Egypt prepares for LE44 bn fuel subsidy cuts in new fiscal year: Minister

Bassem Abo Alabass, Deya Abaza, Monday 30 Jun 2014

Minister refuses to give timeline for fuel prices hikes while presenting revised budget with 10 percent deficit, down from 12 percent in last week's draft

Hany Kadry
Hany Kadry, minister of finance (Photo: Bassem Abo Alabass)

No time has been set to hike Egypt's fuel prices, the finance minister announced on Monday in an effort to appease the public while revealing a budget containing large subsidy cuts.

In the last two months, official sources have been quoted as saying that the costs of three widely-used forms of petrol – 92 octane, 80 octane and diesel – will be raised by LE0.50 to LE1 per litre.

Such reports, which Hany Kadry dubbed as "irresponsible," at Monday's press conference, have created a nationwide state of panic among a population accustomed to heavily-subsidised fuels for decades.

On Sunday night, Egypt's president Abdel-Fattah El-Sisi approved the budget for the 2014/15 fiscal year, after the cabinet revised it to trim the deficit by LE48 billion, now registering LE240 billion or 10 percent of Gross Domestic Product (GDP).

El-Sisi had refused to ratify a draft budget presented last week which featured a 12 percent deficit on the grounds that would result in overly elevated levels of domestic debt.

The new budget targets a budget deficit of LE240 billion or 10-10.5 percent of GDP, with revenues totalling LE549 billion and total expenditure at LE789 billion.

Regardless of the timeline, the new budget confirms that significant fuel subsidy cuts are in the works this coming year.

The ratified budget features a LE44 billion cut in the planned subsidy bill to record LE100.2 billion in the new fiscal year set to start on Tuesday.

The fuel subsidy bill amounted to LE144 billion in the initial draft budget but was reduced to LE104 billion, before finally reaching LE100 billion, Kadry told reporters.

In the fiscal year 2013/14 that ended on Monday, fuel subsidies were expected to have cost the state LE130 billion, compared to LE99.5 billion initially targeted.

"It is doable, although politically challenging in terms of maintaining political stability," Walaa Hazem, fund manager at Cairo-based HC Securities, told Ahram Online about the subsidy cuts, "but in any case it's a must."

The real challenge will be to control inflation once fuel prices have been raised, says Hazem, who expects a double-digit rate of around 15 percent.

"We have seen higher rates of course, such as in 2008 when inflation hit 16 percent, but back then we had a growth rate of 5-6 percent."
Egypt's current average inflation rate stands at 10-11 percent.

Egypt's GDP grew at only 2 percent this year, with the government targeting a rate of around 3 percent next year.

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, Kadry said on Monday.

Others are more sceptical of the government's ability to carry out the stated cuts.

"I am getting a lot of mixed signals with regards to how and when serious subsidy cuts will be carried out," Wael Ziada, head of research at leading Egyptian investment bank EFG-Hermes, told Ahram Online.

"On balance, I think there will be some subsidy cuts, but I do not believe it will be of this magnitude – possibly half of this amount," he said, referring to the projected LE44 billion reduction.

The government may also be over-reaching with a targeted domestic debt of 80-85 percent by the end 2016/2017, as Demian announced on Monday, down from 93.7 percent estimated at the end of the current fiscal year.

"For debt as a percentage of GDP to start declining, it means your deficit should almost disappear by 2016, which I see as quite an ambitious target," said Ziada.

Egypt's subsidies of electricity, however, are set to increase by LE14 billion to LE27.2 billion, pushing the total subsidy bill up to LE178.6 billion, compared to LE166.3 billion this year.

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