Food and energy subsidies rise to $11bn

30 November 2007
The government's bill for food and energy subsidies is likely to rise to£E60bn ($10.9bn) in 2007/08, up from£E54bn in the previous year, despite plans to cut the cost of subsidies.

In late November, the government renewed its efforts to increase the efficiency of food subsidies, following the introduction of legislation in September to reduce energy subsidies.

The state budget for food subsidies for 2007/08 is £E9.5bn, up from £E9.4bn in 2006/07. However, they have now increased by almost 60 per cent to £E15bn.

“Global price rises in wheat, corn, cooking oil and sugar, all of which are imported by Egypt, mean that the government is having to spend more to keep prices down,” says Simon Kitchen, an economist at Egyptian bank EFG-Hermes.

On 26 November, Prime Minister Ahmed Nazif called on the cabinet to develop a schedule to improve the distribution of subsidies.

The possible reforms include replacing paper ration cards with electronic card and cash subsidies.
However, the cash option would be difficult to implement.

“It would defeat the purpose to introduce a cash alternative during a time of high inflation,” says Reham el-Desoki, senior economist at Beltone Financial in Cairo. “Inflation is likely to remain around 6-8 per cent for some time.”

Cairo's efforts to reduce energy subsidies are also hitting problems. In the next three years, Cairo plans to reduce industrial energy subsidies to £E3bn a year from its current £E8bn by increasing the cost of gas.
Although the government wants to save £E32bn in subsidies to heavy industry in the next five years, it is already falling behind.

Sources in Cairo say that an increase in gas prices planned for September 2007 has not yet been implemented.

“It is not clear whether cement companies have started receiving bills for the new prices,” says El-Desoki. “It is unclear why the new prices have not been implemented.

“Perhaps the government is trying to build public support for the subsidy cuts.”

The government insists the new policy has been implemented. “The new prices were introduced in September,” says Amr Assal, head of the Industrial Development Authority, part of the industry ministry. “They were charged to the companies.”

Confusion also surrounds the government's plans for industrial energy subsidies at the end of the three-year period of price increases. “The government has said that the price will be subject to global energy prices and production costs,” says Kitchen. “But it has also said that annual price rises will be capped at 15 per cent. It is very difficult to square the two.”

The reduction of subsidies to domestic energy users, which account for about 80 per cent of total energy subsidies, about £E40bn, is even more problematic.

“The reduction in domestic fuel subsidies in 2006 was poorly managed,” says Kitchen.

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