CAIRO: Late Monday, Parliament approved a bill that will eliminate or reduce a swath of energy subsidies, make cigarettes more expensive and raise the prices of many fuels as it seeks to pay for the 30 percent public-sector wage boost proposed on Labor Day.
The act, lauded by supporters as a step toward bridging the yawning gap between rich and poor, has left opposition lawmakers and some analysts anxious that it will fan already steep inflation and worsen the very problems the pay increases are intended to assuage.
“I think the timing of these implements is terrible, said economist Ahmed El-Naggar of the Al-Ahram Center for Political and Strategic Studies, citing Egypt’s inflation rate – notched at 15.8 percent in March.
“The price of cigarettes will take part of the increase in wages for the poor and middle class, he said. “It means the government gives with the right hand and takes with the left hand.
The bill was proposed, debated and approved late Monday with one member of the dominant National Democratic Party quoted as saying it will “take from the rich to pay the poor. Media reports said that 76 of the estimated 360 lawmakers present opposed the bill.
Among the most notable of the bill’s reforms are a boost in the prices of diesel, kerosene and other fuels by 35 to 47 percent, a rise in the cigarette sales tax from 10 to 33 percent, a hike in natural gas fees and the removal of tax exemptions for private schools.
Local papers said officials expect the move to pad state coffers with an extra LE 14.4 billion annually.
The Ministry of Finance stated that the changes should not raise inflation by more than half a percent. But the fuel hikes in particular have worried some analysts, as the cost of many goods – including most foodstuffs – may rise as it becomes pricier to make and ship them.
Even firms that do not use energy-intensive manufacturing are subject to higher transportation costs due to the rise in diesel prices, said NematAllah Choucri, co-head of research at Cairo-based investment bank HC Brokerage. “Eventually this will be passed on to consumers in the form of higher food prices, higher product prices, Choucri said.
In a statement addressed to its clients, investment consultancy Beltone Financial said it expects the measure will mean higher prices for many goods.
“We expect that the rise in inflation will strongly impact the purchasing power of the low and low-middle income groups, while the higher income population’s purchasing power could be less affected, the statement read.
These reforms have not come entirely without warning. Last August, the Ministry of Trade and Industry announced it would incrementally strip energy subsidies from iron, cement, fertilizer and aluminum firms over three years.
El-Naggar said such subsidies have long enjoyed protection in Egypt because they are seen as necessary to ensuring the stability of the regime.
He said the current ideology reflects a balance between this traditional view and the reform-minded Ministry of Finance.
But because subsidies and handouts are generally anathema to the liberalization-friendly policies of international financiers, they still amount to just 4.1 percent of Egypt’s GDP, compared to 12.9 in the United States, 25.6 in Germany and 24.4 in France, he said.
The removal of certain tax exemptions also featured in Monday’s bill. Choucri said the banking sector could see some fallout as the act removes tax exemptions on the yield of government treasury bills. “Banks will have to pay higher taxes, depending on their holdings of T-bills, she said.
A hike in driving license fees included in the bill has so far prompted less debate. In its statement, Beltone said it did not foresee any effect on the car industry here as most people buy cars simply because there is no other means of transport available.
With bloodshed in Mahalla and along subsidized bread lines in Cairo provoked largely by soaring rice and wheat costs, the prospect of pricier food has stirred some talk of further unrest.
But El-Naggar said people will likely wait to see how the promised wage increases play out. “They will wait until July, he said. “If the government doesn’t take real steps to improve the real wages, the minimum wages, it will be a real problem.
