Egypt to reduce energy subsidies

As part of a long-held government effort to cut energy subsidies and bring prices up to cost, the government this week announced further cuts in it subsidies of natural gas.

A recent report for the Cabinet’s Information and Decision Support Center showed that natural gas subsidies will be reduced in fiscal year 2009/2010 to LE 1.5 billion, down a significant 77 percent from LE 6.5 billion in fiscal year 2008/2009.

An official was quoted in press as saying that the move will affect household consumption and will not have any effect on industry, which pays a price that is slightly higher than the cost determined by the Ministry of Petroleum

The move, a dramatic shift for the government, comes at a time in which supply of natural gas has increased at home in the face of falling exports. Al-Ahram reported that natural gas exports tumbled by 38.5 percent in March of this year, versus March a year ago. Total exports for the industry in March stood at 5 million.

Exports of oil are also down considerably, falling to $230 million in March, versus $616 million in March the previous year.

“The government has been restructuring subsidies on energy, constituting around 70 percent of total government subsidies, to redirect spending to other social items, and gradually raise the cost of energy products to near-cost levels,” wrote Reham ElDesoki, a senior economist at Cairo-based investment bank Beltone Financial.

The government has said that this change in subsidy levels is part of a move to realign Egypt’s energy consumption. Historically, Egypt has consumed considerable levels of both oil products — diesel and gas — and natural gas products.

Egypt is rich in natural gas, though, and poor in oil making natural gas often a cheaper and almost always a more stable source of energy.

Recognizing this, the government announced a long-term plan to extend natural gas piping to over 6 million housing units by the year 2011.

With a tight budget, though, and a significant portion of the government’s annual expenditures going into subsidies like wheat and energy, officials have had to make adjustments in order to underwrite their plan to extend the reach of natural gas as a home energy source.

Some of the money saved through the reduction in subsidies is expected to help pay for the government’s plan.

To date, the government has hit 2.2 million of the 6 million targeted units.

Experts say that the government’s move is likely to affect households more than industry, for which subsidies have already been almost fully eliminated.

“Of the products, diesel (gas oil), natural gas and mazot (fuel oil) are the more heavily subsidized. The government had last raised prices of electricity and natural gas for industry in May 2008 to partially finance an increase in civil servants’ bonuses and reduce subsidies for energy-intensive industries,” wrote ElDesoki.

This comment reflects the small margin for decision-making under which the government operates when it adjusts its spending practices. Subsidy reductions this year and last illustrate that the government has cut back on its subsidies in order to fund other social projects.

The Ministry of Finance asserted, though, that prices of household electricity and water consumption were expected to remain unchanged.

As part of its effort to ease the country’s reliance on oil, the government has also pursued projects in alternative energy.

It has, for example, announced intentions to have 20 percent of the nation’s energy generated from wind farms by the year 2020.

(Daily News Egypt)


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