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Sunday, 7 July 2019

Is Egypt’s fuel pricing mechanism coming into effect this month?

Is Egypt’s fuel pricing mechanism coming into effect this month? Speculation is rife in the local press that the Oil Ministry might begin moving prices on 95-octane fuel this month under the automatic fuel pricing mechanism, after it kept the price of 95-octane unchanged at EGP 7.75 per liter in April. The government has also launched a video campaign on the benefits of lifting fuel subsidies, according to Masrawy, which seems to be a definite sign that the price changes are coming.

A quick refresher on the pricing mechanism: The new mechanism — whose enforcement was mandated by the IMF as a condition for the disbursement of the fifth tranche of its USD 12 bn facility to Egypt — will allow the price of 95-octane to fluctuate by as much as 10% in line with movements in the international markets, the government had said at the time. The Finance Ministry has said previously that any USD 1/bbl increase in international oil prices would lead to a EGP 2.3 bn increase in fuel subsidy costs. The prices undergo a periodic review by a government committee.

The bigger question is how the government plans to pull the trigger on wider fuel subsidy cuts this year. With July being fuel subsidy cuts month, it is yet unclear how the government plans to move on cutting subsidies for the other fuel grades. Government officials who spoke to Bloomberg late last year said that the plan to extend the new mechanism to other grades would be announced in June, with an eye to implementing it in September. It is also unclear whether we would see this apply across all grades and other fuel sources (including liquid gas and diesel) at once or gradually.

Electricity prices are also rising by 15% on average, as the government makes further cuts to the subsidy budget. Check out the full price breakdown here.

What we do know is the overall budgeted size of the subsidy cuts this year. The FY 2019-2020 state budget, which was ratified over the weekend by President Abdel Fattah El Sisi, will see large fuel subsidies fall to EGP 52.96 bn, from EGP 89.75 bn last fiscal year.

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