Isobel Coleman

Democracy in Development

Coleman maps the intersections between political reform, economic growth, and U.S. policy in the developing world.

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Fuel Subsidies and Egypt’s Economy: Running on Fumes

by Isobel Coleman
March 29, 2012

A man carries an empty gas cylinder on his back after the ones distributed by the army ran out in Cairo, Egypt, December 6, 2011 (Amr Dalsh/Courtesy Reuters). A man carries an empty gas cylinder on his back after the ones distributed by the army ran out in Cairo, Egypt, December 6, 2011 (Amr Dalsh/Courtesy Reuters).

I always find that chatting with taxi drivers is a good way to take the pulse of a city. On a visit to Cairo earlier this month, my taxi-driver test indicated that Egyptians remain upbeat about their political evolution, but they are increasingly concerned about the economy. Indeed, every time I got into a cab, the very first thing the driver did was pull into a line at the gas station (making me even later for my next meeting). It seems all the taxis are literally running on fumes.

Egypt’s fuel shortages are undoubtedly playing a role. Recent shortages have been driven by middlemen who are illegally selling subsidized fuel at a markup, and by average Egyptians who are concerned about rising prices and engaging in panic buying and hoarding. In February, I wrote about Egypt’s struggle with fuel subsidies. The subsidies mostly benefit the well-off, encourage profligacy, and exacerbate fiscal woes. Yet lifting them—and forcing citizens to pay market rates to fill their tanks—is politically explosive. Not surprisingly, Egypt’s leaders have dragged their feet.

But Egypt’s fiscal picture is getting darker, and it’s not clear how much longer the foot-dragging can persist. Subsidies of wheat, gasoline, and other energy products (such as cooking fuel) eat up 28 percent of Egypt’s budget. The government has also been buying Egyptian pounds to stabilize the currency, since a weaker pound would make imported food and fuel more expensive (boosting the cost of subsidies even more). All this spending has led Egypt’s foreign currency reserves to plummet by over half in the last year. At the same time, the fuel subsidy bill is projected to increase 25 percent over the coming year because of rising oil prices. The IMF has been in talks with Egypt about a loan, but the country’s leaders have been reluctant to accept the IMF’s involvement. Some in the Muslim Brotherhood, which won the largest number of seats in Egypt’s parliament, are apparently opposed.

To delay the inevitable slashing of subsidies, leaders in Cairo are grasping at straws. The government has begun limiting families to one or two subsidized cooking fuel canisters per month. (This plan has been implemented only in two outlying governorates so far.) Authorities are also trying to encourage the use of natural gas instead of oil products in power plants, factories, and vehicles. As of 2010, Egypt was the 13th largest producer of natural gas in the world, and its production and consumption have increased markedly in recent years. Imported natural gas is also cheaper than imported oil. I heard lots of hopeful talk in Cairo about marshalling domestic resources or getting funds the Gulf region to stave off the IMF, but both seem unlikely. If anything, capital flight is on the rise, and while the Gulf countries have promised much, they have yet to deliver on most of it.

During my recent visit, I found that Egyptians—both leaders and citizens—know that the country faces a moment of reckoning where subsidies have to be cut. Indeed, fears of a price hike are behind the fuel hoarding that has contributed to shortages. Lifting subsidies need not be too painful; as I noted in February, Iran reformed its fuel subsidies in 2010, offsetting the price hikes with cash transfers to families. The question is whether Egypt’s emerging political class can summon the courage necessary to make the tough choices instead of waiting for outside forces (such as the IMF or international currency markets) to bring the issue to a head. The still-ruling Supreme Council of the Armed Forces would do the country a favor by taking the first hard steps to reduce subsidies, rather than throwing the decision to the first post-Mubarak president, who will be elected soon. But don’t count on it.

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  • Posted by Christina Asquith

    Very interesting, isobel, thanks.

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