CAIRO: Egypt has shown resolve in its plans to eliminate energy subsidies for industries by the end of this year in ongoing parliamentary talks regarding the budget.
The government appears ready to push forward on a plan that would phase out energy subsidies starting in July 2010.
In March, the daily Al-Borsa newspaper quoted Minister of Trade and Industry Rachid Mohamed Rachid as saying that the country will resume the gradual elimination of energy subsidies to non-intensive industries in July.
The government suspended initial plans to reduce energy subsidies after the onset of the global economic crisis in 2008.
“Egypt plans to eliminate subsidies to all industries by the end of 2011, after having eliminated those to energy-intensive industries. We are withdrawing the energy subsidy, going back to the original plan that we have put in place in 2007," Rachid said.
Rachid said that energy-intensive industries, such as cement, steel and fertilizers, were no longer receiving energy subsidies.
According to Magdy Rady, cabinet spokesperson, plans to eliminate subsidies were in the pipeline for two years prior to the financial crisis, but were then put on hold.
“We had to stop the elimination when the crisis hit and we are restarting the process gradually this year until all subsidies are eliminated but the end of 2011,” he said.
Ahmed Ezz, head of the People’s Assembly’s planning and budget committee, stressed in his speech to parliament last week the importance of rationalizing energy subsidies gradually over the next five years.
One side effect of the rise in energy prices is expected to be higher inflation rates until the end of the year, said Reham ElDesoki, senior financial analyst at investment bank Beltone Financial.
“A change in energy prices for non-energy intensive industries in July 2010 and the seasonal factors leading to higher consumption in the second half of the year, would now lead, in our opinion, to inflation remaining somewhat high in 2010, averaging 13 percent, compared to the previously expected average of 11 percent,” ElDesoki said in a statement.
Tarek Selim, economics professor at the American University in Cairo, and an industrial economist with numerous writings on energy policy, said that the benefit of reducing energy subsidies is that it reduces the budget deficit.
In his speech last week, Ezz noted that energy subsidies jumped from approximately LE 1 billion a decade ago to LE 67 billion in fiscal year 2010, adding that the Egyptian General Petroleum Corporation is heavily indebted due to mispricing of fossil fuel.
Although not it was not explicitly stated that the plans would affect subsidies for consumers, these statements have led many to believe that the change in subsidies will not only be limited to industrial use.
Selim says that the government plans for the subsidies could cause high levels of inflation.
“A total elimination of subsidies for industry, as well as consumers, will cause a large hike in inflation of around 7- 8 percent. So if inflation is at 11 percent we can expect to see it go up to 18 or 19 percent,” he said.
“Such a change should only be carried out gradually, in parallel to ensuring more social welfare to citizens to balance the affect of rising transportation and food costs. The government should increase the minimum wage or insure an increase of at least LE 150 per month per household,” Selim added.
ElDesoki explains the link between energy prices and inflation citing what happened in the recent butane shortage.
“With the shortage in butane gas and diesel in the local market in quarter one of 2010, prices of these products rose on the black market, leading to a lower than expected decline in headline inflation in quarter one of 2010.
“Inflation remained at the 12-13 percent levels…as the effect of effectively higher energy prices impacted transportation costs of food items, which have a 44 percent weight in the benchmark urban consumer price index,” she added.
