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Fuel subsidy cuts emphasizes authorities’ commitment, but will add to inflation challenge: HSBC - Daily News Egypt

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Fuel subsidy cuts emphasizes authorities’ commitment, but will add to inflation challenge: HSBC

Inflation is forecast to reach 33% in July

The Egyptian authorities decided to go ahead with hikes to subsidised government-set fuel prices on Thursday, lifting gasoline and diesel prices by around 40-50% and doubling the cost of butane cooking gas.

This is the second time fuel subsidies have been cut since November 2016, when Egypt adopted its ambitious economic reform programme supported by the International Monetary Fund (IMF), and the third time since President Al-Sisi took office in mid-2014, according to an HSBC report.

The report cites that there had been some uncertainty over the timing and scale of the fuel price hikes, adding that HSBC views the decision as a strong sign of the authorities’ commitment to the adopted reform agenda.

However, the report indicates that much work remains to be done. Explaining that while fuel prices have now quadrupled since mid-2014 for some products in terms of the Egyptian pound, the sharp currency devaluation, which took place last November had offset the bulk of the previous adjustment.

Moreover, the draft 2017 budget recently approved by the parliament shows the fuel subsidy bill rising by 47% on a year-over-year basis in terms of the pound, with higher welfare payments introduced to offset the subsidy cuts, reducing savings further. HSBC expects the budget deficit to remain in the range of 10% of GDP next year.

According to the report, HSBC had assumed the government would deliver the subsidy cuts and forecast inflation would rise from 29.7% in May to reach around 33% in July, before falling due to weak demand.

Consequently, the report cites that it is expected that the Central Bank of Egypt (CBE) will keep rates on hold in the next Monetary Policy Committee (MPC) meeting on 6 July.

However, since price expectations are unanchored, the risk of higher inflation still exists, said the report, adding that reassessment is needed of the previous views that the hiking cycle has already reached its peak.

Egypt’s Finance Minister Amr El-Garhy announced earlier in June that inflation had reached its peak in March, and that lowering inflation is the government’s top priority.

The report concludes that the continuing cycle of higher prices would act as a test for the authorities’ determination and capacity to deliver on the economic reform programme, especially if the rising inflation were to trigger popular opposition.

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