Fuel Subsidies in Egypt: It’s Time to Wean Off

Despite all the political changes going on in Egypt, there are many underlying issues that could threaten the stability of the country in much more profound ways.

The Egyptian state is one of the biggest subsidizers in the world. Not surprising, considering it’s a socialist state and has been for decades. However, what is surprising is the toll that this taking on the country’s resources. For example, take the subsidization of petroleum products: according to the Shura’s (Egypt’s upper house of parliament) own calculations, subsidies have increased from 290 million Egyptian pounds in 1970 to more than 40 billion Egyptian pounds in 2008 (“Subsidies in Egypt: An issue too hot to touch or too cold to change?” from http://www.egyptoil-gas.com). The government of the day (headed by Mubarak) recognized that this is a drastic increase, and blamed the international increase in oil prices (and subsequently, petroleum prices) worldwide, as well as increased local consumption of petroleum and natural gas products by citizens as well as businesses.

This last reason especially shows an increase in the demand for these products, which indicates that any worries about subsidization fulfilling the demand are somewhat unfounded. Egypt continues to strive towards increased industrialization and, while it is nowhere near developed-country levels of industrialization, it indicates that the country is eager to develop. What is concerning, however, is that the rate of consumption is stifling the profit potential of Egypt’s own resources to an extent that puts the state in an incredible deficit.

By his own admission, Egypt’s former Minister of Finance Youssef Boutros Ghali stated that African governments usually bear “only 10% of the price of petroleum products, while the government in Egypt bears around 75%“. When you consider that in 2008, this approximately amounted to USD $7.4 billion, one can reasonably expect that bill to be substantially higher now since the spike in petroleum product prices that we’ve seen within the past year alone.

The continuous cycle of debt has to stop from this point, and Egypt has to start using its own resources in a more efficient manner. Egypt is not utilizing its natural oil and gas reserves in the most logical way, and that’s why it’s currently behind in paying off debts to foreign oil companies. Egypt must wean off the subsidy system and transfer the costs of petroleum to the consumer in a gradual way to turn its resources into other issues, such as upgrading infrastructure, strengthening (or reforming) the education system, and revitalizing a battered tourism industry.

If Egypt’s consumption must increase, then the subsidization of fuels must be slowly eliminated to allow the government to focus its resources on other issues (Source: ArabianGazette.com)

Benefits and Consequences to Gradual Weaning

The current Egyptian government is already considering the gradual weaning off the subsidy system, but hasn’t fully committed to it because of the public backlash that could result from transferring the continuously growing costs of petroleum onto the consumer. A sudden transfer of cost would certainly shock the system and could be detrimental to security in a generally volatile political environment. And if Egypt learned anything from the 1977 Bread Riots (where the government tried to wean off the bread subsidy by adding a few piasters to the price), it’s that Egyptians are not fully keen on being weaned off a basic requirement to their survival, and forced the government to reinstate the subsidy program. It’s safe to say that a majority of Egyptians now rely on petroleum products for basic survival, whether it’s to cook, to heat their homes, or to run their businesses.

There are some benefits though. The expected increase in cost could prevent the manipulation of cheap petroleum products for irrelevant or inefficient endeavours. One benefit could be decreased traffic due to increased cost, which the traffic-clogged streets of Cairo could stand to benefit from. From an Intellectual Property perspective, this could also provide a great incentive to make a better alternative fuel source or more efficient uses of petroleum products.

It’s a testy issue, and could certainly upset the delicate balance that exists in Egypt so much that could spark more protests and riots. The window to open the discussion on taking out fuel subsidies has either passed or has not arrived yet; either way, it will need to be addressed soon.

 

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