Fuel Subsidies in Egypt

=Origins of Subsidies in Egypt=

In 2010, Egypt ranked sixth amongst cost of fossil-fuel consumption subsidies for top 15 economies. The IEA estimated the average subsidization rate in Egypt to stand at 54.2% in 2011, with every citizen receiving an average subsidy of US$296.5, leaving total subsidies at US$24.5 billion (Oil at US$15.27 billion, Natural Gas at US$3.78 billion, Electricity at US$5.42 billion), equivalent to 10.4% of GDP. Figures reported by the Central Bank of Egypt showed a large discrepancy, where energy subsidies total amounted to approximately US$14 billion in 2011.

Egypt's food and fuel subsidies originated under former president Gamal Abdel Nasser, but became a fixture in 1973 when the price of commodities rose globally. Although previous structural adjustment agreements with the IMF targeted subsidies for reduction, Egypt's subsidies have persisted for social and political stability. Egypt subsidizes almost all of its energy products, where its average domestic retail price of gasoline is among the lowest in the world.

For years, the government has resisted cutting subsidies for fear of igniting inflation and social unrest. However, the economic situation post the January 25 revolution has put it under renewed pressure to tackle the issue as it negotiates a US$4.8 billion loan from the International Monetary Fund to avert a balance of payments crisis. The IMF requires a commitment from Egypt to reform its finances.

According to the Egyptian Center for Economic Studies, different views have increasingly stated that fuel subsidies in Egypt are inefficient, inequitable and costly to public finances. Estimated at US$13.8 billion, fuel subsidies in fiscal year 2011/12 account for 71 percent of total subsidies, 19 percent of total expenditures and 6 percent of GDP. These subsidies benefit mostly energy-intensive industries as well as the richer quintiles who consume more petroleum products.

=Subsidy Mismanagement=

Despite the massive budget allocation for energy subsidies, they remain ineffective at reaching the least privileged citizens, as stated by the Council on Foreign Affairs. More than two-thirds of subsidy expenditures go to fuel, mainly benefiting transportation and industry. This amount has been increasing due to the rising cost of energy globally and deterioration of the Egyptian pound to the US dollar. Data extracted from the 2012/2013 state budget indicate that energy subsidies alone eat up one fifth of the total budget, amounting to a total of US$17 billion. The figure is expected to reach US$21 billion in the following year.

Subsidies breakdown for petroleum products in 2013 shows that diesel receives an allocation of US$7 billion, gasoline US$3 billion, butane US$2.8 billion, mazut US$2.8 billion, and natural gas received US$1.7 billion. While subsidies of fuel make up almost 70 percent of spending on total subsidies, only 14 percent of this figure is spent on liquid petroleum gas (LPG), which is used for cooking and fueling some of Egypt's many taxi cabs. The majority of households in Egypt rely on these butane containers for their cooking needs because they do not have gas connections in their homes. These canisters cost the government about US$11 each to fill, but it sells them for about US$0.73, however, a black market taps off supplies and drives up prices. Less privileged Egyptians may wait for days to collect a subsidized canister from government depots. During 2012 and early 2013, shortages and rising prices made the subsidy for cooking fuel a major issue nation-wide, with strikes and sit-ins becoming a regular occurrence. Lack of gasoline and diesel made fights and brawls a common feature in gas station lines. In February 2013, one man was killed and two people injured after five assailants shot at them following an earlier fight at a gas station.

=Subsidy Misallocation and Corruption=

Subsidy allocations are mismatched with regards to consumption, for example, while natural gas and mazut represent 70 percent of energy consumption, they only receive 24 percent of total subsidies. While some energy products receive a higher endowment of subsidies, they remain to be less vital based on consumption needs.

Cheap subsidized prices have augmented the surge in energy consumption that government finances could not afford, especially after the economic downturn post the revolution. In the last few years prior to 2012, consumption of liquefied petroleum gas (LPG) has been rising at an annual rate of 10 percent, gasoline at 12 percent, diesel at 6 percent and fuel oil at 6 percent, according to figures provided by a Cairo-based energy firm, as referenced from Reuters. About 44 percent of government subsidies go to diesel, used mainly by transport and industry, and 22 percent to fuel oil, used by industry and power plants. The majority of fuel subsidies in terms of absolute cost go to diesel and energy-intensive industries like steel, cement, fertilizer, ceramics, and glass. These industries have been benefiting twice over because they receive their electricity and their fuel at subsidized prices. "Many then export their products, while pocketing the profits. This has not only led to inefficiency, but also corruption," stated Isobel Coleman, Senior Fellow and Director of the Civil Society, Markets, and Democracy Initiative at CFR.

Many of the subsidized energy products are illegally sold. Common practices include illicitly selling diesel as fuel for ships, gasoline to chemical-producing factories, and smuggling fuel outside the Egyptian borders to neighboring countries. According to a study in 2012, the rightful beneficiaries of fuel subsidies in Egypt make up 80 percent of the population, whereas they only receive 20 percent of the subsidy, while the remaining 20 percent of non-eligible citizens obtain 80 percent of that amount.

=References=