Egyptian authorities decided to go ahead with slashing fuel subsidies on Friday, lifting petrol and diesel prices by about 25%.
The price of a litre of octane petrol 92 increased to EGP 8, up from EGP 6.75. Moreover, the price of octane petrol 80 and diesel fuel both increased from EGP 5.50 to EGP 6.75.
Additionally, the price of octane petrol 95 increased from EGP 7.75 to EGP 9 marking a 17% increase, while liquefied petroleum gas (LPG) cylinders increased by 30% to reach EGP 65, up from EGP 50 for household usage, while commercial LPG reached EGP 130.
This increase raised the question of how the last increase in petrol and diesel prices would impact prices and subsequently inflation in view of Egypt’s annual consumer price inflation rising to 13.2% in May 2019, compared to 11.5% in May 2018, according to the Central Agency for Public Mobilization and Statistics (CAPMAS).
Meanwhile the Central Bank of Egypt (CBE) targets an inflation of between 9(±3), which means between 6% to 12%, by the end of the current fiscal year (FY).
Experts agreed on that the last increase would negatively impact prices, which will subsequently also raise inflation, but they differ on the percentage of the hikes.
For his part, Sherif El Demerdash, an economic expert, told Daily News Egypt that the increase in prices is not just dependent on direct increase in fuel prices. He stated that, unfortunately depending on Egypt’s experiences with increases in diesel prices, merchants will be increasing the prices with percentages that will not cope with the real increase in diesel prices.
“With no control on merchants, I expect prices to hike by at least 20%, 30%, thus inflation by the end of the current FY will not be less than 18%, 20% which is unfortunately above the targeted one,” he said.
Meanwhile, Salah El Din Fahmy, another economic expert, stated that the increase in petrol and diesel prices has direct and indirect effects. He explained that the direct effect is that the cost of the fuel itself in any trip will be increased, while the indirect effect is represented in the cost of the products.
Fahmy stated that the fair increase in prices could be on average 22% or 23% to cover the cost of transporting the products.
“It will be difficult to reach the targeted inflation. I think it will increase slightly by 1% over the targeted one,” he assured.
Notably, Egypt had committed to implementing the automatic price indexation mechanism, linking fuel prices to the international crude oil prices and exchange rates. According to the spokesperson of the ministry of petroleum and mineral resources, price indexation is to be implemented on all fuel in September.
The government’s decision comes in line with promises to reduce fuel subsidies according to the reform plan that was agreed upon with the International Monetary Fund (IMF) in order to secure a $12bn loan.
In January, Egyptian authorities agreed with the IMF to implement several reform measures, including the implementation of a fuel price indexation mechanism for all fuel products in June, except octane petrol 95 (a decree was already issued in December 2018), liquefied petroleum gas (LPG), and fuel oil used in bakeries and for electricity generation.