah al-Sisi tries to cushion the effects of the subsidy cuts on the poor by increasing social support to financially incapable Egyptians and also increasing food subsidies.
Around 70 million Egyptians are registered in their country’s food stamp system. The same people receive bread at prices far below the market price. However, some economists cast doubt on Cairo’s ability to protect the poor, especially if the prices of some commodities get out of control. “The problem is that energy is a basic component in everything, which means that raising the price of energy will have its toll on the price of everything in the market,” said economics researcher Khairi Talaat. “This means that any measures by the government to reduce suffering in this regard, including raising the salaries of civil servants, will not help.”