Subsidies Readjustment: Paving a Path to the Poor

The subsidies dilemma is witnessing more and more relevance as the situation becomes unsustainable and the national economy buckles under the strain. The new minister of petroleum will have his hands full attempting to balance economic wisdom and public need.

The authentic visualization of oil and gas subsidies arises to target Egypt’s low-income groups, considered to be the actual intended beneficiaries.

While the notion was originally set in that framework, studies have shown that only 20% of the governmental designed subsidies reach the less wealthy 80% of impoverished the population, whereas the remaining 80% benefit the richer 20% segment. In the 2011/2012 budget, it is noted that subsidies for energy, which include natural gas, fuel, diesel, gasoline and octane, amounted to nearly LE95 billion. Some expect that figure to skyrocket to reach LE 114 billion, leading to a wider budget shortfall and recklessly wasting governmental resources. It is clear that the subsidies allotted to the oil and gas sector are excessive and constitute a massive portion of the country’s expenses. Dissecting the current scenario, questions persist as to whether subsidies should be slashed or retained.

According to some media reports, Egypt’s new government, under Prime Minister Hesham Qandil, will most probably cut fuel subsidies by about 27% in the 2012/2013 budget. Sources state that the total amount spent on fuel subsidies will be curtailed to LE 70 billion instead of LE 95 billion. Authorities will introduce a new coupon system to stabilize distribution and facilitate access for the needy. Sayed Naguida, former head of the energy committee in the legally dissolved parliament, told Egypt Oil and Gas newspaper that only proper studies will reveal if subsidies should be decreased or increased. The most vital angle in the whole story of subsidies is that it actually stretches out to the primary beneficiaries. “Subsidies should eventually get to the poor without ensuing negative impacts on consumers,” Naguida said. He added that oil and gas agreements do not affect investors as it lies in a rigid governmental scheme.
The official stressed on the main objective behind subsidies, which is relieving rather than strainings the governmental budget. Annual fuel subsidies, in Naguida’s estimation, have reached LE 107 billion. This amount should be slowly and rationally decreased in order to cushion customers from the impact. Analyzing the current situation, Naguida, a member of the Muslim Brotherhood’s Freedom and Justice Party, expects that fuel subsidies in the coming phase will decrease to be LE 70 or LE 80 billion only. Among the suggestions currently under consideration is the strategy of granting subsidies only to the disadvantaged while protecting the public budget from severe losses. Commenting on the idea of the coupon system, Naguida praises the initiative and provided a simplified example of a needy taxi driver who will be offered a coupon for 1200 liters, which would cover his car’s consumption of fuel for at least a year.

With talks suggesting that the new government will completely abandon subsidies of fuel oil -low quality fuel used for industrial purposes- in the year 2012/2013, it should be noted that the removal of such subsidies is the primary driver behind the drop in overall fuel subsidies. The draft plan also recommends that the government swap using fuel oil-reliant industries with natural gas in order to reduce demand on oil. As the Egyptian finance minister has submitted the draft budget last June, a final decision towards this proposal should have taken place before the beginning of July 2012. Many experts, however, do not agree that the government should lift the energy subsidy as it neither adds to competitiveness nor allows consumers affordable products.

Ayman Abul Maaty, department manager at the Egyptian General Petroleum Corporation (EGPC), told Egypt Oil and Gas newspaper that subsidies are mandatory in the oil and gas sector.

He criticizes, however, the fact that subsidies are not directed to the proper beneficiaries. “Everyone fuels his car from any gas station. There is no differentiation of who needs more subsidies than the other,” he said. Speaking particularly about ordinary oil consumption, Abul Maaty estimates that the ideal solution to thedilemma of subsidies may well be the coupons proposal.

“Everyone should receive a coupon of LE 2500 every year to cover his car’s petrol expenses. If a citizen, regardless to his societal class, has consumed his quota then he/she will bear the cost of the additional oil needed as per its international price” Abul Maaty said. Giving an example, he assumes that if the average cost of one petrol liter is LE 1.6, an ordinary citizen will have to consume the quota in his coupon and then pays about LE 6.5 per liter as per the international price of oil. He stressed that the coupon system should be implemented on all types of fuel. If the coupon idea is properly applies, Abul Maaty expects Egyptians to start thinking economically without ruining Egypt’s public budget or squandering resources. Once again he stresses, “Egypt needs all sorts of subsidies”. Hany Dahi, head of the EGPC, was not available to comment on the issue when contacted by Egypt Oil and Gas newspaper.

