Egypt will decrease subsidies on natural gas and electricity to non-energy intensive industries, the local press reported, raising prices 26 percent by the beginning of 2010, announced Amr Assal, chairman of the Industrial Development Authority.

The move represents the continuation of a plan initiated by the Ministry of Investment in September 2007 to adjust energy price levels to approximate actual cost by the year 2010.

At the time, non-energy intensive industries received a one-year grace period, while industries deemed energy-intensive, ranging from petrochemicals, cement and fertilizers to glass and ceramics, were required to pay the higher energy prices immediately.

Now the grace period for non-energy intensive industries — defined as those requiring less than 50 million KW/Hr of electricity or 66 million cubic meters of natural gas per year, according to Prime Ministerial Decree No. 1795 (2008) — has run out.

While the economic strain of last year caused the Supreme Energy Council to temporarily suspend the de-subsidization plan, the Egyptian economy has demonstrated sufficient stability to return to goals laid out before the financial crisis. The pursuance of long-term projects — such as restructuring energy subsidies, which make up about 70 percent of a total subsidy budget — remains a cornerstone of development plans.

At the time of the initial announcement to cut energy subsidies, concerns at rising prices for Egyptian industries and consumers were outweighed by recommendations from economists to reduce the treasury’s burden while simultaneously helping energy producers compete at prices dictated by the global market rather than governmental decree.

This recommendation carries significant weight as Egypt hopes to increase domestic energy production, particularly of renewable energy sources, as announced by Electricity and Energy Minister Hassan Younes at last week’s Euromoney conference.

At the launch of the plan two years ago, Minister of Trade and Industry Rachid Mohamed Rachid stated, “Now we are taking industrial policy to a new level with a set of initiatives that build on our efforts to create a competitive, transparent and predictable investment environment for the growing number of foreign and local investors looking to enter Egypt’s industrial sectors.

“We are also giving priority to industrial SMEs development, as a way of ensuring the future growth of the Egyptian industry and continued job creation.”

Although the Nazif government appears ready to proceed on the assumption that Egypt is ready to continue long-term energy subsidy reduction, the price increase will strain the expenses of low-income citizens. Subsequently, the government will provide 10 annual coupons for the purchase of butane canisters at LE 5, cutting the price by LE 44, for low-income families, with additional canisters available for purchase at LE 10 each. Due to high reliance on butane for heating and cooking, the fuel is one of the most highly subsidized by the government, as is diesel.

Khalid Sekkat, research director at the Economic Research Forum, said that the subsidy on diesel is noticeably absent from the restructuring effort. “While butane is largely limited to familial use, increasing the price of diesel would likely lead to dissatisfaction from all areas of the transportation sector,” Sekkat told Daily News Egypt.

In its daily market report, Beltone Financial similarly noted the government’s unwillingness to cut diesel subsidies due to “social sensitivity.”

Sekkat commented on Egypt’s subsidy restructuring as part of a larger trend of liberalization that has accompanied efforts to further integrate the MENA region into the globalized world economy.

“Outside of the Gulf, many countries rely heavily on subsidized energy and food. And many countries need to re-distribute subsidies to ensure they benefit the neediest without wasting government funds. Tunisia and Morocco devote similar percentages of their GDP to subsidies for basic necessities like energy and food. Tunisia recently restructured subsidies, and although this initially evoked protest, the effort has been deemed successful,” he said.

Sakket noted that in his opinion, energy subsidy reduction in Egypt was inspired not by an increase in Egypt’s GDP, which ostensibly would enable more citizens to afford to pay non-subsidized prices, but as a necessary tactic to reduce wasteful government spending.

(The Daily News Egypt)