World Resource Institute

Egypt: Transitioning Away from Subsidizing Fossil Fuels

<p>Photo credit: Insights/Contributor</p>

Photo credit: Insights/Contributor

Highlights

In 2014, Egypt reformed its longstanding fossil fuel subsidies, raising the price of widely consumed petroleum products, including gasoline (by 78%), diesel (by 64%) and kerosene (by 64%). Fuel subsidies consumed over a fifth of the 2013 budget, so the reforms aimed to help close a budget deficit and free up fiscal space to address rising unemployment and slowing growth. Several measures helped offset the disproportionate impact of the higher fuel prices on the poor, including expanded food subsidies and social security pensions, as well as an increase in the public-sector minimum wage and higher taxes on wealthier households and businesses.

Context

In 2014, Egypt faced not only political upheaval but also economic difficulties. GDP growth had slowed from 5% in 2010 to 2% in 2013, unemployment was rising above 13% (and above 30% for youth) and the budget deficit amounted to 8% of GDP.

Egypt had longstanding fossil fuel subsidies that maintained low consumer prices for a range of petroleum products, including gasoline, diesel, kerosene and natural gas. Subsidy reforms had been in the pipeline for more than five years, but had been repeatedly stalled due to political instability. There was broad recognition across Egyptian government ministries, the public, businesses, academics and foreign investors that fossil fuel subsidies were a key part of the country’s fiscal problems.

Though fuel shortages had been central to an economic crisis in 2013, an outsize share of Egypt’s budget went to fuel subsidies: $21 billion in 2013, equivalent to 22% of the budget or 6% of Egypt’s GDP. The subsidies disproportionately favored wealthier people, who consumed more petroleum products: the wealthiest  20% of households enjoyed 46% of the benefits in absolute terms, and the poorest 20% received just 9% of total subsidy spending. In urban areas, the wealthiest 20% of the population received eight times more subsidies in absolute terms than the poorest 20%.

Policies, Actions and Results

In July 2014, the Egyptian government implemented wide-ranging subsidy reform for the first time in decades, allocating about $14 billion for fuel subsidies in the 2014-2015 budget and raising the prices of gasoline, diesel, kerosene, natural gas and several other petroleum products — though still keeping them well below the prices in much of the world. Specific price increases are noted in Figure 1.

Even as the Egyptian government instituted the fuel subsidy cuts, it also adopted several new social protection measures to ease the burdens on lower-income families, such as:  

  • Extending the food subsidy program to 20 new products, including bread, rice, sugar, tea, flour and oil, passed in June 2014 — one month before the subsidy reform — to mitigate likely rising food prices due to higher input costs for farmers and more expensive distribution.
  • Two stimulus packages in August 2013 and January 2015 included an increase in the public-sector minimum wage; this was financed by a $12 billion support package from Gulf countries, which also provided $3 billion worth of fuel supplies to help offset ongoing energy shortages.
  • Expanding social security pensions in the 2014-2015 budget to cover an additional 825,000 families for a total of 2.3 million families, with the average monthly benefit increasing by almost 50% to 386 EGP (about $54 at the end of 2014).
  • Increased taxes on the wealthy and a new capital gains tax on businesses, which showed the public the government’s commitment to preventing unfair adverse impacts of the reform.

The government closely monitored increases in consumer prices to plan for additional corrective measures:

  • The Central Bank adjusted interest rates to mitigate the increase in the headline consumer price index, which rose from 8.2% in June 2014 to 11.8% in October 2014, largely due to the increase in energy prices. The Bank’s intervention brought it back down to 7.8% by November and ensured the financial supports retained their purchasing power.
  • Mitigating the rise in transport prices was one of the most significant challenges, as the price of diesel, which made up almost half of Egypt’s total subsidies, increased by 64%. Following a dramatic increase in transport fares — 11.2% according to official estimates, but up to 50% or even 100% according to other sources — the government offered free transport on army buses to lower-income households.

However, these government measures didn’t fully offset the increase in energy, food and transport costs, especially for poor households.

The reform eased the government’s fiscal pressures, reducing energy subsidy spending by 29% (to $3.1 billion) in the first quarter of the 2014-2015 fiscal year alone. Low global oil prices enabled the government to achieve even greater budget savings than originally expected.

Transparent communication by the government about the increase in transport and energy prices and the corrective measures planned helped reassure the public. Given the scale of price increases and the massive demonstrations that had occurred between 2011 and 2013, public reaction to energy subsidy reform was “relatively muted” despite some discontent among poorer groups.

Strengths   

  • Consensus among political leaders, business leaders and foreign partners in support of energy subsidy reforms: This created a clear mandate to implement energy subsidy reforms, based on a widespread acknowledgment of their unsustainability.
  • Reallocation of savings from fossil fuel reforms into investment and social protections: This contributed to wider economic improvements and offset the negative impact of fuel price increases on lower-income households.
  • Pairing energy subsidy reform with social policies that yielded clear benefits for lower-income households, which helped to increase trust in the government and decrease opposition to the reforms.  
  • Clear, advance communication from the government: This helped citizens understand the plans and how the reforms would affect them.

Challenges and Gaps  

  • Insufficient support for poor households: Some sources saw the government’s compensatory measures as too limited, especially for households that spend a higher share of their income on basic necessities.
  • Difficulty in targeting support towards the poorest: The government was unable to implement measures that more directly targeted poor households because of the absence of a unified registry of households and the lack of administrative foundations for an electronic smart card system. Measures such as direct cash transfer to poor households or a targeted subsidized fuel ration towards income-eligible households would have been more cost-effective than an economy-wide food subsidy program to alleviate the financial burden on the poorest.
  • Long-term social sustainability of reforms and alignment with climate goals: There was a perception that Egypt’s reforms prioritized the demands of international financial institutions, rather than aiming to improve economic growth or citizens’ overall living conditions, which may lead to growing public pushback if not addressed in future policymaking. A stakeholder engagement process will be important for building public buy-in for future policies and promoting equitable actions. In addition, although reforming fossil fuel subsidies is part of mitigating GHG emissions, Egypt will need to do more to contribute to international goals and prepare for the effects of climate change and climate action. 

Further Reading