Egypt’s pharmaceutical companies said on Sunday that they are seeking the approval of the Egyptian Drug Authority to hike the prices of medicines by one per cent to cover the increase in transportation costs on the back of last week’s move to increase fuel prices.

The government hiked the prices of fuel products by an average of 12 per cent on Thursday.

While the decision came into force starting at 6am on Thursday, by midday fruit and vegetables were being sold at a 10 to 15 per cent increase because “the diesel used to fuel irrigation pumps and agricultural equipment is pricier now,” Abdel-Razek, a street vendor in the Roxy area of Heliopolis, told Al-Ahram Weekly.

Diesel, one of the most commonly used fuels in Egypt, rose to LE11.5 a litre from LE10. Gasoline 80 rose to LE12.25, gasoline 92 reached LE13.75, and gasoline 95 rose to LE15. Tariffs on regulated means of transport like white taxis, public buses, and privately operated minibuses saw a 10 to 15 per cent increase.

“It is to be expected. We’ve got used to it. Over the last three years, each time the fuel price increases, prices across the board, whether for food, cigarettes, or transport, all automatically jump as well,” said Laila Farouk, a housewife living in Nasr City.

The move is the second since the International Monetary Fund (IMF) expanded its loan programme to Egypt by $5 billion in March. The government has committed to slashing fuel subsidies as part of the agreement.

It also came four days before the date for the fund’s approval of the third review of the $8 billion augmented loan. The approval was originally scheduled for 10 July. It was pushed to 29 July due to a “delay in the finalisation of some policy details”.

The price of fuel in Egypt has been determined quarterly by a committee of the Ministry of Petroleum and the Ministry of Finance since 2019. While it adjusted prices downwards in 2020 due to the decline in global oil prices on the back of the Covid-19 pandemic, in 12 of the 14 quarterly meetings since the second quarter of 2021 the committee upped the prices.

The average increases in different fuel prices jumped from as low as two to seven per cent in 2021, 2022, and 2023 to the double-digit figure of 12 per cent in each of the committee’s last two meetings, a pattern that Ali Metwaly, an economic consultant at IBIS Consultancy, said is evidence of the government’s plan to accelerate the pace of slashing fuel subsidies.

On Wednesday, Prime Minister Mustafa Madbouli said the government would gradually increase the prices of petroleum products during the coming 18 months as the subsidies have “become a burden” that it can no longer bear.

While Egypt has allowed fuel prices to climb, the value of fuel subsidies remains high due to the rise in the international prices of oil. According to IMF estimates in April, Egypt will spend LE331 billion on fuel subsidies in 2024-25 and LE245 billion in 2025-26.

In 2014-15, Egypt introduced an energy subsidies reform programme aiming at slashing electricity and fuel subsidies.

Since then, fuel prices have witnessed changes 21 times, with the prices of diesel, the most widely used oil product, being raised ten times. The price of diesel in 2014 was LE1.5 and is currently LE11.5.

In 2016-17, the government decreased the budget for fuel subsidies by about 43 per cent year-on-year. However, the following year saw the subsidies figure jump by 214 per cent to cover for losses incurred by the devaluation of the currency in November 2016 and the increase in global oil prices, according to the Egypt Oil and Gas Group, a local research platform focused on fossil fuels.

The government gradually reduced the budget for fuel subsidies from 2018-19 until it reached its lowest value in 2021-22 at LE18.4 billion, 83 per cent lower than the previous year. However, the Russia-Ukraine war and the fluctuation in exchange rates led to a U-turn, with subsidies allocations in 2022-23 52 per cent higher than the previous year.

This was followed by another 326 per cent increase in fuel subsidies in 2023-24, according to Egypt Oil and Gas.

Subsidising energy is a common approach in developing and middle-income countries to protect limited-income households from the effects of increasing global oil prices. However, such subsidies, according to the economic literature, frequently lead to large fiscal deficits and can consume resources that could have been directed to social welfare-targeting expenditure such as education and health.  

They can also create a bias in the allocation of resources towards heavy energy-intensive industries at the expense of labour-intensive industries. For energy-importing countries, the existence of subsidies and associated incentives for the overconsumption of energy can also lead to a deterioration in the balance of payments.

However, slashing the subsidies can lead to inflationary pressures. Madbouli said on Wednesday that the decision to increase fuel prices aimed to reduce the burden on the state budget and to achieve the financial balance needed to implement various development projects.

The measure also seeks to encourage people to rationalise their energy consumption and switch to more efficient alternative energy sources. He stressed that the government would do its best to protect poorer families from the inflationary impacts of the move.

Capital Economics, a macroeconomic think tank located in London, said that the move would be translated into a 0.5 per cent increase in August’s inflation figures, but it expects this impact will be more than offset by weaker inflation in other components of the basket of commodities used to calculate inflation.  

The annual rate should continue to slow over the rest of this year, it said.

Inflation has continued its downward trend over the past quarter, averaging 29.4 per cent year-on-year in the second quarter of 2024, down from 34 per cent in the previous quarter. This comes as the impact of the devaluation fades and smoother foreign-exchange availability allows for an improved supply of goods, according to National Bank of Kuwait economist Noaman Khaled.

Khaled said in a research note earlier this week that the hike in fuel prices together with the pending increase in electricity tariffs would have a limited impact on inflation as fuel and electricity represent around four per cent of the basket of commodities used to calculate the rate and a 20 per cent increase adds about 0.8 per cent to inflation rate.