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Financial Crisis - Energy Subsidies Coming to an End in Egypt

Monday, 25 January 2010 13:48

Egypt's gradual phasing out of energy subsidies will likely be put on timeout due to the continuing repercussions of the financial crisis. Industry will benefit, but an extended grace period could increase the national deficit and derail plans for restructuring the country's energy model. Most likely, Egypt's fiscal reforms will be pushed back two years.

On Jan 13, the Energy Pricing Committee recommended that current prices in non-energy intensive industries be maintained for the next six months in order to protect the economy, although a final decision has yet to be taken by the prime minister, Ahmed Nazif. According to the Prime Ministerial Decree No. 1795 of 2008, non-energy intensive industries are those that require less than 50m kw/hr of electricity or 66m cu metres of natural gas annually.

Just last October, the Industrial Development Authority had announced a 29% price hike would go into effect at the beginning of 2010.

In 2006, following a spike in demand from industries and households, the ruling National Democratic Party began a programme to reduce the country's costly energy subsidies. In the 2007-08 fiscal year, subsidies were removed from energy-intensive industries, including petrochemicals, steel and cement production. But by that time, oil consumption had outstripped domestic supplies, forcing Egypt to import at steep international prices. Long seen as part of the social contract, remaining energy subsidies cost the state an estimated $5.89bn in 2009, and constituted 70% of its total subsidies.

The original plan had been to phase out subsidies for electricity and gasoline completely by 2014, with only butane continuing to be supported. However, since the onset of the financial crisis, the state's primary focus has been on maintaining economic and social stability. The budget deficit is expected to reach 9-10% in the 2009-10 fiscal year due to stimulus spending, such as increased wages for public sector workers.

In December 2009, the finance minister, Youssef Boutros-Ghali, told international press that the global crisis had shifted all fiscal plans, including subsidy dismantling, back two years. "I was planning to go down to a 3% budget deficit by 2012. Now it's going to be 2014," he said.

The continuation of subsidies, however, may not be entirely financially motivated. In its daily market report, investment bank Beltone Financial wrote, "The second quarter of 2010 would be an opportune time for the government to restructure energy subsidies as inflation falls below 10%," adding that the decision to not raise energy prices could be a political one as 2010 is an election year.

Despite the state's insistence that they actually benefit the rich, subsidies remain popular with Egypt's predominantly poor population (43% of citizens live on under $2 a day). Indeed, the removal of subsidies has been consistently referred to by the government as a "restructuring" in order to garner public support.

However, given dwindling domestic energy supplies and demand rising 6.35% on average annually, subsidised energy is an increasingly unsustainable model. Oil production has been on the decline since 1996, with around 700,000 barrels per day of crude now pumped annually.

Egypt is still a net exporter of natural gas, producing 45.8m tonnes in 2009 and consuming 31.2m, while Its 77.2trn ft in proven natural gas reserves are enough to power the country for 30 years. Nonetheless, in 2008 the state announced it would sign no new gas export contracts in 2010 in order to accommodate domestic consumption needs.

As Egypt removes subsidies for petroleum products, it has also sought to increase the weight of renewable energy sources in its portfolio. Given Egypt's vast expanses of uninhabited land and high wind speeds, developing wind power is the obvious answer - the New and Renewable Energy Authority is working in conjunction with international companies to add another 7200 MW in installed capacity by 2020. Egypt's solar power capacity will also receive a boost from the World Bank's Clean Technology Fund, which is putting $5bn towards developing green power in the Middle East and North Africa.

While sector restructuring may have been momentarily set off track by the global recession, it is clear that it will soon be the end of an era for energy subsidies in Egypt. Once the country achieves greater economic stability, it must continue down the path to a sustainable energy model.

Global Arab Network

This article is published in partnership with Oxford Business Group

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