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Egypt has spent half its petroleum subsidy bill for this fiscal year
 
 
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After keeping analysts waiting for months, the Finance Ministry finally released figures for its spending on petroleum subsidies.

In the first half of fiscal year 2014/15, a period spanning July-December 2014, the government spent LE44.77 billion subsidizing petroleum products. The 2014/15 budget calls for LE100 billion in petroleum subsidies, suggesting that so far, Egypt is well on track to meet its spending goal.

By contrast, during FY 2013/14, the budget called for LE99.6 billion in petroleum subsidies, but according to the Finance Ministry, actual spending topped LE145 billion.

Two major changes have impacted Egypt’s subsidy spending: the fall in global oil prices, and an increase in the fuel prices Egyptians pay at the pump.

Since Egypt is a net importer of oil, its fuel subsidy program means that the government pays the difference between the prevailing market price and the consumer price.

When the government calculated subsidy spending for the 2014/15 budget, it assumed that global oil prices would stand at US$105 per barrel. However, global crude prices have been in an almost interrupted decline since the beginning of the fiscal year.

According to Reuters data on Brent spot prices, a major benchmark for world oil prices, the cost of a barrel of oil fell from US$111 on July 1, the first day of the fiscal year, to US$55.27 on December 31.

Overall, the average price during that period was US$89.16 per barrel, about 15 percent below what Egypt expected. However, a 15 percent shift in commodity prices had an even greater impact on the subsidy bill.

To see why, look at this chart, which is based on a completely hypothetical scenario:

petroleum subsidies market price change graph

petroleum subsidies market price change graph


 

With market prices falling and subsidized prices steady, all of the savings come out of the government share, the pink part of the graph. Using the figures in this hypothetical case, we can see that a 15 percent drop in oil prices from LE100 to LE85 would shift the government subsidy expenditure from LE50 per unit to LE35 per unit, a savings of 30 percent.

Of course, crude oil is not the only petroleum product Egypt buys, nor does the average Egyptian buy barrels of crude oil. Different fuel products are subsidized at different levels, and the government has not released enough information to allow calculations for how much it has actually saved due to falling oil prices.

In late December, DCode Consulting predicted that by the end of the fiscal year in June 2015, low fuel prices would save the government LE25 billion on its LE100 billion subsidy bill. In general, it seems reasonable to assume that without the fall in oil prices, Egypt would already have burned through more than half of its petroleum subsidy budget. 

Subsidy cuts

Egypt slashed fuel subsidies at the beginning of July, raising gasoline and diesel prices across the board. Overnight, the cost of commonly used fuel jumped by anywhere from 40 to 175 percent.

Although the timing of the price hikes came as a surprise to the general public, Egypt’s budget was calculated assuming that subsidy cuts would be made.

petroleum price and subsidy shift graph

petroleum price and subsidy shift graph


 

If we go back to our hypothetical subsidy scenario, we can see how raising the subsided price from LE50 to LE60 — in other words, decreasing subsidies by 20 percent — combined with the 15 percent drop in fuel prices, cuts the subsidy bill per in half to LE25 per unit.

Most analysts predict that oil prices will continue to decline during the second half of Egypt’s fiscal year, staying well below US$50 per barrel. This means Egypt should expect to see continued, and likely even greater, subsidy savings as the year progresses.

Does this matter?

The combination of subsidy cuts and falling oil prices will save the government billions and help to keep the budget deficit down. This, in turn, reduces the government’s need to borrow money, easing pressure on local banks and saving future debt and interest payments.

However, since the government is already spending more money than it takes in, it’s unlikely that lower spending on fuel subsidies will translate directly into greater spending on other social benefits.

In the near future, then, these savings are unlikely to trickle down to the typical consumer. On one hand, low global oil prices led to lower prices for many of the commodities Egypt imports. However, the fall in global commodity prices coincided with increased consumer prices for fuel, and therefore the local transport of goods, so annual inflation shot from 8.3 percent in June to 11.2 percent in July, even as global prices commodity prices fell.

Any hope for lower oil prices and subsidy savings to improve the standards of living for ordinary Egyptians relies on the government taking advantage of the fiscal breathing room to fulfill their promises to increase spending on healthcare, education and social welfare programs.

This content was produced in partnership with the Rosa Luxemburg Foundation

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Isabel Esterman