Egypt’s energy subsidies have been an issue of contention for years, but increasingly so in recent months as the ailing economy struggles to recover and the state fights to tighten a gaping budget deficit.
“Energy subsidy reforms are the moral equivalence of war, the people have to be prepared to face it,” economist Hazem al-Beblawi, who was named Egypt’s prime minister last week and previously served as finance minister, told Mada Masr last month.
“If there is no acceptance of the reform, nothing will happen,” he added, saying that more needs to be done to persuade people that reform is necessary.
Fuel subsidies were projected to reach a record high of LE120 billion (US$17.4 billion) in the fiscal year ending 30 June, yet the government has repeatedly avoided introducing broad subsidy reforms, fearing public unrest and a repeat of the 1977 bread riots.
“The government cannot continue to subsidize fuel. We will reach a point where the budget does not have enough resources and we will have to use the worst policy — printing money, which causes inflation,” Beblawi said.
Over the past year under deposed President Mohamed Morsi, the government has come to rely on financial support from countries like Turkey, Libya, and mainly Qatar, to combat diminished foreign reserves and a rising energy bill.
The state owes increasingly large sums of money to oil companies, some estimating them to be as high as $20 billion. In this toxic mix, delayed payments deter investments in the sector at a time when the country is struggling to meet rising energy demand.
Since Morsi was removed from office on 3 July after unprecedented protests called for his ouster and led to an military ultimatum, pledges of aid have flooded in from Kuwait, the United Arab Emirates, and Saudi Arabia to the tune of $12 billion. This may plug the gaps in the state deficit, but it remains to be seen how they will affect the country’s energy problems.
In the past months, Qatar has offered free shipments of LPG, and Egypt has signed deals with Libya and Kuwait for crude oil, while many trading companies have almost completely halted their supply in fear of payment defaults.
At the same time, premiums on regular fuel prices have increased as major traders face consistent discharge delay and higher demurrage charges, putting a further strain on Egypt’s energy bill.
In an attempt to ease Egypt’s energy crisis, the government has raised fuel prices for energy-intensive industries such as cement and brick factories this year, as well as hiking the price for 95 gasoline in November 2012, which is mostly used in luxury vehicles.
While broader reforms are still in the pipeline, it is not certain when or how they will be introduced. In recent months the government under Morsi frequently revised plans, making decisions only to retract them after public backlash.
The Petroleum Ministry’s main challenge is curbing rampant black market smuggling of fuel.
Diesel shortages have taken their toll on transportation drivers and fuel shortages have caused frequent lines outside gas stations. Farmers who use diesel for their water pumps have also been particularly hit as smugglers have siphoned off an estimated 20 percent of all subsidized fuel, diesel, and gasoline in particular.
To hinder smugglers, the ministry plans to use smart cards which will track fuel from deposits to petrol stations all across Egypt.
So far, however, only fuel from the Mostorod refinery has been tracked to a handful of stations in Cairo and Giza.
One truck driver on the agricultural route between Alexandria and Cairo said that much of the fuel smuggling happens under a legal cover. Farmers who need diesel to operate their machinery can acquire a government permit to access larger amounts of subsidized fuel from petrol stations. For the permit they only have to show proof that they own the farming machinery. Whether this will stop with the introduction of smart cards is not clear.
The government also plans to collect data on the fuel usage patterns of different vehicle owners starting from mid-July, Mahmoud Nazim, secretary of the Petroleum Ministry at the time, said last month. After this research stage, planned to take up to two months, smart cards would cut the amount of subsidized fuel consumed by each demographic and income group.
Of course, with a new interim president, Beblawi as prime minister, and the ongoing formation of a new government, all these plans may be put on hold.
With the aforementioned initiative, the government had aimed to reduce its energy subsidy bill to LE99 billion in 2013/2014. But this is small change, and fuel subsidies would still cost more than in 2011/2012.
Though power outages and gas queues have made the energy crisis and the need for reform visible and palpable to most Egyptians, popular resentment will be the biggest hurdle towards any reforms
“I don’t mind paying more for fuel, but the government has to provide me with a decent job and higher income so that I can pay my bills. Subsidies are the only thing that the government provides,” one shop owner in Cairo said.
Though research has shown that the rich benefit from energy subsidies more than the poor, and the consumer smart card system would try to cushion costs for poorer fuel consumers by providing them with larger allowances of subsidized fuel, subsidy cuts would still represent a considerable burden on citizens who barely make ends meet. This amid steadily rising poverty rates.
For one, the International Monetary Fund has suggested targeted cash transfers to the poor.
Beblawi warned that rising fuel prices could cause prices of other products to spiral since fuel is used in production and transportation across the economy.
“It would be important to have certain caveats at hand to reign in inflation,” he said in the interview last month.
Egypt is one of the largest non-OPEC oil producers in Africa and the second largest natural gas producer on the continent, but became a net energy importer in 2008 as a result of its growing population, rising demand, and the provision of cheap fuel. This year, it went from being a natural gas exporter to a net importer of the vital product.
Fuel subsidies have made Egypt also one of the least energy efficient countries worldwide, putting it on rank five right after countries like Iran and Russia.