Energy Subsidy Reform Program: The Full Picture

Energy Subsidy Reform Program: The Full Picture

Energy subsidy reform is a main pillar of Egypt’s economic reform program. The government has implemented the last round of subsidy cuts in June 2019 and the subsidy’s system reform is supposed to be ongoing until 2020. It is worth noting that according to the Middle East and North Africa (IFPRI) paper, titled “Phasing Out Energy Subsidies as Part of Egypt’s Economic Reform Program: Impacts and Policy Implications,” the first wave of the fuel subsidy cuts began in 2014 by increasing diesel prices by 64%, 80-octane gasoline by 80%, and 92-octane gasoline by 40%. Overall prices averaged at a 50% increase; however, despite the increase, fuel products remained heavily subsidized; hence, the government continued its fiscal reform by implementing further cuts.

Currently, the reform of fuel subsidies in Egypt is on track and the North African country is a step away from eliminating subsidies completely as a way out of the economic conundrum back during fiscal year (FY) 2015/16 which was caused by high deficits, overestimated exchange rates, diminishing gross international reserves, and low economic growth. The program aims to restore macroeconomic stability, promote inclusive growth, and enhance business climate to attract more investors. The success of the reform program relies on achieving many pillars including the flotation of the exchange rate, phasing out energy subsidies, and the introduction of a value-added tax (VAT), according to the IFPRI paper.

Fuel Subsidy Reform Program

While the fuel subsidy cuts began prior to the International Monetary Fund (IMF) loan deal, the IMF agreement encouraged a steady and sharp decrease in subsidies over four more rounds in November 2016, June 2017, June 2018, and lastly July 2019, according to published data by Ministry of Finance (MoF).

Over the comparison period, which begins from FY 2014/15 to FY 2019/20, fuel subsidies’ budget as a share in total expenditures had a decreasing trend. However, in FY 2016/17, the  share significantly increased hitting 11.14%, that was mainly due to the implementation of free floating exchange rates, Tarek El Molla, Minister of Petroleum and Mineral Resources told Reuters in August 2017.

Furthermore, the state budget was ratified last June, introducing further cuts in fuel subsidies by around 40%, reaching EGP 52.9 billion in FY 2019/20, down from EGP 89 billion in FY 2018/19, the planned FY 2019/20 budget showed.

As a result of cutting fuel subsidies, petroleum products’ prices rose. In July, 92-octane gasoline price hit EGP 8, up from EGP 6.75 with an increase of around 18.5%. Additionally, an increase of around 22.7% occurred in the prices of 80-octane gasoline, diesel, and kerosene to reach EGP 6.75, up from EGP 5.5. In addition, household cylinders price rose by around 30%, the Ministry of Petroleum and Mineral Resources declared, adding that the price of natural gas used in households increased from 20% to hit 34.3%. Looking at the gas-vehicles, the natural gas price increased by 75%, from EGP 2 to EGP 3.5 per cubic meter (m3); which represents the lowest fuel type priced recently. Despite having the highest increase, in terms of price, it has the lowest, representing an incentive to turn vehicles to gas-powered ones.

Regarding Brent crude global price, it reached $66.55 per barrel in June 2019 (1,116.9 EGP), in addition, the global natural gas price recorded an increase to hit around $2.31 per million British thermal unit (mmBtu) (38.77 EGP), according to Bloomberg data. It is worth noting that the Organization of the Petroleum Exporting Countries (OPEC) and its allies have decided, during their sixth ministerial meeting in Vienna summit held in July, to continue oil production cut agreement to reduce it to 1.2 million barrels per day (mmbbl/d) for an additional period of nine months, starting from July 1, 2019 to March 31, 2020 which is expected to increase the prices globally.

Automatic Fuel Pricing Indexation Mechanism

In conjunction with the government steps to apply the fuel subsidy reform program, December 2018 witnessed the approval of the Prime Minister Moustafa Madbouly to implement a new automatic price indexation mechanism for 95-octane gasoline with the first price adjustment scheduled at the end of March 2019, according to the IMF fourth country review. The Ministry of Petroleum and Mineral Resources began implementing the mechanism on 95-octane gasoline in April 2019. The price was revised three months later in July 2019 and increased to reach EGP 9, up from EGP 7.75.

It is worth noting that the price indexation for other fuel products was introduced in June 2019 with the first price adjustments scheduled to be by the end of September, the IMF review added. Under the mechanism, the price of fuel products will fluctuate along with the international prices. However, the price changes will be kept at ±10% band and petroleum products will be re-priced on a quarterly basis.

On the other hand, the government will continue to support butane cylinders as well as the petroleum products provided to bakeries and power stations, without applying the new mechanism on them.

It is expected that fuel subsidies will cost around EGP 26.8 billion in FY 2020/21. As a percentage of the gross domestic product (GDP), fuel subsidies anticipated to decline from 1% in FY 2019/20 to 0.4% in FY 2020/21, according to the IMF fourth country review.



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