Egypt fuel prices to increase over fifty percent

(June 29)Egypt announced that fuel prices will be increased by up to 55 percent. This is the second rise since Egypt allowed the local currency to rise seven months ago.

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Subsides on fuel and other items are being cut as one of a number of IMF-backed austerity programs. In exchange, Egypt is receiving a $12 billion dollar loan. The poor and middle class had already been hit by earlier measures such as the floating of the Egyptian pound late last year. Although fuel is still cheap compared to the price in many countries the increase is bound to boost inflation even more as well as increasing discontent with President Abdel el-Sisi's economic policies. However, Egyptian PM Sherif Ismail said at a news conference that the decision was essential and could not be delayed and said: "We took part of the value of the subsidies allocated to energy to use it for other subsidies that are important for limited-income and poor individuals." The IMF conditions also included the imposition of a value added tax (VAT) to help raise revenues. The IMF measures have helped create runaway inflation which is now about 30 percent. After floating the pound, Egypt spent billions trying to keep up the value of the currency but it went from a value of 8.9 pounds to the dollar when it was floated to 18 to the dollar afterwards, losing half its value.

Many Egyptians were surprised by the amount of the increase as many Egyptians are already struggling with soaring living costs. Subsidies have long been used in Egypt as a way of gaining support for governments. However, the IMF insists on moving towards free markets and reducing state expenditures by reducing or doing away with subsidies. PM Sherif Ismail told reporters that officials would monitor prices and said: "We will not allow any greed and exploitation of our citizens."

However, many of the poorest Egyptians will be worst hit by the increases as the cooking gas cylinders they use have doubled in price from 15 pounds a cylinder to 30 pounds ($1.66). Al-Sisi insisted in December that conditions would improve in six months. Yet Ehab Labib a Cairo taxi driver said of the new price increases: "It's completely the wrong timing. People can't take it anymore, all prices will increase. I will sell this taxi, what else am I going to do?"

Egypt is expected to receive a second instalment of $1.25 billion of the IMF loan with the next few weeks. Hani Berzi, head of one of the country's top food producers Edita Food Industries said that he expected costs to go up from 3 to 5 percent but said: "I will have to absorb that, I have no intention of increasing prices... the market can't stand it."

Egypt is hoping to reduce its deficit to less than the 10.5 percent of GDP forecast for this year. However, social unrest may increase with the rise in prices. About half of Egypt's 93 million people live below or near the poverty line. PM Sherif Ismail estimated that the price rises would increase the inflation rate now around 30 percent an additional four or five percentage points. However, the government did raise pension payouts and added exemptions for low income taxpayer, as well as allocating more funds to subsidized food programs. The expenditures will add about 85 billion pounds to next year's budget. The IMF mission chief to Egypt said: “The fuel price increases, together with the higher social spending already announced, will help the budget while protecting the poor." Reducing fuel subsidies will help put the government’s debt “on a declining trajectory and help free resources to support the most vulnerable groups by strengthening social protection measures.”

The Egyptian government hopes that in the next fiscal year the budget deficit will be about 9 percent of GDP. The value-added-tax is to be raised one percent to 14 percent. Fees for mobile phones, car licences, and taxes on tobacco will also increase. The government also intends to raise money by selling stakes in state-owned enterprises. Reham El Desoki, senior economist at Dubai-based Arqaam Capital said: “The government is getting all the painful measures done this fiscal year. That’s probably the government’s strategy: ‘Now, the worst is probably behind us.”’