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News Analysis: Egypt debates subsidy cuts, price hikes

English.news.cn   2014-07-08 00:14:33

by Mahmoud Fouly

CAIRO, July 7 (Xinhua) -- Egypt's recent price hike on natural gas, fuel and electricity is aimed at shrinking energy subsidies and reviving a deteriorating economy, yet the move has sparked debates among analysts and economists in the recession-stricken country.

Some Egyptian economists believe that lifting subsidies without increasing wages would be "disastrous" for the poor, while others say the step is a necessary "surgery" or a "bitter medication" that must be endured to cure a dying economy.

Prime Minister Ibrahim Mahlab says the hikes are part of a government plan to cut back subsidies completely within three years. Egypt has already begun reducing fuel subsidies, raising prices up to 78 percent, and has slashed natural gas subsidies of several industries, leading to price increases in those fields ranging from 30 to 70 percent.

The government has also raised electricity prices but has downplayed the hike, describing it as "insignificant."

"Cutting down or removing subsidies is required, but without raising wages it would be disastrous for the poor and would lower the middle class to the level of the poor," said Ehab al-Desouki, head of the Economy Department of Sadat Academy.

According to Oil Minister Sherif Ismael, the fuel price hike aims to minimize the budget deficit of the new fiscal year that amounts to more than 33.5 billion U.S. dollars. He added that the target is to cut down fuel subsidies from 130 billion Egyptian pounds (about 18 billion dollars) to 100 billion (about 14 billion dollars).

Desouki said the move has not been efficiently applied, adding that subsidy cuts should be accompanied by investment and an increase in product and services to "avoid mounting inflation rate and skyrocketing prices," the economist told Xinhua.

He added that "people should not die of hunger" so that the government can save money to deal with other issues like education and healthcare.

Economist and international energy expert Ibrahim Zahran said it is the over-burdened citizens that will eventually pay for the government's "illusory" subsidy burdens.

"Egypt produces 4 million tons of car fuel and it only imports 1 million ton to cover its 5-million-ton consumption," he told Xinhua. "However, they talk about subsidies as if they import 100 percent of the fuel."

Business tycoons and wealthy factory owners are the real beneficiaries of the subsidies, Zahran said. "The government should obliterate corruption first before burdening the poor citizen with all its problems," he added.

On a daily basis, Egypt's citizens continue to suffer from recurrent power outages, gas shortages and soaring prices, all of which were among the reasons that sparked popular uprising against former Islamist President Mohamed Morsi, which ended up with his ouster by the military last year.

Former army chief and current President Abdel-Fattah al-Sisi, who orchestrated Morsi's removal, took office last month, and urged the Egyptians to tighten their belts and make sacrifices for a better future for the country.

Economist and former Prime Minister Hazem al-Beblawi pointed out that the people need to understand that one quarter of the general budget goes for subsidies and one quarter goes for paying off debt profits. "The state has to correct that for the sake of the country's future," Beblawi told Xinhua.

The country's new budget approved by Sisi includes expenditures of about 110.3 billion U.S. dollars while revenues are expected to stand at 76.7 billion.

"A state cannot live on more than its resources," said the former prime minister, noting that reducing subsidies is a difficult decision but it is a "must" before the country can provide for people's most basic needs.

Beblawi warned that Egypt cannot go on wasting half of its annual budget on subsidies, saying the old way of spending would jeopardize the nation's ability to provide basic services, security, job opportunities, housing, etc.

His view has been echoed by economic analyst and former assistant to IMF executive director Fakhry al-Fiky, who believes that cutting down subsidies "is a step in the right direction."

The expert said that 28 percent of the government's spending goes for subsidies that are designed to assist the poor, "but two- thirds of them are utilized by the well-to-do."

"The improper subsidy system made the rich richer and the poor poorer," the former IMF official told Xinhua. He added that reducing subsidies is one of the "unpopular and unfavorable" economic reform procedures but it is "inevitable" and would soon bear its fruits.

"Egypt's general debts reached 100 percent of the gross domestic product last June, while the safe limit is 60 percent," the expert said, stressing the ongoing government procedures to control subsidies should have been done a long time ago to spare the economy from reaching "a point of no return."

Editor: Fu Peng
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