CAIRO: “Ever since last year’s increase in fuel prices, I spend an extra LE 8 each day on gasoline consumption alone, and the majority of customers does not want to bear that increase, said Atteya Eid, a Cairo taxi driver.
“It wrecked my living, Eid said.
Last year, the government abruptly raised the prices of gasoline and oil products in an attempt to reduce the sizeable budget deficit – forecast at more than 9 percent of GDP in the 2006-07 fiscal years.
Amid last year’s Revolution Day Anniversary celebrations, the price of 90-octane fuel rose 30 percent from LE 1 per liter to LE 1.30, while the price of diesel – widely used in trucks and minibuses – rose 25 percent from LE 0.60 per liter to LE 0.75.
The new prices took affect on the Friday preceding the July 23 celebrations, when many Egyptians escape Cairo’s heat and flock to the North Coast for the long weekend. The government had strategically marked its calendar so that the surge would pass smoothly without public unrest.
A year on, B- and C-class citizens as well as taxi-drivers suffer the most from the rising energy costs. “On a daily-basis, problems arise with customers, particularly [government] employees, said Eid. “Some customers consider the hike and increase the fare without being asked, while others – also overburdened with soaring prices – refuse to pay one extra piaster.
A sustained increase in the price of goods and services, referred to as inflation, results in the decline of the purchase power of currency, as every pound buys a smaller percentage of a good or service. Sudden changes in the cost of key commodities – such as energy prices – results in inflationary effects, as goods and services dependent on those commodities will absorb the increased prices.
“By definition, as growth rates increase, inflation rates [unavoidably] increase, said Samir Radwan, executive director of the Egyptian National Competitiveness Council, adding that current GDP stood at 7.2 percent. “However, monetary and fiscal policies should control the inflation rate and keep it within reasonable levels.
Analysts blame avian flu outbreaks as well as gasoline price hikes for inflation rising into the double digits towards the end of last year, reaching more than 12 percent. Currently, the inflation rate is just under 8 percent, reflecting a downwards trend.
Hikes in fuel prices, in particular, automatically raise prices of other goods and commodities that depend mainly on oil and energy to import raw materials or during different phases of the production process.
It’s a domino effect, as Radwan explained. “Take for example what happened during avian flu outbreaks: Prices of all animal protein-related products – from poultry to meat to fish – went up. And, despite the end of avian flu season, prices did not decline enough, he said.
“Once prices rise, they never return to normal levels even if inflation slows down. Adjustment never occurs because markets are not well-regulated, he added.
Radwan continued saying that higher rates of inflation further increased costs of production of goods and services. “And it is the middle- and low-income citizens that suffer the most.
Government policies, he explained, should pay close attention to inflation targeting as well as monitor markets to ensure that prices are kept under a reasonable ceiling.
Removal of energy subsidies was another attempt by the government’s to tackle its immense budget deficit, but many argue whether or not it was successful as the deficit only decreased by around two percent, according to state figures.
“If the government wants to raise gasoline prices, fine. But at least, it should increase supply of 80-octane fuel [cheaper and lower quality gasoline] to help us maintain our living, argued Mahmoud Abdel-Qader, a local taxi-driver. “Gas stations across the capital do not want to sell 80-octane fuel [because they would rather] make more profit selling the more expensive 90/92-octane fuel. Even when I come across gas stations that sell the 80-octane, they save it for police vehicles.
Experts predict a further drop in inflation rates, which are projected to fall below seven percent by the end of this year.
“[A few of] the reasons for it to be higher, such as the avian flu outbreak, have been removed, commented Angus Blair, head of research at Beltone Financial. “Ideally, you want the inflation rate to be as low as possible – between one and three percent.
Blair suggested various tools the government could use to manage inflation. To fully recover from avian flu downturns and bring down food prices, he said that the government should introduce greater agricultural reforms, namely animal husbandry, that would eventually diminish the economic impact of avian flu outbreaks.
“Use of subsidy [resources] is limited; and the more you reduce subsidy, the higher inflation rates you get, stated Blair, adding that increasing food supply could be the only way out.
A further reduction in energy subsidies is currently in the works. Finance Minister Youssef Boutros Ghali said earlier this month that the government planned to announce fresh cuts in energy subsidies within the next three to four months, a step that will further stoke inflation.
If the government takes this move, I will sell my taxi and work on a ‘toc-toc’ instead, Abdel-Qader said sarcastically.
