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Policy Analysis 26 August, 2014

Cairo Partially Lifts Energy Subsidies: Deepening the Crisis or a Step Towards a Solution?

Policy Analysis Unit

The Policy Analysis Unit is the Center’s department dedicated to the study of the region’s most pressing current affairs. An integral and vital part of the ACRPS’ activities, it offers academically rigorous analysis on issues that are relevant and useful to the public, academics and policy-makers of the Arab region and beyond. The Policy Analysis Unit draws on the collaborative efforts of a number of scholars based within and outside the ACRPS. It produces three of the Center’s publication series: Assessment Report, Policy Analysis, and Case Analysis reports. 


Introduction

Egyptians started Ramadan this year with the introduction of new austerity measures. Taking effect on July 1, these measures aim to reduce Egypt’s deficit by partially lifting fuel and electricity subsidies, and by increasing taxes on a number of commodities.[1] The decisions announced by Prime Minister Mahlab were a shock to Egyptians, especially coming at a time when their impact is felt most strongly. Mahlab’s government insisted that such drastic measures are inevitable and represent a necessary evil in solving the chronic budget deficit in Egypt. The time has come, he claimed, to take harsh measures to deal with the fiscal imbalances afflicting Egypt’s economy.[2] Mahlab stated that the revenue collected from tax increases and fuel and electricity price hikes will be earmarked for public services, especially health and education. Egypt’s government, however, has yet to disclose the steps it intends to take to confront the expected economic downturn resulting from the subsidy cuts, to regulate markets, or to compensate Egypt’s poor for the impact the new austerity measures are likely to have on them.[3]

The Controversy Over Subsidies

Few deny that a fiscal imbalance is afflicting Egypt and threatening to push the economy over the brink. Disagreement arises on how to confront a crisis that dates from Anwar al-Sadat’s reign, that further worsened under Mubarak, and that has become even more severe during the political instability crippling Egypt since 2011. Economists have long warned of a looming crisis in Egypt and most would agree that the subsidy system should be reworked. However, opinions are divided about the solutions that should be adopted. The current government and the business elite, who heavily influence Egypt’s economic policy, believe that rapid austerity measures and a fiscal stimulation program are needed.[4] Many opposition parties and think tank experts have come out against these ideas, arguing that they simply reproduce past measures with a poor record of saving the Egyptian economy. What they would like to see is an economic development program based on fighting poverty, creating jobs and fostering a balanced economy that does not favor businessmen and investors and does not produce monopolies. Their main concern is rampant poverty and the heavy impact these measures are likely to have on the livelihoods of large segments of Egyptian society, who live below or just above the poverty line. Many fear that Egypt’s current government will renege on the constitutional right to implement a socially-oriented economic policy, and to provide safeguards against economic exclusion and impoverishment.

Under Mubarak, several administrations—Ahmad Nazif’s in particular—were criticized for their neoliberal economic approach, which brought nearly half of Egypt’s population below the poverty line. Combined with high levels of corruption and a widespread plundering of the public purse, Egypt’s economic policies enacted a predatory capitalist model in which the poor bear the brunt of the economic crisis. During the revolution, strong demands were made for social justice and inclusion of the poor. The governments after the January 25 revolution thus found themselves in a bind. The fiscal crisis inherited from Mubarak could not be ignored, and threatened to make it impossible to meet such demands. It thus came as no surprise that the solution should focus upon the factor which had long exacerbated the crisis: public debt.

Reactions to the Rise in Fuel Prices

In an attempt to pre-empt public outrage, Prime Minister Mahlab justified the subsidy cuts by saying that they would serve the poorest sections of society. He stated that “the partial removal of energy, fuel, and gasoline subsidies will save the state LE 51 billion,” and “the surplus from the removed subsidies will go toward the most pressing problems […] in the following manner: LE 22 billion for health and education, LE 10 billion for the minimum wage, LE 12 billion for pension increases, and LE 5.7 billion for social welfare.”[5]

Official figures indicate that with the reform package, the budget will have a deficit of LE 288 billion, or 12.6 percent, a slight improvement over the previous budget deficit of over 14 percent. Domestic and foreign debt has reached a total of approximately LE 1.9 trillion. The inflation rate stands at 10.6 percent, which is undermining purchasing power and pushing the Egyptian pound toward collapse.[6]

The public anger that has ensued from the subsidy cuts was inevitable, and has been accompanied by harsh criticism from political parties and movements, regardless of their ideological leanings, many of whom view these austerity measures as a continuation of Mubarak’s policies.[7] At the forefront of critics of Mahlab’s austerity budget are the new parties formed after the revolution. The Free Egyptians Party stated that it generally supported a reform of the subsidy system, provided that subsidies for the wealthy be cut as well. The party has warned of dire economic consequences and worsening inflation that will affect the poorest groups as a result of the government’s decisions.

