Between a rock and a hard place

Perhaps precious few observers were able to read between the lines of the government statement given by Prime Minister Ahmed Nazif before the People’s Assembly (the upper house of parliament) in the last week of 2007. “We will never cut the government subsidies to butagaz and bread,” stressed Nazif, while he didn’t mention anything about other subsidized energy sources.

No wonder then that the government announced a 100% increase in mazout and by the beginning of the new year. According to the new prices, a ton of mazout has soared from LE 500 to LE 1000, while butamin prices rose from LE 550 to LE 1000. Officials at the ministries of petroleum and finance defended the unexpected rise, arguing that it was aimed at bridging the gap between local and international prices ($300 per ton).

The dramatic upturn in mazout prices is, in fact, attributed to a significant increase in local consumption combined with skyrocketing oil prices. Egypt’s consumption of mazout hit 8.5 million tons; one-third of this amount is used in electricity plants. Therefore, the Ministry of Electricity and Energy decided few weeks ago to raise electricity prices; observers forecasted a significant increase in oil derivatives which is the spinal cord of power plants. The decision also is expected to make waves in construction sectors. Many experts estimated an average rise of LE400-500 in the price of a one square meter in newly built residential units, for the cost of brick — whose manufacturing depends mainly on mazout — hit new highs.

The rise in mazout and butamin came to crown a series of rises in basic commodities prices over the past year. With oil subsidies expected to hover around LE50 million and skyrocketing oil prices that exceeded $100 in January, policy-makers were caught between the devil and deep blue sea: either to cut government subsidies on oil derivatives or face a serious deficit in the state budget.

In fact, raising the prices of mazout and butamin is widely believed to be merely a step towards cutting subsidies on other oil derivatives like petrol and solar. News reports also had it that there were disagreement between the economic portfolio ministers (ministers of finance, trade and industry, investment) and high-profile security officials over the timing of cutting subsidies on other oil derivatives. Security sources stressed that raising the prices of petrol and solar could lead to serious results among the poor categories, since transportation fares would be affected.

Nevertheless, informed government sources expected a significant increase in these two derivatives in the middle of the year. “The prices of fuel 90, 92, 95 will be increased. Also solar prices will be raised since it is not fair to keep subsidizing it while it is sold to yachts of the rich and resorts, taking into consideration that its international prices are soaring,” said a source in the oil ministry.

When government officials started in the past two months to float the idea of cutting subsidies on basic commodities like bread, news reports had it that senior security officials warned against a new bread riots like those happened in 1977 when then-president Anwar Sadat attempted to cut subsidies on a range of foods. According to independent estimates, around 80% of the population benefits from the LE65 billion subsidies program. Perhaps, that was the reason behind the Prime Minister’s meeting with editors-in-chief of independent and opposition newspapers last month. Nazif tried to soothe their worries concerning the subsidies issue.

Pulling the plug on government subsidies seems to be the only solution available for policy-makers. But the social and political consequences are still uncertain.

By Mohamed El-Sayed


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