Subsidies Deepen Egypt’s Budget Deficit

By Jennifer Lewis

In Egypt, subsidies on natural gas and petroleum products have become one of the most controversial topics. With the declining economy of the country, the extensive subsidies on oil and gas products are expanding the deficit in the budget. It was revealed by Egypt’s Minister of Petroleum that the total cost of subsidies on petroleum products is around $7.4 billion a year; however the total revenue generated from the exports of petroleum products amounts to around $10 billion a year. Therefore, the excessively high costs of subsidies render the exports less profitable for the country. Bloomberg reported that Egypt’s exports of natural gas to Jordan or Spain have shrunk due to the increase in country’s local consumption, as well.

Due to high local demand reinforced by the subsidies the local supply of gas and oil reserves is shrinking, and with the subsidies being a significant burden on the economy, the situation is becoming increasingly complex for Egypt; the declining reserves and low profits are impairing the country’s ability to export the oil and gas products. The regulatory authorities have determined that the only solution to this issue is to control the local demand by somehow managing the subsidies.

Economic Implications of Subsidies

The extent of cuts on price of petroleum products in Egypt can be realized from the fact that other African governments provide only 10% subsidy on the prices of oil and gas products; while Egypt provides a subsidy of 75%. Although the lowered petroleum prices are appreciated by consumers in the short term, they remain unaware of the long term implications of these subsidies on the economy as a whole. Egypt’s subsidy policy has a cyclical impact on the economy which results in increased financial assistance from international avenues. Due to significant cuts on petroleum prices, Egypt’s budget bears a deficit and this gap in the budget is filled with loans from international financial institutions. If the artificially low prices of oil and gas products are not raised, the debt will continue to increase, and this will have a negative impact on the economy.

This is a highly difficult situation faced by Egyptian government. The regulatory authorities cannot lift the subsidies with immediate effect, to avoid disastrous impacts of such actions. On the other hand, the deficit in the budget cannot be managed unless the cost of subsidies is lowered. If an effective strategy, regarding the cuts in the prices of oil and gas products is not developed soon, budget deficit may continue to worsen in the future.

Possible Solution

The biggest hurdle in the way of removing the subsidies is their extensive scope. An immediate elimination of price cuts would cause a steep incline in petroleum prices. This would have a negative impact on the economy as a whole; a steep incline in petroleum prices would give a sudden push to the rate of inflation causing a steep incline in the prices of all the consumer products. An increase in price by a noticeable degree could also induce complains and protests from consumers.

One of the solutions to this problem may be a carefully planned, gradual decline in the scope of subsidies. Prices should be increased by a small degree after reasonably long time intervals. This would allow to manage inflation rates successfully, without any abrupt impacts on the economy, and it would also greatly reduce the possibility of mass consumer complains.

One of the factors that may cause disruption in the implementation of any strategy for lifting price cuts is the social unrest prevailing in Egypt; in such an environment, economic and social conditions can be unpredictable. Shutdowns and protests make it difficult for businesses to operate properly, and, along with economical impacts of subsidies managing strategy, this may cause further decline to the economy. It is crucial for organizations to acquire liability insurance to mitigate the healthcare costs and other costs that may occur due to social conditions, in order to cut any costs that may arise because of mass protests or similar scenarios. Therefore, it can be said that Egypt is facing a dilemma with regard to the subsidies on oil and gas products, and the social conditions may hinder the effectiveness of any strategies applied to lower the subsidies. However, despite the risks, effective strategy is needed, and it is needed soon!