In Tumultuous Egypt, Fuel Subsidy Reform Is Inevitable

Egypt remains mired in crisis since the military-backed ouster of President Mohammed Mursi July 3. The ongoing political instability will further delay attempts to address one of the country’s thorniest economic issues: long-standing fuel subsidies that account for a fifth of state spending, a reported $17.4 billion over the past year.

Those subsidies played a role in the recent blackouts and fuel shortages that have paralyzed the streets of Cairo. While fuel subsidies have been important to maintaining socio-economic stability in Egypt for years, keeping gas prices under $2 per gallon, they also have created waste, a ballooning debt, and the smuggling of cheap fuel to sell at profit. (See related interactive: “Fossil Fuel Burden on State Coffers.”) Part of the debt includes more than $5 billion in payments to international energy firms producing oil and gas in the country. With its foreign currency reserves down by more than 60 percent in the past two years, amounting to $13.4 billion in March, Egypt is no longer able to afford the subsidies.

But previous attempts to cut subsidies on fuel and basic food items in Egypt have not gone well. In 1977, such an effort led to bloody riots that resulted in 80 deaths before President Anwar Sadat cancelled the reforms. According to a recent World Bank/Gallup’s public opinion poll in the Middle East and North Africa, Egypt and Jordan were most likely to resist subsidy reforms compared to other countries. Six in 10 Egyptians did not point to an item that merited a subsidy cut. But subsidies in this North African country, particularly for fuel, are turning into a macroeconomic nightmare.

Some moves have been made recently to address the problem. Egypt did raise some electricity prices, while energy-intensive industries now reportedly pay more for natural gas use. Last November, the Mursi government announced that it would roll out “smart cards” in July 2013, which would provide limited amounts of subsidized petrol and diesel and help reduce theft. However, on July 2, Egyptian officials lifted the limitation on quantities of subsidized fuel. They aim to use the “smart cards” to stem smuggling, which they believe is behind the current shortages. The state oil company, the Egyptian General Petroleum Corporation, said in May that it also would address smuggling by maintaining the price at the global market level before fuel reaches the point of sale in a retail market.

But as the latest crisis leaves the economy in a nosedive with rising budget deficit, depletion of foreign exchange reserves, and investor skepticism, additional subsidy reform efforts may be necessary for Egypt to prevent a fiscal catastrophe. A much-needed loan of $4.8 billion from the IMF appears to be stalled in the wake of the latest political upheaval, but Egypt was already facing pressure to enact subsidy reform in order to secure the funding. And Egypt inevitably faces rising internal pressures as its population grows steadily, with the average gas demand rising about a reported 8 percent per year.  According to the U.S. Census Bureau, the current population of 85 million will expand by another 15 million in the next decade.  Egypt is already a net importer of oil since 2008 and is expected to become a net importer of natural gas as well.

Yet fuel subsidy reform is achievable without causing social instability.  Egypt can learn from lessons of other countries that managed to carry out such reforms. Examples of several African countries (Mozambique, Gabon, and Ghana, among others), Turkey, and Iran illustrate that a key to a smooth change is in careful planning combined with a strong public relations campaign and a gradual execution of reforms with targeted social and economic help to the poor. For example, Gabon and Ghana removed secondary education fees for students, boosted healthcare services to the poor, expanded the public transportation network, and provided other social protection services.

Unlike Iran, Egypt cannot afford to provide cash to a large segment of the population in order to compensate for raising fuel prices, but it can learn from Iran’s extensive public relations efforts to inform the public about social and economic harm of subsidies. A key message to the Egyptian people should be that only the upper 20 percent of the population benefit from fuel subsidies.  Egypt can also learn from reform mistakes of other countries: Nigeria’s efforts to remove fuel subsidies in 2012 met bitter protests and led to partial abandonment of the reforms. Observers of Nigeria criticized the government’s hastiness to raise prices without measures in place to assist the poor and with little communication about planning or timelines. (See related story: “Nigeria’s Rocky Effort to Wean Itself From Susbsidized Fuel.”)