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Egypt's fuel subsidy reform is credit positive, reducing fuel subsidy bill to 1.7% of GDP in 2019: Moody's - Daily News Egypt

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Egypt’s fuel subsidy reform is credit positive, reducing fuel subsidy bill to 1.7% of GDP in 2019: Moody’s

Subsidy reform adjustment led to declining purchasing power, yet a brightening economic and employment outlook provides a better basis for acceptance of the new reforms

The decision of the newly sworn-in Egyptian government to increase fuel prices by 35.0%-66.6% with immediate effect is credit positive, according to a report issued by Moody’s on Thursday.

The international credit rating agency believes that the implemented price hikes are credit positive, as they will reduce the fuel subsidy bill to 1.7% of GDP in fiscal year (FY) 2018/19 from the government’s projection of 2.5% of GDP in the current fiscal year. It also stated that these hikes will help reduce the overall subsidy bill from its estimate of 7.5% of GDP in FY 2017/18 to 6.5% in FY 2018/19.

The report cites that the hikes are part of the reform agenda agreed to with the International Monetary Fund (IMF) and will help Egypt meet the agreed target for a fiscal deficit of 8.4% of GDP in FY 2018/19, from around 9.8% of GDP in FY 2017/18.

Moreover, without any expected policy changes under newly appointed Finance Minister Mohamed Moeit, the report indicated that the fuel subsidy bill would have increased to EGP 180bn (3.5% of GDP) by FY 2018/19 due to crude oil price increases.

Consequently, the government’s planned fiscal consolidation will be jeopardised. The authorities plan to eliminate all fuel subsidies (excluding liquefied natural gas) by the end of 2019 as per the government’s reform programme agreed to with the IMF, says the report.

However, as a compensating measure, Moeit announced a 15% increase in pensions starting in July. The minimum pension will increase to EGP 750 from EGP 500, which will cost the government EGP 21.3bn (0.4% of fiscal FY 2018/19 GDP). In addition, the government is working on expanding more targeted cash transfers instead of wholesale subsidies through social protection programmes such as Takafol and Karama.

The most recent price hike follows earlier price increases in electricity, transportation and tap water of 25%-250%. The fuel price hikes are the third since the flotation of the currency in November 2016, which led to a 45% currency depreciation in real effective terms, followed by a surge in annual inflation to a peak of more than 34% in July 2017, which then decreased to 11.4% in May 2018.

Moody’s report indicates that, although improvements were witnessed in external competitiveness, foreign-exchange reserve coverage, and the economic growth outlook since the floatation, Egypt’s population has borne the brunt of the subsidy reform adjustment costs in the form of declining purchasing power, especially over the past year.

The difference between wage growth and inflation is getting higher as nominal weekly wage growth registered at 11.5% in 2017, while the average inflation reading was at 30.7%.

The World Bank’s poverty impact analysis suggests that the welfare loss from previous energy price increases was around 5.5% of household expenditure on average before any mitigating measures.

Moody’s report takes into consideration the risk of reform fatigue in the population by assigning a high domestic political event risk assessment to Egypt’s credit profile in light of the potentially significant effect on public finances if reforms were reversed.

However, the report concludes that the brightening economic and employment outlook in Egypt provides a better basis for acceptance of the new reforms by highlighting the economic benefits of successful reform implementation after an inevitable adjustment phase.

Topics: Fuel Fuel subsidy

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