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Egyptians protest fuel price hikes as economists welcome the move

A number of economists applaud fuel subsidy cuts as Egyptian consumer protection watchdog warns of runaway inflation

Deya Abaza, Saturday 5 Jul 2014
petrol station
Cars queues in a petrol station in Cairo (Photo: Bassam Al-Zoghby)
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Amid fears of the consequences of the steepest comprehensive fuel price hikes in decades, a number of economists and analysts have welcomed both the timing and the magnitude of reforms to Egypt’s bloated fuel subsidy program.

On Friday at midnight, the government of Egypt raised the prices of three widely-used state-subsidized fuels, 80 octane gasoline, 92 octane, and diesel fuel, by up to 78 percent.

The move is part of a larger effort to rein in Egypt’s budget deficit to 10 percent of GDP in the 2014/2015 fiscal year by cutting LE44 billion in spending on energy subsidies, among other measures.

Egyptians woke up to find the prices of certain modes of non-governmental public transport, such as the popular microbus, were charging 50 percent-higher fares than the previous day.

“This morning I paid LE1.5 to take the microbus from Bulaq El-Dakroor to Is’af,” complained Ahmed Mohamed, a young waiter in an upscale Cairo neighbourhood.

In the Nile delta governorate of Sharqiya, scuffles broke out between the drivers who increased their rates and groups of commuters, according to state-run Al-Ahram’s Arabic website.

In the Upper Egyptian city of Qena, farmers complained of higher prices of diesel, used in the irrigation of crops and their transportation, Al-Ahram's Arabic new website reported on Saturday.

Many farmers rent irrigation pumps from other farmers or farmers' cooperatives for a fee, as well as trucks to carry their produce to market.

Near the capital, dozens of microbus drivers blocked traffic underneath a main bridge in Qalioubiya governorate to protest the price hikes until security forces arrived to disperse them an hour later, state-run news agency MENA reported. 

The Transport Workers Union announced a state of emergency after what they described as mounting complaints from workers and strikes by drivers.

Nonetheless, the measure was welcomed by economists, who agree that the subsidy cuts and price increases were inevitable.

“Any reaction to an initial price increase is bound to be negative” Walaa Hazem, Fund Manager at Cairo-based HC Securities, told Ahram Online, “but there is no alternative at this point."

“In my opinion it should have been done even earlier.” says economist and former Finance Minister Ahmed Galal, “because the longer you wait [to implement such reforms], the harder and costlier it gets.”

“Cutting down on the energy subsidies has been the single most important decision that needed to be taken for some time now,” says Galal, “the case for phasing out energy subsidy is compelling, not only from a macroeconomic perspective but also for more equity and social justice,” “what was required was the political will to see it through.”

Energy subsidies have consumed about a quarter of Egypt’s budget in recent years, representing twice what the state spends on education and four times what it spends on healthcare.

Moreover, the inefficiency of the subsidies, with over 80 percent going to the benefit of the wealthiest 20 percent of the population and some 20 percent wasted through smuggling, according to officials, have prompted increasingly loud calls for reform.

The country has witnessed chronic shortages of certain fuels over recent years, which officials have blamed on smuggling of subsidized fuels.

Last year, the government spent over LE130 billion in fuel subsidies alone.

"In either case there is a trade-off that must be made, either you have poor services and lines in front of gas stations or you have pricier services" says Hazem. 

Friday’s move has nonetheless set off panic in some quarters, with the head of Egypt’s Consumer Protection Agency warning of an “at least 200 percent increase in the prices of some commodities,” as reported by private daily Al-Masry Al-Youm on Friday.

“Resulting inflation will vary from one industry and product to another,” says Hazem, “but with essential commodities the market will eventually find its own equilibrium after an initial spike” he explains.

The resulting rise in inflation will be a one-time affair, notes Galal, adding that it is expected that the average inflation rate for Egypt will increase by just two to three percentage points in the wake of Friday’s decision.

The government plans to control inflation through the prices of basic commodities it offers in state-run grocery stores, which are 25 percent below market price, Finance Minister Hany Kadry told reporters on Monday, speaking about the planned fuel price hikes.

“This may be a good temporary solution,” says Galal, "but the more effective ways for the government to combat inflation in the long-run include enforcing the anti-monopoly law, opening up rights to import commodities, regulating the prices of natural monopolies (e.g., electricity and gas), and controlling money supply".

Meanwhile, Galal points to the government’s spending increases on health and education, as well as social solidarity pensions, as channels by which the burden on the poor will be alleviated as the fuel subsidy cuts take effect.

At a Saturday press conference, PM Ibrahim Mahlab claimed the fuel subsidy reforms, along with recently-increased electricity prices, would save the state LE51 billion this year, of which LE22 billion would be spent on Egypt's derelict public education and healthcare sectors.

Back in January, the interim cabinet of PM Hazem El-Beblawi approved a 50 percent increase in social solidarity pensions for 1.4 million Egyptian families.

Families eligible for these pensions are those whose members are unable to work or have no source of income, according to Egyptian law.

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