Egyptian industries will not be negatively affected, nor will foreign investments, should the energy subsidies they recieve be removed, Ismail El-Nagdy, head of the Industrial Development Authority (IDA), told the state news agency Wednesday.
El-Nagdy added that some industries have the ability to absorb the extra costs resulting from the subsidy removal without being forced to raise the prices of their final products.
The IDA head cited the fertiliser industry as an example, where the market price of fertilisers is already high and will not be affected if LE11 pounds is added to the cost per ton.
El-Nadgy’s opinion seems in concurrence with that of other experts.
“Industries such as cement or fertilisers do not need subsidies as they are very competitive for many other reasons, among which is Egypt’s proximity to the European market,” Samir Makary, an economics professor at the American University in Cairo, told Ahram Online.
Makary also made a distinction between energy intensive industries according to their ability to compete in international markets. Accordingly, subsidies should be directed to the industries that need them most.
A 2007 study prepared by Abdallah Shehata, economics professor at Cairo University, tested the sensitivity in profitability of several industries to changes in energy pricing. It specifically concluded that profitability of export oriented fertiliser companies will not be severely hit if energy costs are raised by 100 per cent, as profitability per ton stays well above 20 per cent for export.
As for the time frame on which subsidies are to be removed, El-Nagdy added that the issue is still under study and is in the hands of Hazem El-Biblawi, the newly appointed finance minister and deputy prime minister.
El-Biblawy announced Tuesday that the government is currently studying methods to rationalise energy subsidies; namely removing subsidies from steel, cement, fertilisers and the tiles industries.
Energy subsidies comprise a significant portion of Egypt’s expenses. It contributes to more than 70 per cent of total subsidies and almost 20 per cent of total expenditures in Egypt’s first draft 2011/2012 budget.
In 2007, Energy intensive industries, which include fertilisers, cement, chemicals, iron and steel, aluminium, and other industries, consumed around 33 per cent of total subsidised energy in terms of volume, which translates into approximately 25 per cent of total energy subsidy costs.
Assuming that their share of subsidised energy has not been drastically altered in the past four years, energy intensive industries would consume around LE25 billion in 2011/2012 state budget of public funds.
Another 2009 study issued by the Shoura Council indicates that only 45 plants benefit from more than two thirds of energy subsidies. The study also explains that these 45 companies contribute around 20 per cent of industrial output and provide seven per cent of salaries.
Egypt’s state budget for 2011/2012 is burdened with a deficit of 8.6 per cent that the government had announced it would mainly cover through domestic borrowing.