Fuel Subsidy Reform in Egypt

=Tackling Subsidy Reform=

In November 2011, the Cabinet issued a decree to end subsidies on natural gas to energy-intensive industries as of January 2012, but this did not occur. Similarly, the minister of supply and internal trade announced a new coupon system for distributing butane canisters in September 2011. The system would entail that each Egyptian family would receive one to two cylinders of fully subsidized butane cooking gas per month depending on how many members it has and further consumption would be partially subsidized. In March 2013, Petroleum Minister Osama Kamal said the government is considering three ways to identify allocations for fuel subsidies in the new fiscal year 2013/2014, adding that the subsidy amount may increase drastically the following year if no rationing measures are implemented.

The first scenario entails allocating US$14.6 billion to subsidize fuel, if the government applies a smart-card system to distribute diesel oil, gasoline and butane gas starting in July 2013. The government had previously announced plans to create a smart-card system for fuel subsidies to limit smuggling problems, which exploit between 15-20 percent of local distribution. The second scenario the government is considering would allocate US$17.7 billion for fuel subsidies, and the amount could increase if oil prices and thus petroleum products’ prices increase. The final scenario would allocate US$20.6 billion as an expected rate to subsidize petroleum products in 2013/14, if the Cabinet postpones the implementation of the fuel subsidies system this year. The minister added that the Cabinet would make the final decision on whether to apply the smart-card system after setting the state budget’s priorities.

Concerning car fuel regulations, Oil Minister Osama Kamal was quoted saying in October 2012 that the government "is committed to subsidizing petrol for only one car per family". Each car with a maximum 1.6 litre engine will be allocated around 1,800 litres of subsidized fuel a year, enough to travel 60 kilometres per day. He was referring to 80-, 90- and 92-grade gasoline, while prices of higher-grade 95 gasoline would be raised to what the government pays for it. Unspecified amounts of subsidized diesel would be issued for trucks, three-wheeler passenger vehicles, mini-buses and buses for transporting children to schools whose fees are regulated by the state.

The government has reportedly noted to the President's office that in order to amend the subsidy system three critical factors must ensue: strong political will, austere measures to limit fuel smuggling and complete transparency with the general populace behind the reasons of lifting subsidies.

=Socioeconomic Challenges with Subsidy Removal=

The Council of Foreign relations submitted that Egypt's current economic crisis and political transition makes the prospects of a comprehensive and effective subsidy reform particularly challenging. The government has been buying Egyptian pounds in part to stabilize the currency, since a weaker pound would make imported food and fuel more expensive, which will boost the cost of subsidies more. This has led Egypt's foreign currency reserves to plummet by more than half since the onset of the revolution up until 2013. As of January 2013 spending levels, reserves are expected to last only for another three months, according to the CBE, and the government is already buying energy on credit wherever it can.

Currency devaluation has been taking place since the beginning of 2013, but as a result it has made it more expensive for Egypt to import food and fuel, a potentially grave situation for poor citizens. Ongoing negotiations over a US$4.8 billion International Monetary Fund loan, for which one condition is that Egypt implements strict measures that guarantee expenditure rationalizing and a partial lifts on subsidies. While Egypt has been attempting to employ these mechanisms for distributing subsidized petroleum products, in the face of fuel sales on the black market, political tension has pressured the Cabinet to postpone the implementation.

=Alternative Solutions=

The government is hoping to cut subsidies by switching to less expensive natural gas. Importing natural gas instead of fuel oil would reduce by half the government's expenditure, but it would also require upfront investment in infrastructure to make the switch possible. "The government has outlined plans to expand the use of natural gas in households as well as in commercial, industrial and touristic facilities to save the country the value of petroleum subsidies," stated former Oil Minister Abdullah Ghorab in March 2012. Although natural gas might be imported from abroad if Egypt remained committed to its own gas export contracts, but imported gas would cost the country only US$7-8 per million British thermal units, compared to US$17 per mbtu that it pays for fuel oil.

Delays in switching to gas were the result of corruption, bureaucracy and poor cooperation between ministries. Saad Al-Hoseiny, a Freedom and Justice Party member, the political arm of the Muslim Brotherhood, was quoted saying in March 2012 that, "Every ministry acts as an island unto its own. There are those who benefit from importing fuel oil -- huge commissions and profits for the companies that import the fuel oil." He said his party would reject rises in domestic energy prices for households and instead insist that power plants, factories and transport use natural gas.

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