Egypt’s Finance Ministry has signed an agreement with the Interior Ministry and the local electronics payment company E-finance to roll out a smart card system for distributing fuel across the country, according to Finance Minister Ahmed Galal.

Smuggling currently consumes about a third of the fuel subsidies. In order to prevent this, fuel smart cards are being distributed to vehicles using diesel and will soon be introduced among vehicles operating on gasoline. The next phase will involve giving out cards to unregistered vehicles including those used in agriculture. Tanker trucks have already started operating under the system.

The system is part of a plan to reform fuel subsidies, which account for about a fifth of the government budget. They have risen to £E120bn ($17.2bn) compared to £E40bn in the fiscal year 2005/06. The authorities plan to lower them to £E100bn in 2013/14.

Subsidies reform and an increase in taxes are among the measures the government is taking to curb Egypt’s widening fiscal deficit, expected to drop slightly to £E186bn – 9.1 per cent of gross domestic product (GDP) – over 2013/14.

It is also one of the key steps towards a $4.8bn International Monetary Fund (IMF) loan, which is seen as essential in restoring the economy as well as foreign donor and investor confidence.

The Washington-based IMF was in discussions about the loan with former president Mohamed Mursi’s government for about a year, but has not entered into talks with the new interim government yet. Last month, it said it would not engage until the government gains recognition from the international community. Elections are scheduled to take place in about six months.

During the political transition, a total amount of $12bn in aid from Kuwait, Saudi Arabia and the UAE is helping Egypt meet its short-term maturities and strengthen the Egyptian pound. At the end of July, the country’s net foreign reserves reached $18.9bn, up 26.8 per cent compared with last month, according to the Central Bank of Egypt.

Government expenditure surged by 45 per cent in March this year compared to December 2010, shortly before former president Hosni Mubarak was overthrown, according to data from Kuwait-based NBK Capital. In March, expenditure came close to reaching £E550bn, about £E75bn higher than in the same month last year and £E200bn higher than two years ago.

Subsidies account for the biggest chunk of expenditure (39 per cent), followed by salaries and wages (25 per cent), interest payments (22 per cent), and others (14 per cent).

The majority of subsidies are for fuel and energy prices, while the remainder is mainly aimed at reducing food prices, particularly wheat since Egypt is one of the biggest importers of wheat globally. Food and fuel subsidies increased 15 per cent year-on-year in March, and by 73 per cent and 63 per cent respectively compared to December 2010.