Egypt Cuts Fuel Subsidies in Effort to Reduce Deficit

The austerity measures mark a break with the stopgap economic measures of Egypt’s last government.

Traffic in Cairo, Egypt, September 7, 2006
Traffic in Cairo, Egypt, September 7, 2006 (David Evers)

Egypt’s government cut fuel subsidies overnight on Friday, increasing the price of gasoline and natural gas by over 70 percent and triggering scattered protests across several of its major cities. Prime Minister Ibrahim Mahlab defended the move as necessary to shrink the nation’s high fiscal deficit.

“The decisions were taken after delicate studies,” Mahlab, the former boss of Arab Contractors, one of the Middle East’s largest construction firms, told a news conference on Saturday. “How can I achieve social justice while I am subsidizing for the rich on the expense of the poor?”

Fuel subsidies took up a fifth of government spending. While many poor Egyptians depended on subsidized LPG for cooking and farmers relied on cheap diesel to fuel their irrigation pumps, the policy mainly benefited wealthier Egyptians with cars. The World Bank estimated last year that the richest 20 percent of Egyptians claimed more than half of the subsidies.

Despite the cut, Egypt’s government will still spend 16 percent of its budget on energy subsidies the next twelve months.

But the reduction marks a break with the stopgap economic measures Egypt’s previous governments enacted. The Islamist president Mohamed Morsi, who was deposed by the army last summer, raised wages for civil servants and imposed capital and price controls to keep consumer goods affordable and prevent money flowing out of the country. The result was high inflation, forcing Egyptians to turn to the black market, and a deficit equal to 11.5 percent of economic output. A 60 percent loss in the Egyptian pound’s value against the dollar priced everything but bread out of the reach of the poorer half of the population which lives off $2 per day or less.

The interim government that took office after Morsi’s ouster later renationalized two state companies that had been sold off by former autocrat Hosni Mubarak and revived a 1940s law that enabled it to cut fruit and vegetable prices by as much as a quarter.

Former army chief Abdul Fatah Sisi, who led the coup against Morsi and was elected president in May, had warned in March that tough economic measures were needed, saying, “I cannot make miracles. Rather, I propose hard work and self denial.”

His administration earlier issued a 10 percent tax on stock market gains and increased the price of electricity.

The austerity measures are meant to reduce Egypt’s deficit to 10 percent in the next fiscal year, from an expected shortfall of 12 percent this year.

3.2 percent growth is projected for 2015 — up from 2 to 2.5 percent this year but still far short of the 5 percent growth rates under Mubarak who was toppled in Egypt’s 2011 “Arab Spring” uprising. Unemployment is officially at just under 14 percent but that figure masks the high level of underemployment, especially among the youth.

Foreign investment and tourism have dwindled since Mubarak was forced out of office. Egypt’s trade deficit has exploded while food and fuel supplies are still running short.

Nearby Arab Gulf states provided financial help when the army took over last year but Egypt’s most important ally outside the region, the United States, cut part of its financial and military support in protest to the coup.