WATANI International
22 August 2010
The argument that subsidies should go to those who most need them has been stressed by President Mubarak over and over again in light of the significant increases in the numbers of people in Egypt who live below the poverty line. Finally, after delays due to the global financial crisis on the one hand and the pressures of stakeholders on the other, the government has announced plans to phase out energy subsidies—beginning with re-pricing energy for the industrial sector, especially energy-intensive industries—and direct them to other priorities of the more needy sectors of Egyptians. During the fiscal year 2009/2010, subsidies on oil products were registered EGP53 billion, they are expected to rise to EGP67.7 billion in fiscal 2010/2011, despite new energy prices.
Subsidy in kind
The primary objective of the State is to ascertain the level of support required by those who deserve it, Minister of Economic Development Othman Mohamed Othman told Watani. He stressed there was an urgent need to restructure the subsidy system owing to its poor record in reducing poverty.
Recent statistics, Dr Othman added, reveal that the poor receive only 16 per cent of the allocation of subsidies, while the richest in Egypt receive 28 per cent of these allocations. This prompted the government to support the lower-income category, allocating some EGP117 billion in the budget of 2010/2011 for subsidies, at an increase of EGP43 billion on the previous year.
In as far as how much the phasing out of energy subsidies may directly impact the public, the butagas cylinder is a case in point. A cylinder, used by households and businesses in neighbourhoods where natural gas is unavailable, costs the State EGP32 and is sold to consumers at EGP4. Middlemen, however, buy it at EGP4 and resell it to the public at anywhere between EGP8 and EGP15. Economic expert Samir Radwan says that, given that traders and middlemen benefit most from the situation, subsidies in kind are not sufficiently beneficial to the wider public, and it may do the public better to remove the subsidy and support the needy in other ways.
For his part, Mohamed Youssef, dean of Beni Sueif University and among the leading economic experts in Egypt, praised the government’s decision to phase out energy subsidies. He stressed, however, that the government should take its time with regard to raising the prices of petrol, diesel, gas and electricity since this would impact all Egyptians, including the poor.
Better for industry
Amr Assal, who heads the committees of industrial development and energy pricing, concurred with Mr Othman. He confirmed it was necessary to change energy prices and eliminate the State subsidy. The move, Mr Assal insisted, was in the ultimate favour of Egyptian industry which ought to be working on raising efficiency and rationalising energy consumption. The end result, he said, would be better competitiveness on global markets. He indicated that Egypt was already one of the cheapest countries in regard to energy pricing.
According to Mr Mohamed Abul-Enein, chairman of the Committee of Industry and Energy in Parliament, the increase in energy prices amounts to between 20 and 25 per cent of the total price of energy supplied to energy-intensive industries. The impact upon production costs, he claims, should not exceed one per cent.
Galal al-Zorba, chairman of the Federation of Egyptian Industries (FEI), agreed with Mr Abul-Enein and pointed out that exports to foreign markets would not be affected by the increase because world prices were basically higher than Egyptian ones. The study made by FEI concluded that the impact of the new energy prices would not exceed five or six per cent of the prices of the end products of energy-intensive industries.
On the contrary
Most industrialists do not agree. Fouad Thabet, chairman of the Federation of Economic Development Associations, said it is not true the increase in energy prices will raise the competitiveness of products. On the contrary, he believes that an increase in energy prices would increase production costs, especially in case of small projects.
He noted that the government should allow the consumption of a specific monthly number of kilowatts at subsidised prices, and if factories exceeded that quota then the government should increase the consumption subsidy bearing in mind that small businesses consume less than 500 kilowatts per month. Raising energy prices for energy-intensive industries, however, he said, is a reasonable move.
The timing of the energy price hike, which went into force last month, came under fire from some industrialists. Samir Noaman, director of a major steel producing company, said that the timing was altogether not appropriate. “The price increase,” he said, “will not help competitiveness in foreign markets. The price of energy is among the most important production costs. How can a product compete on the global market when it costs so much to produce?”