FEATURE: Egypt looking at energy subsidies to cut deficit

Wed Mar 7, 2012 2:09pm GMT

By Patrick Werr and Sherine El Madany

CAIRO (Reuters) - Egypt is pinning its hopes on natural gas to help it reduce energy subsidies that are eating up 20 percent of its state budget and are likely to continue growing if measures aren't taken soon.

For years, the government has resisted cutting subsidies for fear of igniting inflation and the wrath of its citizens. It is now under renewed pressure to tackle the issue as it negotiates a $3.2 billion emergency loan from the International Monetary Fund to avert a balance of payments crisis; the IMF is expected to require a commitment from Cairo to reform its finances.

The subsidy problem has become more difficult politically since the uprising which overthrew president Hosni Mubarak last year, because the turmoil slashed economic growth, pushing up unemployment and poverty.

At the same time, a solution has become more urgent financially. In the last six months the government has struggled to finance a budget deficit inflated by post-uprising demands for higher wages and lower revenue growth.

Egypt's energy subsidy bill is projected to soar 40 percent to 95 billion Egyptian pounds in the current financial year which ends on June 30, because of a jump in international energy prices and a growing population, according to figures provided by three sources familiar with the government's calculations. They declined to be identified because of the political sensitivity of the issue.

Oil Minister Abdullah Ghorab told reporters on Monday that budget allocations to keep down retail prices of petroleum products were scheduled to increase more than 25 percent in the next financial year to 120 billion pounds.

Solving the energy subsidy conundrum "is crucial now because the fiscal state is very tight", said Nada Farid, an economist with Beltone Research.

"All the political parties, the IMF and the government are saying that energy subsidies must be tackled as soon as possible. It's about having a government that is able to actually take decisions."   Continued...

Powered by Reuters AlertNet. AlertNet provides news, images and insight from the world's disasters and conflicts and is brought to you by Reuters Foundation.