Other views disagree with the idea of cutting subsidies. Magda Qandil, the executive director of the Egyptian Centre for Economic Studies, was quoted as saying that a successful strategy for subsidy cuts entails preparing the entire Egyptian population for general reform. According to Qandil, the first step is to clearly analyze the amount of budgetary loss resulting from subsidies.

This should be followed by a clarification of the benefits that will result for higher-income citizens and the best solutions to protect the poor. Qandil recommends that the immediate action to be taken should be adjusting the amount of subsidies reaching the rich first -meaning the reevaluation of subsidies for the 95-octane gasoline consumed by the more affable portion of Egyptian society. Disagreeing with the opinion that subsidies should be carried out on all types of petroleum, Qandil stated that natural gas and fuel oil make up roughly 70% of petroleum consumption. In light of this fact, it would seem unfair to lift subsidies from almost all petroleum products. “This would only add to the burden of the needy. It would contradict the notion of social justice,” Qandil said. She believes that the best scenario would be adjusting all petroleum prices and directing about 50 per cent of the subsidies to the poor. “This would not cost the government any additional expenditure as we could cut from a segment and give another segment.”

Ahmed Abd Rabo, the general manager of petroleum affairs at Egypt’s Ministry of Petroleum, regarded any sort of subsidies as frittering away to all oil and gas assets. He states that those subsidies of LE 90 billion reach only 15 to 20 per cent of lowincome citizens, who actually constitute about 70 per cent of the total Egyptian population. He condemns citizens who misuse energy resources in hotels and other luxurious places rather than intensifying efforts to use these assets in heavy industries. Abd Rabo suggests that the subsidies dilemma should be resolved when consumers are allowed to make profit out of all oil products and benefit from the subsidies at the same time. Refuting the coupons inititative, Abd Rabo proposes the idea of granting lowincome groups financial subsidies. “A citizen should be offered an annual financial subsidiary that covers his own oil expenses in lieu of enforcing subsidies on all oil products,” he said. By implementing this concept, the expert believes that there will be more room for profit making, leaving space for unfixed prices.

When citizens are granted an annual or monthly financial stipend from the government, the prospects of the black market in the oil sector will be diminished. Some experts suggest other moves. Head of the Energy Committee at the Federation of Egyptian Industries Tamer Abu Bakr stated that the solution for the subsidies predicament is to substitute the overwhelming majority of petrol products with cheaper natural gas. Agreeing with the opinion of Qandil, Abu Bakr regards natural gas as the best alternative for oil despite the fact that it entails higher imports.

Former Minister of Finance Samir Radwan explained that the subsidies problem is not limited to the petroleum sector, but has also raised concerns in the fields of transportation, bakeries and poor communities.

“Since 2005, the government was pro-business and energyintensive industries were provided with subsidized fuel, because they were supporters of the government,” the former minister said. He added: “Now, it is the political situation. The collective psyche of Egyptians is that by taking away subsidies it will hit the poor very hard. But you can compensate the poor and remove subsidies. Brazil, for example, has been very successful in its cash transfers program.”

Taking a deeper look at the country’s political situation, the ruling Freedom and Justice Party (FJP), the political arm of the Muslim Brotherhood and currently the most powerful political entity in Egypt, will heavily influence policy related to the issue of subsidies. According to its economic platform, the FJP wants to cancel “subsidies for energy-intensive industries” and review “the current subsidy policy of petroleum products, which gives the rich 80% of subsidy funds.”

Until the new government is clear on what steps should be taken to resolve the challenges around subsidies, the issue will remain a controversy in Egypt’s petroleum sector. Whether the coupons system will be the best answer or a temporary alternative, subsidies are expected to be one of the toughest issues on the plate of the new government in Egypt, particularly in light of the country’s ailing economy. The political cost of decreasing or altering subsidies could be substantial in such a charged political atmosphere as the one Egypt is currently experiencing, but he economic cost of leaving them untouched may just end up being catastrophic.

By Ethar Chalaby


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