Following the recent announcement to the press delivered by the Egyptian Prime Minister Hisham Qandil, revealing the country’s 10-year economic plan, the country’s economy is foreseen to exhibit an annual growth between 3.5 and 4 percent in the 2012-13 fiscal years, followed by a one percent increase on the following fiscal year.
While the economic plan takes Egypt, according to Qandil, towards a social-justice based economic approach, with more emphasis on healthcare, education, pension schemes, and other social welfare aspects, the government is considering restructuring its approach towards state subsidization, particularly considering the energy sector. The main rationale preached by Qandil is ensuring that state subsidies are solely restricted to the needy. Hence was the approval of ending subsidies on 95 octane gasoline by the cabinet on 21 November 2012. Egypt has been under severe pressure from the IMF to unleash its economic reform program as a prerequisite to the finalization of the $4.8 billion loan preliminary deal that is currently undergoing negotiations between Egypt and the IMF. This staff-level agreement was reached with the IMF’s technical team currently visiting Cairo, and is expected to be a preface of another $14.5 billion necessary to fund Egypt’s economic program already revealed to the IMF. The Egyptian government announced in the 2012/2013 budget a cut of subsidies for energy to LE70 billion. Many experts estimate that the government goal is too optimistic. Last year, subsidies were set to reach some LE95 billion in the budget, but are estimated to have actually reached LE115 billion.
Before the government’s recent decision to restructure the energy subsidization policies, the state subsidization totaled approximately 44 billion EGP, representing almost 25 percent of annual government expenditures. Qandil even suggests that the new policies will achieve annual savings of 55 billion EGP. Last year alone, the government spent 115 billion EGP on subsidizing petroleum combustibles and compounds, under the stringent demands imposed by political and economic instability that followed the revolution.
The government’s decision was accompanied with a supplementary plan that sets definite sale quotas with regards to other types of fuel still under state subsidization. The Minister of Planning and International Cooperation Ashraf al-Arabi announced to Reuters press agency last Wednesday that 95 octane gasoline will be distributed using coupons starting from April 2013. He added that vehicles with 1600cc will have a special consideration in their quotas.
Widespread worry among Egyptians has become evident after the implementation of the subsidization reforms. Ordinary citizens are fearful from witnessing a long period of austerity as a result of the conditions imposed by the IMF loan. On the other hand, economic experts suggest that the new measures will be only aimed at those capable to afford the price of 95 octane, the most expensive gasoline grade, and will by no means impact the ability of the poor to purchase other types of subsidized fuels. This opinion was also propagated by al-Arabi, who eased down the public opinion by stating that the fuel quota system would not be put into effect prior to acquiring public consent on its implementation mechanism.
Furthermore, Qandil stated that the consumption of lower grades of fuel, namely 92, 90 and 80 octane gasolines, would be regulated by virtue of a newly introduced system of smart cards. The main idea of such smart cards is that they will only allow drivers to fill their tanks only to the extent that enables them to get from their homes to their workplace and vice-versa, regardless of long trips. On average, capable drivers pay 2.75 EGP for a liter of 95 octane fuel, an amount that is far less than the international price, taking into account that this price only corresponds to $0.45.
The subsidization cuts are typically expected to incite excessive consumption and black market fuel trade. The subsidized fuel black market has been a key contributor of the fuel scarcity phenomenon that hit the country several times in 2011 and 2012. For this reason, a new law sets the penalty against anyone caught while smuggling subsidized fuel between 5 and 7 years in prison, and imposes fines between 100,000 and 1 million EGP on offenders.
Even months before the formalization of the subsidization reforms, the Egyptian President Mohamed Morsy announced that 85% of Egypt’s fuel crisis was contained by virtue of security crackdown on fuel smuggling cartels. According to Morsy, 23 million liters of oil and diesel were claimed by the security apparatus from illegal traffickers only in August and September 2012. Nevertheless, the President announced that two among the Ministry of Energy, Petroleum and Mining top officials had been arrested and charged with illegal smuggling of 5 million liters of subsidized oil and diesel per month. These quantities amounted to approximately 700 million EGP of public funds.
Securing internal demands on combustibles until the end of 2012
Under the strain of government budget deficits, Egypt has been struggling to import oil since the outbreak of the 25 January 2011 Revolution. The country’s ability to secure its domestic and industrial oil demands has been even coupled by the government’s limited accessibility to credit, given the astronomical cost allocated to fuel subsidization. Only in the past six months, credit supplies by foreign banks to Egypt have dried up to the minimum level since the revolution, and soaring charges preconditioned any loan offered by lenders to the country, whose ability to meet its financial obligations has become in serious question. The situation was even worse on several occasions in 2011 and 2012, when severe gasoline shortages sparked angry protests in the streets of Cairo and other major cities. The shortages were the direct result of the government’s incapability to pay for petrol, causing oil tankers to keep their place at the port cities of Alexandria, Port Said, Damietta, and Suez, awaiting the receipt of letters of credit to discharge their content. The prolonged duration of fuel shortages has had more devastating socioeconomic impacts. For instance, bakeries selling subsidized bread were compelled to periodically shut down due to the shortage of diesel fuel required for them to operate. Nevertheless, the repeated electricity blackouts in August 2012, which coincided with the holy month of Ramadan, were linked with the lack of fuel supplies.
Despite of these exceptionally strenuous internal and external constraints, Egypt succeeded in securing oil supplies for the remainder of 2012. However, Reuters reported that the deal was concluded on the ground of providing Egypt with unusual oil grades in exchange of astronomical charges paid to the western suppliers Shell, Petraco, and JP Morgan. Despite the costly price that aimed at compensating the suppliers for their potential incurred risk, this deal provides Egypt with 6 million barrels by December 2012, such that the share of every supplier is 2 billion barrels originating from Iraq and Oman. Meanwhile, negotiations on prices between the Egyptian Gas and Petroleum Company (EGPC) and the three suppliers have not yet been concluded. The government is exerting its maximum momentum in order to win payment flexibility.
Natural Gas and Butane
Concerning gas, Egypt has been experiencing extreme difficulty in fulfilling its domestic demands while maintaining its trade agreements. This happens despite of Egypt being a gas producer and exporter. Given this context, shortages in butane cooking gas, commonly known in Egypt as butagas, are expected as winter is approaching. The government is looking to increase its butane imports from its main supplier, Algeria, which together with Libya and Saudi Arabia, provide Egypt with almost 50 percent of its butane demands. Butane cylinders enjoy government subsidization, and approximately 2 million tons of the combustible material is locally produced in the country annually. Reports indicate that Egypt’s butane imports totaled 360,000 tones prior to the revolution, and exhibited a staggering increase to 700,000 tons during the current year. Currently, the Egyptian government is attempting to secure a deal with the Algerian petroleum company Sonatrach whereby Egypt would even receive 1 million tons of butane to meet its domestic requirements.
In parallel, the Egyptian government has opened a new gate towards the exploration of natural gas in the Eastern Mediterranean Sea basin. A meeting was held recently between the Egyptian and Cypriot ministers of foreign affairs to discuss opportunities of collaboration with respect to this particular subject matter. However, the primary concern revolves around potential legal problems that might amount absent any maritime border demarcation between Egypt and Israel.
By Ethar Shalaby