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ENERGY PRICE HIKES FUEL INFLATIONARY PRESSURE
BY EMAN WAHBY
The government’s recent decision to raise
fuel prices has cast the specter of inflation over the country as
the increased cost of transportation and industrial production begins
to trickle down to the consumer. “The fuel price hike will
have a negative effect on consumers, especially limited-income citizens,
who will have to bear a package of price increases,” says
Abdel Fatah Al-Gebali, head of the economic unit at the Al-Ahram
Center for Political & Strategic Studies (ACPSS).
On July 21, state newspapers announced that the government had increased
the price of 90-octane gasoline by 30 percent to LE 1.30 per liter.
The price of diesel fuel was simultaneously raised by 25 percent
to LE 0.75 per liter, and natural gas prices saw increases of 25
percent to reach nearly LE 0.25 per cubic meter.
This was the first time the government raised gasoline prices since
1993. Diesel prices, however, were increased 100 percent in September
2004. The new energy prices are expected to shave LE 6 billion off
the total LE 42 billion allocated for energy subsidies in the FY
2005-06 budget.
Facing a storm of criticism in the People’s Assembly, MP Mostafa
Al-Saeed, chairman of the parliament’s economic committee,
defended the government’s decision to raise fuel prices, pointing
out that rising global oil prices had forced many other countries
in the region, such as Jordan, Tunisia and Morocco, to increase
the prices of petroleum products. He said Egypt had no option but
to raise fuel prices to offset rising energy subsidy costs, which
were placing enormous pressure on the national budget. According
to preliminary data from the IMF, the FY 2005-06 budget ran a deficit
equivalent to 8.3 percent of GDP.
While the government had denied all rumors of an impending fuel
price hike, the July 21 decree did not come entirely out of the
blue. Last March, Prime Minister Ahmed Nazif reasserted his government’s
plans to revise subsidy policies, which he described as exhaustive
to the government’s budget and unfairly biased in favor of
those who need them least. He cited research by the Egyptian government
and the World Bank that showed that the wealthiest 10 percent of
Egypt’s population receive LE 700 per capita in fuel subsidies
each year, while the majority of low-to-middle-income people receive
only LE 300 per capita.
This argument did little to stem the tide of criticism. Many press
editorials criticized the timing of the fuel price hike, which came
just a month before government employees received their social allowance,
an annual supplement intended to offset cost of living rises. “With
such increases, the price of many commodities, products and services
will rise, thus canceling the effect of the allowance that the employees
did not receive yet,” state-run Al-Mosawwer magazine railed.
It went on to note that some traders were using the fuel price hike
as an excuse to raise the prices of various commodities. “As
for the government’s usual promises to supervise the prices
in the market, these are all just words that will not benefit consumers.
The government cannot stop the price increases in the market or
disrupt the market mechanisms of supply and demand.”
Businessmen also criticized the government’s decision to reduce
fuel subsidies. “The decision was a surprise as the government
should have announced such plans and informed investors ahead so
that they had more time to adjust contracts and their future plans,”
said Abdel Moneim Seoudi, board chairman of the Egyptian Automotive
Manufacturing Association (EAMA).
Magdy Sobhy, senior economist at ACPSS, expressed concern over the
ability of exporters to meet their commitments. “Many export-oriented
industries, which mainly rely on diesel or natural gas, are involved
in long-term contracts,” he said. “So, how would they
suddenly readjust their prices in the international markets?”
Egyptian consumers, meanwhile, feared the diesel price hike would
translate into higher transportation costs and more expensive consumer
goods. Their fears were realized as air-conditioned public buses
increased their fares by 10 percent to LE 1.10. Private minibuses
followed suit, increasing the fares on short distance routes from
50 piastres to 75 piastres, and on long distance routes from 75
piastres to LE 1. “We would argue with the drivers about these
illogical increases,” complained Reda Hussein, a daily commuter.
“If the price of one liter of diesel increased 15 piastres,
why should drivers increase the price of a ticket by 25 piastres?”
Sobhy expects a domino effect. “The increase in transportation
costs will feed the increase in the prices of commodities and services,
which will all result in high inflation,” he explained. “All
factories will suffer from the high transportation costs as they
rely on [truck fleets] for delivering input for production from
ports and then delivering products to consumers.”
He predicted that inflation rates, which have been held in check
during the past two years, would begin to climb again. In line with
expectations, the Consumer Price Index (CPI), a common measure of
cost-of-living increases, soared to reach 6.8 percent in July, from
4.1 percent in June.
In addition to higher transportation costs, the price of fuel has
pushed up production costs in industries such as fertilizer, aluminum,
iron and steel, agriculture and electricity generation, which rely
heavily on natural gas and diesel. Natural gas, for instance, represents
52 percent of total input for the fertilizer industry. Several investor
associations in the new cities have presented requests to the Ministry
of Trade & Industry for special rates for factories that purchase
natural gas or diesel.
If not, the added costs will almost certainly be transferred to
consumers, warned the EAMA’s Seoudi. “Factories will
not bear such differences and will gradually increase the prices
of their products,” he said.
Furthermore, the fuel price hike will increase investment costs
in Egypt, which could discourage prospective investors. “There
are numerous investment opportunities in the region and all countries
are competing to present the best investment opportunities with
the most reasonable costs to lure investors,” Sobhy explained.
The government’s fuel price adjustment will improve public
finances at the cost of higher inflation. The full impact of the
decision remains to be seen but, clearly, the dominoes have already
begun to fall.
PUMP PREFERENCES
According to state-run Al-Massaa newspaper, oil minister
Sameh Fahmy in early August announced that sales of 92-octane
gasoline shot up 300 percent following the increase in the
prices of 90-octane fuel. The minister attributed the increase
to the fact that owners of modern cars prefer using 92-octane
for its high quality and similarity in price to 90-octane.
Previously, the cost difference between the two blends was
LE 0.40. The July 21 fuel price hike reduced the difference
to just LE 0.10.
Due to increased demand, Egyptian refineries have set out
to expand their production of 92-octane fuel. Fahmy assured
citizens that 80-octane fuel would still be available in the
market, since it is the only fuel produced at the Assiut and
Tanta refineries. The low-grade fuel is the mainstay of taxis
and older cars.
Fahmy added that there has been higher demand for natural
gas vehicles. He says that since the price hike the number
of cars converted to run on natural gas has risen from 20
to 200 cars daily. |
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