October 17, 2012 5:28 pm

Egypt poor braced for end to cheap fuel

Egypt Street Vendor©Reuters

Street vendors carry gas cylinders on their way to work in Cairo's Tahrir Square

Sitting on the unpaved ground next to their empty butane cylinders, dozens of poor Egyptians waited patiently, hoping that a truck would bring a fresh consignment of the heavily subsidised gas to the depot in the Cairo slum of Ard al-Lewa.

It was early afternoon but most had arrived with their battered metal gas cylinders at six in the morning – some were queueing for a second or third day. No one was certain if the gas truck would come at all that day. The manager of the privately run depot insisted he had no information.

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“Will I get a full bottle today? Who knows?” sighed Um Youssef, a housewife. “I am in front of the depot everyday. I just want to know how the people who sell gas bottles on the black market for thirty or forty pounds [$5-$7] manage to get them.”

Egypt’s government spends $11 for each cylinders of butane, which is supposed to sell for 50 cents. However, by the time it reaches Um Youssef at the official distribution centre, a canister costs $1.50. For those who do not want to queue, black market prices can soar up to $12 per canister at times of shortages.

Expensive and inefficient, the butane subsidy exemplifies the worst of Egypt’s energy policy, which has for years been predicated on providing cheap fuel in exchange for social peace.

The country allocates 20 per cent of its budget – $17.2bn last year – to subsidies on fuel, from the diesel used by impoverished farmers to run their tractors, to the high-octane gasoline copiously consumed by the SUVs of the rich.

But with the country’s deficit soaring to 11 per cent of gross domestic product and the new Islamist government seeking to secure a crucial loan from the International Monetary Fund, subsidy reform is on the agenda.

Hisham Kandil, the prime minister, told the Financial Times that he wanted to reduce the overall energy subsidy by a third, or some $6.57bn, in the financial year ending in June 2013, though he admitted the target might not be met in full because nearly halfway through the fiscal year the cuts had not yet started.

“There is a consensus that something needs to be done about subsidies,” he said. “What do we do and how quickly and how to ensure that the real poor are not impacted, this is a subject of discussion . . . I cannot give you a date [of when the cuts will start].”

The government is already up to $7bn in arrears to international oil companies working in the country and owes another $1.5bn to $2bn for fuel imports. This year, cash flow problems have caused periodic fuel shortages and long lines at petrol stations, contributing to a general atmosphere of crisis.

“The subsidy is not an easy matter to tackle but it is overdue and we have no other alternative,” said Mona Abdel Hamid, a business consultant who advises oil companies.

“If you want to develop infrastructure projects in renewable energy or roads and transport, it will depend on what happens to the subsidy. We won’t be able to attract foreign investors in these sectors unless they get returns commensurate with the level of investment required.”

Officials have made it clear they want the cuts to start with the wasteful butane subsidy, but they have not announced details of how they will implement the change, beyond saying they will use a coupon or smart card system.

Ossama Kamal, the oil minister, was quoted on Sunday as saying that the government was working on a programme to allow all citizens to obtain a set share of energy products at the low subsidised price and that consumption beyond the allotted amount would be only “partially subsidised”.

Despite the urgency, observers say significant reforms are unlikely before parliamentary elections due early next year. The authorities, they say, will want imprimatur of parliament on any cuts which will result in painful price rises. The government also wants to avoid damaging the electoral chances of Freedom and Justice, the party of Mohamed Morsi, the president.

Mr Kandil said it was crucial to get the cuts right the first time, otherwise further reform would be very difficult. He wanted a carefully designed system, he said, that would even integrate the black market operators who traded in the subsidised butane.

“The thieves, I will give them jobs in the distribution,” he said. “Those baltagiyya [thugs] who take the gas bottles and then charge people money for them, if you can hire them, rather than block the system, you integrate them in it. They will get less money, but they will have a job and get a uniform, and they will be honest people. That is worth some money.”

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