The government announced Monday that plans to increase electricity prices have been finalised as part of its five-year campaign to restructure subsidies and cut down on government expenses. The expected price increase may result in higher inflation rates and a potential for predatory pricing, says Arqaam Capital Research.
The increase is part of a five-year plan to raise electricity prices across different sectors in order to restructure energy subsidies, which constitute more than 60% of total government subsidies. The subsidies themselves account for nearly 25% of total government expenditure. The electricity subsidy restructuring plan started in 2014 with the aim of lifting subsidies over five years—possibly to be extended beyond 2020—to accommodate the implementation of other economic reforms.
The Ministry of Electricity released its plan for price adjustment in a press conference outlining the new price list for the residential, commercial, and industrial sectors based on consumption levels for fiscal year (FY) 2016/2017.
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For the average household, electricity prices will be on average 35% higher. This increase will go into effect retroactively for the month of July. Consumers will receive their first electricity bill that is adjusted for the price increases in August, while the price increase for July will be billed over the next ten months starting September.
The minister announced that, despite the partial lifting of subsidies, the government’s expenditure for electricity subsidies increased from EGP 12bn to EGP 30bn due to the weak exchange rate of the Egyptian pound and the increased cost of liquefied natural gas (LNG). Subsidies for this year make up 25% of government expenditure.
Arqaam Capital Research analysed the prospective fallout from the increase in electricity prices on inflation, prices, the commercial and industrial sectors, and global perception of Egypt’s reform.
The impact of the electricity price hike will have a negligible effect on headline inflation initially, according to Arqaam researchers, as utilities only constitute 2.5% of overall consumer goods consumption. However, inflation may increase “to around 15-16% in September once the full effect of the aforementioned reforms is combined”.
Researchers have stated that it is difficult to estimate the results of the compounded reform as the price increases will coincide with the value-added tax (VAT), the devaluation of the pound against the US dollar down to EGP 11, and an expected restructuring in petroleum product prices, which may result in a spike in inflation.
A larger impact will be felt from the general increase in prices across the commercial sector. As electricity bills in this sector will rise by 20% on average, they will look to pass off those costs to consumers in the service sector.
The industrial and commercial sectors have been grappling with the rising production costs of goods due to the weak Egyptian pound, as well as higher inflation. VAT and the devaluation will increase this burden. While companies may not be able to pass off these increased costs to consumers without losing business, the full effects of these compounded changes will not be known until potentially October or even November.
Despite all the negative influences these fiscal and monetary reforms will have on demand and consumption, the government’s steadfastness to their planned reform is “a true sign of commitment” as International Monetary Fund negotiations are set to be completed this week.
