Make it or break it: Phasing out energy subsidy in Egypt

‘The International Monetary Fund (IMF) estimated in 2011, that food subsidies amounted to 0.7 percent of GDP and that for energy was equivalent to about 8.5 percent of regional GDP, or 22 percent of government revenue. (IEA webmeets)’. In Egypt, Energy subsidy accounts for 25% of government expenditure, this is twice as much as Egypt spends on education. Four times than Egypt spends on the health sector. Figures are alarming.  However, this is not an explicit problem to Egypt, its one that has hit many countries within the MENA at different points of time. And each country tried to deal with it differently, thus there is room to learn what worked and what did not.

Energy Subsidy reform in Egypt has become a must

Having stated the above mentioned figures, energy subsidies continue to be a burden on government budgets. There is very little evidence tracing the effectiveness of previous energy subsidy reform programs and its impact on reducing poverty or reaching the needy. In fact, there is more evidence shared showing the ineffectiveness of energy subsidy programs during the opening session of the Seventeenth World Congress “The Dilemma of Subsidy Reform and Equity in MENA” .  The purpose of this session is to discuss subsidy reform and its underlying challenges such as achieving a more equitable system while avoiding inflationary effects and food riots in the context of MENA countries.

Energy subsidy has implications not only on budgets, but also on resource allocation, industries created, excessive consumption, waste that takes place, arbitrage across borders, It is bad news everywhere. So the question is twofold. Firstly, how to design a program to phase out energy subsidy that is efficiency enhancing, equitable, and can be deliver with the right capacity? And secondly, how tot deal with the political economy of phasing out energy? Any discussion on energy subsidy cannot be done purely on economic grounds.

Sherine el Shawarby

Sherine el Shawarby at the Opening ceremony of the Seventeenth World Congress

Why has reform in energy subsidy in Egypt has become a must?
Dr. Sherine el Shawarby, Assistant to Egyptian Finance Minister for Economic Justice and Social Protection shares Egypt’s experience in wanting to reform energy subsidy programs. El Shawarby, argues that fiscal budgets have reached levels that have become impossible to sustain. Fiscal deficit for 2013 reached up to 13.5% of Egypt’s GDP. For Fuel, the price of petrol presents only 6% of cost, which is impossible to maintain. Natural gas however, is much better where the price represents 70% of cost. Nevertheless between both extremes, a problem of cost recovery still persists.

Now what to do?
Phasing out energy subsidy in Egypt has become a must. Dr. Shawarby suggests some learning from other experience to take into consideration when designing a market-driver energy subsidy program:

  1. Avoid price jumps
  2. Gradual phase our of energy subsidy with small increment in prices
  3. Plan over a clear time frame to avoid risk of political reversal (3-5 years)
  4. A mid-terms strategy developed to fully recover the cost of energy products
  5. Undergo a full energy pricing reform and the liberalisation of the entire energy sector
  6. Identify early one winners and losers from phasing out energy subsidy reform . Some sectors might suffer of inflation, like transportation and agriculture, loses to middle-level income groups might be significant if no compensation mechanism takes place
  7. Enhance pro-poor policies, start t include some conditional transfer to benefit the poor

It is by far mostly important to understand that energy subsidies are the most popular source of social protection for in Egypt, and it might be among the very few subsidies that Egyptians are getting back directly from government. Phasing out  energy subsidy might be accompanies by opposed responses from the public, especially the poor. And hence a well designed properly communicated government strategy is requirement to transparently campaign for safety nets and pro-poor policies designed in place.

Every time a reducing energy subsidy reform is done, someone is better off and others are worse off, there will always be winners and losers, how can the governments manage the change in the balance of power, becomes an interesting question that requires openness and more rigorous share of experience.

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