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SUBSIDIES: BITING THE BULLET
Egypt’s transport sector is in the spotlight these days, and for good reasons. Traffic in our overcrowded capital is spiraling out of control. With more people living in the satellite cities, and their commute taking up to two hours each way, they’re dealing with chronic gridlock and its consequences, like lower productivity at work and less time for working parents to spend with their kids.
The high-level attendance at AmCham Egypt’s recent conference on public-private partnerships (PPPs) in the transport sector suggests the importance of an issue that touches all our lives. Solutions were discussed, such as road building, railway expansion (including lines running to Sixth of October and 10th of Ramadan cities) and improving river transport.
For the average Egyptian struggling to purchase basic necessities with an often insufficient salary, inadequate transport is but one of many energy-sapping pressures they must confront daily. Food prices in Egypt increased last year by 70 percent and again by 30 percent during the first two months of this year. Cereal prices jumped by 200 percent.
Reducing these pressures is a state priority, but the national budget is also exhibiting signs of strain. Not long ago, the Central Bank of Egypt (CBE) held about $22 billion in reserves, covering 12 to 13 months of imports. Now, the CBE’s nearly $33 billion in reserves can cover only seven to eight months of imports.
The biggest strain on our budget is subsidies, and the state, while committed to social spending, seems to have reached a policy-making impasse. Fuel subsidies are a major expenditure, and have risen exponentially from $500 million in 1995, to an estimated $14 billion in 2008, including the additional $3.6 billion (approximately 2.2 percent of GDP) allocated for the 2007-08 fiscal year. High international oil and gas prices are largely responsible – raw material prices have increased worldwide between 400 and 500 percent. Egypt, like everywhere else, is feeling the squeeze. But in Egypt, price rises represent a real threat to economic reform and social stability.
Last year, the government announced its intention to raise the prices of gas and electricity paid by energy-intensive industries by gradually cutting their energy subsidies. The price rises (61 percent for electricity and 110 percent for gas) were meant to be phased in over the course of three years, and applied to Egypt’s iron, cement, aluminum and fertilizer manufacturers. However, the overall schedule for deregulation is not quite clear.
Meanwhile, as a means of mitigating fuel subsidy spending, an annual gasoline consumption tax was also announced in January, to be based on engine capacity and added to car registration fees. It was then noted that diesel-operated vehicles would be exempted because diesel prices would increase directly. Just last month, however, the Egyptian General Petroleum Corporation (EGPC) denied reports of fuel price increases, saying it was a rumor.
Fuel subsidies are a touchy issue, affecting people’s daily lives and companies’ bottom lines, but a strong stand on the issue is necessary. Rachid Mohamed Rachid, minister of trade and industry, remarked that the government decided to raise energy prices for industries to full market cost partly to ensure that new investors would know where they stand. Long term, this makes better sense than the temporary incentive of subsidized fuel, especially if we’re confident in Egypt’s many investment advantages. Likewise, where the public is concerned, a fuel tax, while a good idea, is a band-aid solution where full-scale treatment is required.
Fuel and other subsidies should target the needy, and people need to know the state is on their side. But the government should be clear about the fact that subsides cannot, and need not, continue indefinitely. We need a workable schedule for fuel price increases – one that balances public and industry needs, while demonstrating the state’s concern for citizens and its ability to act fairly, even when powerful industries are involved.
Reducing subsidies is a necessary part of the economic reform we’ve demanded and worked hard to achieve. Major economic transitions such as the one we’ve undertaken inevitably involve sacrifices, but for reform to work, these sacrifices need to be equitably shared between the state, industry and the people. If any one of the three is weakened by overburdening, it will be harder for all of us, as a nation, to succeed.
OMAR A. MOHANNA
President, AmCham Egypt
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