Last updated: July 5, 2014 6:06 pm

Egypt sharply raises energy prices

Egypt on Saturday implemented a long-feared hike in energy prices after the government pledged to reduce a gaping budget deficit by slashing fuel subsidies accounting for a fifth of state spending.

The move, long seen as a crucial structural reform, has been repeatedly postponed by successive administrations fearful that it would provoke social unrest in a country with high poverty levels and a foundering economy.

Ibrahim Mehleb, reappointed prime minister in the new military-backed government sworn in last month, said it would be a “crime” not to curb the subsidies.

Addressing a televised news conference, he said the reform was necessary to free funds for essential services such as health care and education.

On Saturday, there were reports of localised strikes by taxi drivers and of angry altercations between passengers and microbus drivers charging higher fares.

The price of diesel, used in industry and in public transport, including the microbuses heavily relied upon by the poor, has jumped 64 per cent to 25 cents a litre.

The highest price rise was for 80 per cent octane gasoline used by older cars, up 78 per cent to 22 cents per litre.

Natural gas prices for a range of industries have also increased by 30 to 70 per cent. Electricity prices are due to start rising from this month with a view to phasing the subsidy out completely over five years according to a separate official announcement this week.

Ashraf al Arabi, the minister of planning, was quoted in the Shorouk daily on Saturday as saying: “In five years fuel will be offered at 80 per cent of its real cost to sections of the population which are deemed to need subsidies, the rest will pay market prices.”

The increases are intended to lead to savings of $6bn this fiscal year bringing down the fuel subsidy bill to $14bn or 13 per cent of state spending. The government aims to narrow the deficit down from 12 per cent in the fiscal year ending at the start of June, to 10 per cent in 2014/2015.

Hany Kadri, the finance minister, said earlier this week that Egypt could no longer afford to defer reforms and that the economy had to squeeze through a bottleneck in order to take off.

He spoke after Abdel Fattah al Sisi, the president, announced that he would take a 50 per cent pay cut and donate half his personal wealth to the country in a speech in which he called on all Egyptians to make sacrifices in order to relaunch the economy.

New legislation which has just came into force caps earnings for all state employees to $6000 per month is being seen as part of measures to prepare the public for austerity. Previous exceptions mulled for top officials in state banks and government oil companies have been scrapped.

The government’s decision to reduce the subsidy will be welcomed by investors, international oil companies owed some $6bn in arrears, and aid donors such as the United Arab Emirates which have been urging the reforms on Cairo.

The move also places Egypt in a stronger position should it seek a loan from the International Monetary Fund within the next year as many observers expect.

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