MP: New fuel pricing mechanism ‘rushed’ through to appease IMF on subsidy cuts

The government raised fuel prices on Friday, the latest in a round of subsidy cuts tied to an economic program backed by the International Monetary Fund. This is the fifth hike in fuel prices since the process to restructure fuel subsidies in the state budget began five years ago, in July 2014, a month after President Abdel Fattah al-Sisi took office.

The prices of diesel and 85-octane fuel rose by 22.7%, while the price of 95-octane and 92-octane rose by 16% and 18.5%, respectively.

The IMF has billed the economic reform program as a way to reduce subsidies while easing “the burden of adjustment on the poor.” Yet over the last five years, the largest price increases have been in petroleum products more commonly used by low-income segments of the population.

Liquified petroleum gas (LPG) cylinders, used in households and some commercial outlets as an alternative to gas, have seen the biggest rise, with prices increasing more than sevenfold since 2014. Meanwhile, the price of 95-octane fuel, used by private car owners, has risen a little over 50% over the same period.

The following graph shows the cumulative price increase for various petroleum products since 2014:

The fuel subsidy cuts have also had a significant impact on inflation. The rise in the price of diesel fuel, which is used in agricultural machinery and in trucks used to transport fruits and vegetables, has the biggest effect on  food prices. Fruit and vegetables are the most volatile expenditure items on which the general inflation index is based. Between July 2014 and May 2019, general inflation rose by more than 100%, while fruit and vegetable prices rose by more than 203% percent. 

However, the high inflation rates are also attributable to other aspects of the IMF economic reform program, primarily the flotation of the pound in November 2016 and the increase in Value Added Tax from 10% to 14%.

The various austerity measures are all conditions of the US$12 billion loan agreement signed with the IMF in November 2016. The price hikes implemented on Friday are the last of the fuel subsidy cuts as Egypt looks to receive the final $2 billion tranche of the loan. 

In a decree published on Saturday, Prime Minister Mostafa Madbouly announced that an “automatic fuel price indexation mechanism” — a part of the IMF agreement — would be used from the end of June for all petroleum products except for liquified petroleum gas cylinders, and across all sectors except for electricity and bakeries. The new mechanism, which was introduced for 95-octane in January, links local fuel prices to international markets, and will see the government re-price fuel by as much as 10% every four months.

MP Yasser Omar, a deputy in the budget and planning committee in Parliament, told Mada Masr that the expansion of the new pricing mechanism was originally scheduled for September, and was rushed through. Omar says the decision to implement it earlier was intended to send a message to the IMF that Egypt has removed all fuel subsidies. The last fiscal year budget allocated around LE 89 billion for energy subsidies. The budget for the new fiscal year, which began on July 1, still includes a provision for fuel subsidies worth LE 53 billion. “If the government is going to liberalize the prices of all petroleum products, where will these billions of pounds go?” Omar said.

Omar expects the implementation of the new pricing mechanism will only extend to 95 and 92-octane fuel, and will not be enforced on diesel or 85-octane fuel because of their potential inflationary impact.

In its fourth review of the loan agreement, the IMF said fuel subsidy reform “will encourage energy efficiency, attract investment in more labor-intensive industries, and free up fiscal space for high-priority expenditures, including targeted cash transfers to poor households.”

According to a senior official at the Ministry of Petroleum, who spoke to Mada Masr on condition of anonymity, the cost of producing a liter of 80-octane fuel is 55 cents, compared to 60 cents for a liter of diesel, 60 cents for a liter of 92-octane, and 65 cents for a liter of 95-octane.

The following graph shows the decline in government subsidies following the most recent fuel price hikes.

Level of subsidy as a percentage of the total cost of production of a liter of various petroleum products. Data based on the cost price — according a Ministry of Petroleum official — (using an exchange rate of EGP 16.7 pounds to the dollar) less the selling price to the consumer.

Beesan Kassab 

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