Even the Egyptian Patriotic Movement, a party which is close to the regime, considers the recent decisions to be a mistake and a heavy burden on ordinary Egyptians. The party feels that the measures neglect national security considerations. “We have been turned into a Mamluk state: whenever the government senses a crisis, it imposes new taxes” claimed one of the party’s leading figures, warning that popular anger would be sparked by these decisions. He called on al-Sisi to resolve the crisis by holding the prime minister accountable for the recent price increases.

The Constitution Party, one of the main parties of the secular revolutionary forces, condemned the measures, saying that they represent a strong bias for the higher income brackets of Egyptian society at the expense of the poor when handling subsidies. According to the party’s spokesman, the party’s position is that any measures to reform subsidies must not adversely affect the poor. He stressed that the decision-making process raised serious concerns, and that it was impossible to raise fuel prices without a parallel rise in the price of other commodities.

The Salafist Nour Party has been equally critical of the measures, and condemned the government for taking such decisions without embarking on non-inflationary economic reforms or development projects. The Socialist Popular Alliance Party has gone so far as to call for a peaceful protest against the government following the decisions that it described as biased and damaging to the working classes. Unsurprisingly, the regime-friendly Congress Party has backed the decisions but warned that the price hike of diesel fuel in particular would affect both the middle class and the working classes.

The oldest of the traditional liberal opposition parties, Wafd, has stated that new budget’s problem is its timing rather than the measures in themselves. The way it was handled, the party complained, lacked transparency and was marred by misleading statements, for example when the petroleum minister denied there would be any price increases during Ramadan. Despite this, the government went ahead with decisions that “do not respect the people.” An even harsher tone has been taken by the Muslim Brotherhood-aligned National Alliance in Support of Legitimacy, which described the new set of austerity measures as aiming to starve the Egyptian people, in particular the poorest classes. They have called on all Egyptians to reject the oppressive measures which serve only the interests of the business elite, especially the supporters of the coup against the elected president.[8]

For their part, Egypt’s businessmen are more than satisfied with the move to cut state subsidies. Naguib Sawiris, a powerful business tycoon and spokesman for the Sawiris family, which has large investments in many industries including cement, telecommunications, construction, and tourism, has asked the government to deregulate the prices of cement and other subsidized, energy-intensive industrial products, allowing them to match global prices. He has also called for expediting cash subsidy programs to rescue the poor.[9]

Among the dissatisfied are Egypt’s taxi and microbus drivers, who have threatened to call a strike. Microbus drivers complain that the government has abandoned them to face an angry public. The government implemented a ten percent fare increase, but this has not made up for their losses, given that not only fuel prices have risen but also those of other staple goods. Egypt’s taxi drivers’ association, already in tense relations with the government over the white taxi project—a government program aiming to replace the capital’s aging taxi fleet—has threatened to step up their protests. These could include taxi convoys demonstrating against the insufficient tariff increase enacted by the governor of Cairo.

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This Report was translated into English by the ACRPS Translation and English editing team. To read the original Arabic version, which appeared online on August 17, 2014, please click  here.


[1] For the text of the decision to increase fuel prices, see Al Masry Al Youm, in the Official Gazette: http://www.almasryalyoum.com/news/details/476424 and Tarek Tablawy and Salma al-Wardany, ‘El-Sisi says Price Rises to Save Egypt from Debt Drowning’, Ahram Online, July 6, 2014:  http://bit.ly/XLxy8u

[2] For an interview with the Minister for Planning that reveals important aspects of the government’s vision, see http://www.almasryalyoum.com/news/details/478186.

[3] For more information on energy subsidy cuts, including figures and data, see Azza Maghazi and Ahmad Rajab, ‘Energy Subsidies: Wasted Money- A special report,  Al Masry Al Youm, March 25, 2014:   http://www.almasryalyoum.com/news/details/417087.

[4] Ahmed al-Sayyid al-Naggar ‘Egypt's budget: beginning cautiously to exit the Mubarak box’, Ahram Online, July 29, 2014:  http://bit.ly/VKlNxw. Ironically, al-Naggar also wrote on the subject from an opposite perspective during Morsi’s presidency: http://www.ahram.org.eg/NewsQ/133211.aspx.

[5] Press Conference of the Prime Minister, Television Channel 1, July 5, 2014: http://www.youtube.com/watch?v=Fnwd2jyIIjc.

[6] Ahmed al-Sayyid al-Naggar ‘Egypt's budget: beginning cautiously to exit the Mubarak box’, Ahram Online, July 29, 2014:  http://bit.ly/VKlNxw.

[7] Summer Said, ‘Egyptians Fume Over Fuel Subsidy Cuts’, Wall Street journal, July 6, 2014 : http://on.wsj.com/1vejaU3.

[8] “Pro - Democracy Alliance Calls for a week of ‘The Coup Crushes the Poor’,” Rassd, July 10, 2014: http://goo.gl/n3Fw4f.

[9] Marwa Hussein, ‘Egyptian businessmen in Twitter spat’, Ahram Online, April 6, 2014: http://bit.ly/1ws4vpJ