Eliminating most of the fuel subsidies is a key recommendation of the International Monetary Fund’s (IMF) recent report on Egypt, which showed progress in many macroeconomic indicators, Egypt Oil & Gas reports.
The international organization believes that gas subsidies benefit mainly the rich, advising the Egyptian government to allow fuel prices to change in line with costs. “This would protect the budget from movements in global oil prices and the exchange rate, and safeguard priority spending on social programs and necessary infrastructure,” the IMF stated.
The organization suggested to combine fuel subsidy elimination with a progressive taxation system, where richer people pay more taxes, in order to test the stability of it. It should also maintain the flexibility of its currency exchange rate. Another key recommendation is protecting low-income households through an efficient social assistance program that gives cash subsidies instead of price subsidies.
It is worth mentioning that, in 2017, the Ministry of Social Solidarity started implementing two cash subsidizing programs called Takaful and Karama (Solidarity and Dignity). Takaful program supports families with children attending school, while Karama program support the elderly above 65, and the handicapped.
IMF further advised the Egyptian government to step back from the market and to open the market for fair and free competition for private investment.
Commenting on the country’s economic progess, the organization stated that “GDP growth is strengthening and inflation is declining. The government trimmed the budget deficit, tourism revenues and remittances are increasing, and the country’s foreign exchange reserves have been rebuilt.”
Yet, there are economists who are suspicious from the efficiency of the reform plan. A recent poll conducted by Reuters Arabic showed that 12 analysts expect Egypt’s GDP growth to reach 4.2% in the current fiscal year (FY) and 4.5% in FY 2018/2019. In contrast, the government is expecting GDP growth to reach between 5.3% and 5.5% this year.
The poll also showed expectation for inflation rate increase during the current FY. It is expected to reach 25.4% instead of 23.3%, which was expected before. However, the cited economists expect inflation to drop to 23.3% in FY 2018/2019 and 12.6% in FY 2019/2020.
Egypt has been following an economic reform plan since November 2016 in order to secure a $12-billion loan from the IMF. The plan included the radical decision of floating national currency, leading to increasing inflation rate to 25.54% year-on-year (Y.o.Y) as an immediate result of the decision.