CAIRO: Egypt has delayed a final decision on reducing energy subsidies for non-intensive industries and is currently considering the speed at which said plans would be executed.
Parliament talks regarding the budget last month showed the government’s commitment to eliminate energy subsidies for non-intensive industries by the end of this year. This week, however, the Energy Pricing Committee postponed to June 22 its final decision on whether to raise electricity and gas prices for non-energy intensive industries.
The new prices were scheduled to take effect starting July 2010, reported Al-Masry Al-Youm newspaper.
Negotiations are underway between the committee and industry representatives, with the latter requesting a more gradual implementation of the increase in energy prices, according to a Beltone Financial report.
The Economist Intelligence Unit country report for June 2010 expected the government to go through with its decision to remove the subsidies due to deficit pressures.
“In the second half of 2010 the government will resume its program of incrementally reducing subsidies on energy prices in a bid to align domestic prices with international prices and minimize the fiscal drain, and it aims to have eliminated all energy subsidies by the end of 2011,” the report said.
“In light of the potential inflationary impact when the government resumes its program of reducing energy subsidies, we expect the Central Bank of Egypt to starting raising interest rates again in late 2010,” the report added.
Tarek Selim, industrial economist and professor at the American University in Cairo, said that the benefit of reducing energy subsidies is that it reduces the budget deficit, adding that the government delayed the final decision to discuss and analyze the macro- and micro-economic situation of these non-energy intensive industries.
“I believe that the government may choose to delay the decision due to the state of inflation and financial recession,” said Selim. “To protect local investment in these industries the government does not want to create another fiscal shock in addition to the financial crisis shock already experienced by these industries.”
He added, “The market is not ready for another shock and lifting energy subsidies now will affect the investment climate and therefore it may be a good decision to delay and might give these industries more time to recover.”
“The second reason is that the general inflation level is high, so the government is reluctant to cause more inflationary pressure,” concluded Selim.
The government is making plans to resolve these issues of inflation, managing the budget deficit, increasing revenues but at the same time increasing the overall amount of energy subsidies.
The People’s Assembly recently approved a bill increasing energy subsidies in the current fiscal year 2009/10 by LE 32.8 billion, on one hand, and increasing revenues from the Egyptian General Petroleum Co by LE 32.8 billion, reported Al-Ahram newspaper.
The addition was previously announced and is being implemented to finalize expenditure and revenue accounts for the fiscal year ending June 2010, Beltone Financial reported. Energy subsidies were raised during the fiscal year with the rise in international energy prices, beyond the level expected by the state budget when its assumptions were formulated.
A report by the Budget and Planning Committee indicated that subsidies on 80-octane gasoline are LE 1.29/liter. Subsidies on 90-octane gasoline are LE 1.10, compared to a sale price of LE 1.75/liter; on 92-octane are LE 1.43/liter, compared to a sale price of LE 1.85/liter and LE 1.12/liter on 95-octane gasoline, compared to a sale price of LE 2.75/liter.
Selim warned about the total elimination of the subsidies and called for the process to be gradual.
“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,” Selim previously told Daily News Egypt.
“Such a change should only be carried out gradually, in parallel to insuring more social welfare to citizens to balance the affect of rising transportation and food costs,” Selim added.
