By Mohamed Ayyad
Reforming the subsidy system is a “good” step that should be followed by programmes to improve the lives of the poor, said Ahmed AbouHashima, chairmen of Egyptian Steel.
“It is time to lift subsidies for those who are able to get on without them [the subsidies], in order to reduce pressure on the state budget, which faces chronic deficits,” said AbouHashima. “Why is the government subsidising the gasoline for my car?”
The government reduced energy subsidies in the 2014/2015 budget, which eats up 20% of public expenditure, in a move seen as critical to economic reform. The measure has raised fears among citizens over price rises, as one quarter of the population lives below the poverty line.
As for the policy’s implications, AbouHashima sees any price rise by the government on gas for energy-intensive factories, such as steel or cement, as “inevitable”, and notes that this will cause price rises of their products. The government is yet to disclose details on subsidy cuts in its budget, and whether they will raise prices for gasoline or natural gas for factories.
AbouHashima fears price hikes on basic commodities if prices for items like diesel fuel are raised. He called on the government to develop a plan of social protection to guarantee monetary support in order to lessen the burden of price rises on the poor, while also speeding up the development of consumer cooperatives to provide greater diversity of basic goods, which would also ease the burden of rising prices.
“The situation we are in now, in terms of energy crises and water poverty, is the result of the previous regimes having no vision and ignoring the future at the expense of the present,” said the chairman. “Did these crises just appear in the middle of the night? Where was the government back when these crises were first becoming apparent?” he asked.
In AbouHashima’s view, raising allocations for education, health, and social protections while reducing energy subsidies are steps that strengthen the new budget, but people are still waiting for such measures to be implemented.
AbouHashima noted that greater attention on technical education is necessary, saying that free education has led to deterioration of technical education. This in turn has, in his view, negatively impacted national industry, which now lacks skilled and trained labour. “I want trained workers, and I’m not finding any,” he said. “I myself had free education, but I am against it.”
The state spends 13% of its annual budget on supplying fuel and electricity for companies and consumers at prices far below market value. The Ministry of Finance estimates that subsidies for petroleum in the new budget will be EGP 104bn versus EGP 134.29bn in the current year’s budget, which ends this June.
“The factories do not mind price increases in the gas they are getting as long as the government continues to supply the necessary quantities in a timely way, as supply shortages in fuels for factories decreases their energy supply and raises the cost on their final products,” said Walid Al-Hilal, chairman of the Export Council for Chemicals.
Al-Hilal fears the repercussions of price rises on diesel fuel for basic commodities, but expects the market to gradually absorb the increases, as long as the government steps in to resolve logistical issues related to transportation and storage, which have caused losses accounting for 30% of price rises.
He said that the government intends to allow steel companies, like cement factories, to use coal as an energy source. This will reduce dependency on the government’s subsidised natural gas, and reduce the possibility of higher prices on final goods if the price on gas for factories is raised.
“The government should use savings from reduced subsidies to reform the education system and strengthen social safety nets in regard to health insurance and retirement pensions, and provide cash support to the poorest families, which will decrease the anger on the street in the event of price increases due to the changing prices of diesel and gasoline,” said Al-Hilal.
However, the new budget stated that half of what was provided in subsidies for petroleum products would be allocated to subsidize electricity, and will constitute up to EGP 33.492bn, an increase of 85.6% in subsidies from the current fiscal year, after repeated blackouts because of the shortage in fuel supplies to power stations.
Hilal considers steps like cutting energy subsidies, increasing fuel efficiency, expanding the use of smart cards for fuel distribution, rationing consumption and developing new and renewable energy sources (especially solar energy) vital measures in respect to reforming the economy, which is suffering from a weak currency, climbing unemployment, and a worsening budget deficit.
In a governmental move aimed at reducing the impact of cutting energy subsidies on the poor, the government increased the amount allocated to social welfare programs by 200% in the new budget.