RESEARCH & ANALYSIS
REFORMING ENERGY SUBSIDIES: RENOVATING EGYPT’S FUEL PRICING MECHANISM BY AMINA HUSSEIN, REHAM GAMAL & TASNEEM MADI
ENERGY For decades, Egyptians have relished subsidies targeting specific social and SUBSIDIES REFORM economic objectives. Subsidizing energy plays an important role in making fuel Countries and electricity prices affordable, however, this governmental policy could befollow various approaches in implementing subsidy reform prog considered unsustainable. as it differs in terms of the time frame and the outcomes. For instance, co like Iran followed a radical approach, in which the reform was fully-implem Fuel subsidies are a burden on the public budget, as a major contributor at onetopoint. fiscalOn the other hand, Morocco and Tunisia follow the gradual a deficit. In addition, it has negatively impacted the Balance of Payments as many (BOP),with steps have already been taken with more reforms in plan. For exa huge local energy demand resulting in a need for more imports ,hence, Tunisia energy depends on simpler reforms accompanied with gradual hikes in pr subsidies reform was a priority for the government. tariffs every quarter. A third approach was followed by Egypt and Yemen, two countries stepped up the process in 2014 after a period of gradual ref Although, phasing out subsidies significantly affects the main indicators of the Egyptian economy, such as the parameters of welfare and income distribution. Egypt started implementing minor reforms before engaging in the current Nevertheless, delaying that reform would further complicate the issues subsidies that will reform program. In 2012, the government rose the price of gaso 2013, household electricity and gasoline prices were increased. This incre in return hinder economic development plans. Since the turn of the century, petroleum products and electricity prices witnessed many reforms. linked On thetoother consumption across multiple sectors, as was announced by the M hand, an increase in global oil prices meant that fuel subsidies increased of Electricity as well.and Renewable Energy. Before reform was first introduced, en subsidies totaled EGP 139.5 billion, accounting for 74% of the total subsid 20% of public expenditure in fiscal year (FY) 2013/14, according to the Min (Dollars per Barrel) Europe Brent Spot Price FOB Finance (MoF). 111.26
111.65 108.63
79.51
71.06 54.24
In FY 2013/14, Energy subsidies accounted for EGP 139.5 billion
61.49 43.54
99.02 52.35
2009
2010
2011
2012
2013
Source: EIA
2014
2015
2016
2017
Y 2018
74%of
total subsidies
20%of government expenditures
Source: MoF
PETROLEUM PRODUCTS SUBSIDIES REFORM AND ITS DEVALUATION IN EGYPT
In July 2014, the Egyptian government launched a reform program to grad phase-out energy subsidies that particularly targets fuel pricing. Therefore 2014/15, fuel subsidies significantly declined to EGP 74 billion, representin energy subsidies, 49% of the total government subsidies, and only 10% o expenditure, according to MoF.
It is obvious that between FY 2013/14 and FY 2017/18 fuel subsidies witne significant reduction. Dropping from EGP 126 billion in FY 2013/14 to reac 110 billion in FY 2017/18. It is worth mentioning that fuel subsidies reach lowest level in 2015/16, recording only EGP 51 billion, due to lower global that averaged $43.26 per barrel, according to United States Energy Inform Administration (EIA).
On November3, 2016, the Central Bank of Egypt (CBE) radically freed the rate of the Egyptian pound, as part of a commitment to the International M Fund (IMF) to obtain a $12 billion loan, which the government viewed as a to recover the crippling foreign exchange reserves and control the rise o currency black market. This led to controlling the rising currency manipula speculations, but it also left a toll on the local currency. Consequently, the the pound noticeably depreciated. Only one day after the flotation, the Eg 18 | EGYPT OIL & GAS NEWSPAPER