The decision came amid unprecedented regional and global tensions that have pushed the prices of global oil prices higher.
It was issued a few hours after Prime Minister Mostafa Madbouly announced that the government will apply a gradual increase the fuel products till the end of 2025 to end the subsidies and reach the break-even point in this respect by December 2025.
The decision also come just days before the International Monetary Fund (IMF) scheduled third review of Egypt’s $8 loan programme on Monday 29 July.
How is pricing pf fuel products set in Egypt?
The Fuel Automatic Pricing Committee (FAPC), established by the petroleum ministry in 2019 to monitor and recommend automatic pricing mechanisms for petroleum products on a quarterly basis, last met in June.
The FAPC assess prices of petroleum products and propose changes in line with the international price of Brent crude oil and the price of the dollar against the Egyptian pound.
The committee only issues non-binding recommendations regarding said prices and the price cap for raising or lowering fuel prices on a quarterly basis cannot exceed 10 percent.
Since its formation, the FAPC recommended changing fuel prices 12 times: two increases in 2024; two increases in 2023; three increases in 2022; three increases in 2021; no increases in 2020; and one increase followed by one decrease in 2019.
In almost five years, diesel fuel prices increased by about 70 percent; octane 95 prices increased by around 67 percent; octane 92 prices increased by around 72 percent; and octane 80 prices increased by around 81 percent.
Key drivers behind fuel prices movement
"The recent increase in the prices of the fuel products will reduce the gap between the cost and consumer price by 15 percent. In March, the cost of fuel products was double the selling price," Khaled Osman, Assistant of the Minister of Petroleum and Mineral Resources for Products and Internal Trade, told Ahram Online.
Osman noted that the global tensions since March 2022, following the eruption of the Ukrainian-Russian war, strongly impacted the Egyptian economy, widening the gap between cost and selling price.
He said subsidies for petroleum products amounted to EGP 1 billion daily, which he described as "untenable for the country’s budget."
"Therefore, we have delayed the 10 percent pricing adjustment formula during the quarterly reviews and taken measures to reduce the gap," Osman added.
He also noted that government has a committement towards the citizens to reduce this gap within a year and a half according to the pronouncements made by PM Madbouly on Wednesday.
Osman emphasized that the global price of Brent crude oil and the foreign exchange rate in the local market constitute about 80 percent of the cost of producing petroleum products.
“Egypt imports approximately 30-35 percent of its fuel needs and 25-30 percent of its gasoline needs,” he explained.
“We hope the situation to stabilise soon in the region soon, which would reduce production costs, especially since the disruptions in the Red Sea as a result of the Houthi attacks have increased shipping and insurance costs for imports,” he said.
"Despite the recent increase applied, prices in Egypt remain significantly lower than in neighboring countries, where fuel products prices are at least $1.25 per litre compared to 27 cents here," Osman stressed.
He also noted that reducing fuel subsidies will allow the sector to invest in refineries and increase production capacities, thereby reducing the quantities of petroleum products imported and alleviating pressure on the dollar.
The recent devaluation of the Egyptian pound against the US dollar and high global oil prices pushed the cost of fuel subsidies in the current FY2024/2025, which starts on 1 July, to over EGP 154 billion, up from about EGP 119 billion in FY2023/2024.
How would the new increase affect already-high inflation?
Executive Director of VI Markets in Egypt Ahmed Moaty explained to Ahram Online that the latest increase of fuel prices is mainly driven by the spikes in prices globally.
"Before 2020, the Brent price averaged below $60 per barrel, while now it hit $75 and has stabilised at this level over the past few months, due to the global and regional geopolitical tensions," Moaty said.
He added that the subsidies for energy products represent a large sum of money incurred by the country at a value exceeding EGP 147 billion at the moment, compared to EGP18 billion in 2019 - or a near10-fold rise.
Moaty argued that fuel subsidies negatively affect national projects and the pooerer segments in the society.
He explained that poorer classes are not very much affected by the rise in the prices of fuels since they live in remote areas and may not have access to transportation methods.
However, Moaty added, the middle class is the segment most affected by the rise in prices.
Still, the rise in fuel prices will be gradual and will not have a big impact on inflation, he said.
In June, despite a 4-month downwards trend of annual headline and core inflation rates, dropping from the lower 30s to 27.1 percent and 26 percent, respectively, inflation rates are still well above the target the Central Bank of Egypt (CBE) set at seven percent (±2 percent) in the fourth quarter of 2024.
"The rise in octane prices will affect inflation in Egypt but not by a large percentage, as the CBE and the government are working to reach the inflation target for 2024," Moaty said.
This is because the government addressed the main issues that pushed up inflation, such as the hard currency parallel market.
The rate of any rise in inflation will decelerate and it will be below the rate of the rise in fuel prices, argued Moaty.
On 6 March, the CBE devaluted the Egyptian pound against the US dollar to eliminate the gap between exchange rates in the official and parallel market and attract hard currency and foreign investments.
Hossam Arafat, the former head of the General Division of Petroleum Materials, told Ahram Online that the adjustment in gasoline prices may lead to a rise in inflation because gasoline is a key component in determining costs for production process, transportaion, and goods.
"These new increases in fuel proces will lead to a price adjustment in the cost of transportation fares for individuals and goods," Arafat stressed.
Arafat urged the concerned bodies to take the necessary oversight measues to curb any attempt by players in the market to overcharge consumers beyond the actual scope of the impact of recent fuel price increases.
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