Country Update: Assessing Egypt's Energy Subsidy Reforms
In early-July 2014, the Egyptian Government announced sweeping measures to significantly increase most of the energy prices paid by businesses and households. ‘Big bang’ reform of this kind is a bold break from the past: energy prices in Egypt have changed little over several decades. According to the government, the reforms represent a decisive first step in reducing the burden of energy subsidies on Egypt’s public finances.
As a result of very slow energy price appreciation over time, the share of fuel subsidies in the Egyptian Government’s budget increased from 9 per cent in 2002 to 22 per cent in 2013. When electricity subsidies (for both inputs and end-user prices) are included, this share is well above 30 per cent. Currently, Egypt spends more on fuel subsides (not including electricity subsidies) than on health, education and infrastructure combined. Significantly compounding the issue of a rapidly expanding subsidy burden, Egypt has experienced stalled growth, growing poverty and unemployment, and declining government revenue since the revolution of January 2011. This combination of soaring subsidy costs and economic stagnation has resulted in significant fiscal instability in Egypt, with the government’s budget deficit reaching 14 per cent of GDP in fiscal year 2013. There has thus been a growing need for subsidy reform; however a prevailing context of economic hardship and high poverty has made implementations of reforms difficult.
The subsidy reforms introduced in July 2014 form part of a broader attempt to reduce Egypt’s budget deficit to 10 percent of GDP in the next fiscal year (through revenue enhancements as well as cost cutting), from an expected deficit of around 14 percent in FY13, with slow year-on-year reduction in the size of the budget deficit thereafter. The recent budget handed down by Finance Minister Hany Kadri aims to cut fuel subsidies to 13 per cent of total government spending in the current fiscal year, a decrease of about 10 per cent in total expenditure. Altogether, savings from the current reforms are estimated at EGP51 billion (USD7.1 billion). Ministers have stressed that the current reforms are only the first step in a longer process of energy subsidy reduction. The government pledged to keep subsidised food prices stable following the energy price rises and expanded the food subsidy system to cover about twenty additional staple products.
Compared with experience in other countries, mass public protest against the decision to raise energy prices has been relatively muted. Nonetheless, reports suggest a mood of significant frustration, and often despair, among Egypt’s poor regarding higher costs of living. This mood has not, however, translated into mass protests and civil unrest. Although transport operators undertook strikes and protests in Cairo, Sinai and Alexandria, and small protests were organised by in Cairo’s Tahrir Square, large-scale demonstrations of the kind experienced during and since the revolution of January 2011 have been mostly avoided. Presumably the violent crackdown on the Muslim Brotherhood and the banning of public protest has had a significant effect in discouraging demonstrations. Indeed, on-the-ground reports suggest that the reforms have considerably tested the faith of poor Egyptians in the new El-Sisi Government.
The government has made significant efforts to communicate the rationale for reforms immediately before and after the event, beginning with a media offensive on the energy subsidy problem during the budget negotiations in late-June 2014. Senior ministers, the prime minister and President El-Sisi have since conducted an intensive public relations campaign in support of the reforms, speaking on the issue (at least initially) on a daily basis and publicly engaging with aggrieved stakeholders (most notably small transport operators).