Egypt Set for Costlier Consumer Goods on Energy Prices

Egyptians braced for what many expected to be steep increases in prices of consumer goods after the government raised energy prices as much as 78 percent to pare a costly and often abused subsidy system.

Egypt’s premier, Ibrahim Mahlab, defended the price increases at a news conference yesterday, saying they were imperative to the government’s “war” on poverty and a way to achieve “justice” in a system that long benefited the wealthy at the expense of the poor. The increase could prove to be the first major test of whether President Abdel-Fattah El-Sisi secured a strong enough voter mandate to tackle an issue that successive governments had shied from, fearing a backlash.

A smattering of protests broke out after the announcement of measures that raised gasoline prices by as much as 78 percent. Dozens of drivers and passengers blocked the road in the middle-income Cairo neighborhood of Shoubra el-Kheima yesterday, the state-run Al-Ahram newspaper reported. In the upscale Maadi neighborhood, a taxi driver and a passenger had a fistfight over the fare, which the passenger said shot up 50 percent within 45 minutes.

“How is it that social justice always seems to mean that we, the poor, get short-changed,” taxi driver Mohamed Farid said, referring to the main declared aim of the 2011 uprising that ousted President Hosni Mubarak.

Shrugging his shoulders, he said there was little to do “but wait and see.” “What are we going to do?” he asked. “Keep overthrowing governments when they do something we don’t like?”

Follow-On Rises

Notices of other, secondary price increases followed swiftly. The head of the Cairo Chamber of Commerce’s poultry division said chicken prices will rise by 25 percent within days because of added transportation costs, Al-Ahram reported. Mini-bus and taxi fares were raised by about 13 percent, according to figures provided in state media.

The increase, which also affects other refined fuels including diesel and natural gas, was announced late on July 4 in the Official Gazette and implemented within hours. It was announced a day after the government raised electricity prices. The rises are likely to deepen the hardship of many Egyptians during the holy month of Ramadan, when food prices typically increase and this year is being further burdened by frequent power cuts.

Unsustainable Subsidies

Mahlab said Egypt had spent 687 billion pounds ($96 billion) on energy subsidies over the past decade. Money saved from energy subsidies will benefit other key services such as health and education, officials have said. The price increases will add 51 billion pounds to state coffers, Mahlab said.

El-Sisi’s government has said the subsidy system it inherited is unsustainable, especially if Egypt’s economy is to rebound from its slowest growth rate in two decades. Officials are looking to narrow the budget deficit to 10 percent of gross domestic product in the fiscal year that began July 1, from an expected 12 percent for the previous year.

El-Sisi has said Egyptians must be willing to make sacrifices and put the the nation’s interests before their own to help end more than three years of unrest since Mubarak’s ouster. He himself said he would only accept half his pay and would give away half of his wealth.

President’s Popularity

The increases may determine whether El-Sisi’s popularity, which surged after former President Mohamed Mursi was toppled a year ago, will be strong enough to allay likely anger. Both Mubarak, who ruled for three decades, and Mursi steered clear of sweeping energy price rises.

Under the new pricing, reported by the state-run Al-Ahram newspaper, 95-octane gasoline increased to 6.25 pounds per liter from 5.85 pounds and 80-octane, which many drivers favor, rose 78 percent to 1.60 pounds from from 0.9 pounds. Diesel fuel, used in trucks and minibuses, was raised 64 percent to 1.80 pounds from 1.10 pounds, according to the state-run Al-Ahram newspaper.

A smart-card system curbing access to fully subsidized fuels has been years in the making without full implementation.

The price increases will have an inflationary impact that “will probably have a negative impact on consumption in the short term,” Mohamed Abu Basha, a Cairo-based economist at EFG-Hermes Holdings SAE, said by phone. While consumers and businesses will have to absorb the shock in the short-term, the government is “paving the way for more fiscal sustainability and for putting the economy on a path toward recovery.”

Safety Net

While a major backlash isn’t likely, “the government still doesn’t have the required social safety net in place, which is of concern,” he added.

Subsidies, including those for energy products, consume about a quarter of state spending, while wages to public-sector employees swallow another quarter. Finance Minister Hani Kadry, who has said cuts in energy subsidies could save about 40 billion pounds this fiscal year, told the news conference with Mahlab that Egypt is paying 540 million pounds a day in interest on its debts. Even with the new pricing, it will pay about 350 million pounds, compared with public-sector salaries of 550 million pounds, he said.

People commuting to work in Cairo were caught by surprise when they noticed the increase in public transportation fares. Mohamed Abdel-Kader, who earns a monthly salary of 790 pounds, paid 3 pounds instead of 2.20 pounds to go to work in a minibus.

“I have to cut one of my family’s small expenditures,” he said. “What do you suggest? Cut food spending and leave my kids to die of hunger, or get them out of schools to save the money? Really, what am I going to do?”

Before it's here, it's on the Bloomberg Terminal.