9 July 2014

Egypt: Slashed Fuel Subsidies Stir Discontent

Cairo — "If you don't like the price, go talk to your government," a microbus driver shouted at his passenger. "What do you expect me to do? Take the price hit and feed my children pebbles?"

The two squabbled, drawing in onlookers into a heated debate at a Cairo bus station.

Egypt's government has announced the most drastic price adjustment to fuel prices in decades in a long awaited move to restrain energy subsidies that consume a fifth of annual budget and keep gasoline prices in the Arab world's most populous nation among the lowest in the world.

The cabinet, appointed last month by newly elected President Abdel Fattah al-Sisi, announced the measures as part of Egypt's attempts to reduce its deficit to 10 percent of Gross Domestic Product (GDP) in the next fiscal year, from an expected shortfall of 12 percent in 2013-14.

But the new measures have not gone by without protest.

"The worst is yet to come. This argument about prices is just the beginning," 58-year old driver Ali Badawy told the Thomson Reuters Foundation, pointing at the clash nearby. "I voted for the first time in my life this year. I elected Sisi. But to start his term with fuel price hikes that could very well bury us is a risky business."

In the new scheme, the price of 92-octane gasoline will be 2.60 Egyptian pounds (36 cents) per liter, up 40 percent from its current price of 1.85 Egyptian pounds, while 80-octane gasoline would rise to 1.60 Egyptian pounds, up 78 percent. Natural gas for vehicles, on which many taxis rely, is to rise by 175 percent to 1.10 Egyptian pounds per cubic meter.

While Egypt ranks among the ten cheapest countries in the world for petrol, critics argue removing subsidies needs to be accompanied by complementary measures to protect wages and mitigate price inflation. In Cairo and across several provinces, scattered and minor protests by taxi drivers were reported across the media.

"Are we supposed to leave this nation in debt and poverty? We only fear God. We will not be intimidated by loud voices," Prime Minister Ibrahim Mehlab said in a press conference, adding that the new price scheme will save the budget 51 billion Egyptian pounds for this fiscal year, most of which will be allocated to health and education expenditure.

He pointed to assessments that Egypt's distorted subsidy system has meant the economy needs higher growth rates to absorb the same labor force, a problem in a nation where 13 percent of the workforce is unemployed.

The International Monetary Fund (IMF) estimates fuel subsidies in the Middle East account for 8.6 percent of regional GDP and 48 percent of global energy subsidies. In Egypt, it found total energy subsidies were three times the level of spending on education and seven times higher than total health expenditure in 2011.

'CRIME AGAINST THE NATION'

But according to a 2005 household survey, 57 percent of energy subsidies benefited only the top two income quintiles of households. The government promises that the new price scheme aims to achieve justice in the redistribution of resources.

"We want to build schools. We want better health care," Mehlab said at Saturday's press conference, declaring that Egypt had spent more than 687 billion pounds (nearly $100 billion) in the last decade on fuel subsidies. "It is a crime against the nation to continue this state of affairs."

"We have never and will never deny the depth of our problems. We aren't doing this for our own interests" Mehlab added. "Our will is strong to succeed at this first step of economic reform."

Subsidies, economists argue, also discourage investment opportunities in the energy sector and create incentives for waste. They are often at the root of over-consumption.

"The negative environmental externalities from energy subsidies are substantial. Subsidies cause overconsumption of petroleum products, coal, and natural gas, and reduce incentives for investment in energy efficiency, public transport, and renewable energy," the International Monetary Fund said in a March note on the region.

Subsidies for fossil fuels and climate finance are also often at odds.

A study from the Overseas Development Institute that reviewed 42 developing countries found that the countries spend 75 times as much on fossil-fuel subsidies as they received in climate finance from 2010-2012 to help reduce climate-changing emissions and adapt to climate impacts. Egypt appeared in both the list of top 12 recipients of climate finance and the list of top 12 providers of fossil fuel subsidies.

REDUCING THE PAIN

Egypt has delayed adjusting fuel prices for decades out of concern that reducing energy subsidies will cause political unrest and affect low-income groups, including farmers who rely on diesel pumps to irrigate their fields, as well as people working in the transportation sector and the informal economy.

Mehlab's cabinet has come under attack for not doing enough to communicate how it plans to protect the poor from higher fuel prices and for offering vague promises about holding down price hikes.

The cabinet has gone on a media offensive, with ministers seemingly moving from one television studio to the next in a bid to offer public assurances. Mehlab visited a central bus station, speaking to drivers and passengers and asking for their "word of honor" that prices will not be raised. The president himself held a roundtable with newspaper editors, where fuel prices were among the main topics discussed.

The government also advertised a hotline to receive public complaints on any price manipulation and declared that social safety nets will be expanded to include the most vulnerable groups affected by the fuel price adjustment.

But such commitments have not swayed critics, who say the government needs to declare targeted mitigation measures and clearly communicate the details of those policies to the public.

"Words of assurances are not enough," columnist Ahmed el-Sawy wrote in a scolding piece in al-Tahrir newspaper. "Those with fixed incomes will pay for increased prices with their flesh."

In comments published in the independent daily al-Masry al-Youm, the head of the Consumer Protection Agency warned the decision may result in as much as a 200 percent increase in the price of commodities. She described the decision as "random and ill-sighted."

Activists point to successful global experiences in subsidy reductions, built on the creation of preventive policies to protect citizens. China, for instance, provided specific-sector support to agriculture and fisheries. Malaysia offered low transport tariffs, and in other countries boosts to salaries were made available. Elsewhere, bank accounts were opened for citizens and compensating cash transfers deposited.

The Egyptian government for now is scrambling to answer its skeptics.

"This is not the way to administer a needle," Hamdy Rizk wrote in al-Masry al-Youm in a column addressed to Sisi. "I ask you: Why do you risk losing people's love? Why are you letting your popularity come under attack?"

Dina Zayed is a Cairo-based sustainability specialist who writes on climate issues.

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