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Thursday, 23 April 2020

Egypt nearly halves fuel subsidy spending in 2020-2021 budget

FinMin nearly halves projected fuel subsidy spending in 2020-2021 budget: The Finance Ministry is allocating EGP 28.1 bn to subsidies for petroleum products in FY2020-2021, down by nearly half from EGP 52.9 bn in FY2019-2020 forecasts, according to figures obtained by Masrawy. Prior subsidy cuts, the collapse in global oil prices, and price hikes for electricity companies have given the government room to cut fuel subsidies while reducing energy prices for manufacturers to help them weather the covid-19 storm, officials we’ve spoken with tell us.

Factor #1- Lower global prices automatically trim our oil spending: The new draft budget sets the average crude price at USD 61 / bbl, USD 7 lower than the price used in last year’s forecasts. This means that next fiscal year’s predictions will naturally be over USD 20 bn less on an annual basis since, according to ministry calculations, each USD 1 decrease in the price of oil leads to savings of between EGP 3-4 bn in fuel subsidy spending.

Factor #2- Fewer fuel products today receive subsidies: Subsidies on most fuel products were lifted last summer, raising their prices by up to 30%. An automatic fuel pricing mechanism that allows prices to move in tandem with global indices was also rolled out around the same time, and has seen two cuts in fuel prices since then — one this month and another last October. Those cuts have offset the original hike by nearly 50%, but was not enough to cause subsidy spending to rebound, another official said.

Lowering energy prices for factories didn’t add to the subsidies bill: This move, which saw the government respond to demands from industry late last year to slash gas prices for certain types of factories with expectations to do more, was offset by a parallel move to raise the price at which electricity plants receive natural gas. Although most electricity providers are owned by the state, they operate independently and so the cost of subsidies was transferred from the state’s budget to their own.

Overall, the government now needs to allocate much less in budget forecasts for fuel subsidies. In fact, forecasts for the ongoing fiscal year turned out much less than what was originally budgeted. The government ended up spending only EGP 9.88 bn in the first half despite expecting to dole out five times this amount throughout the year.

The government also still has in place a fuel hedging mechanism that it had resorted to several times in recent years, says Finance Ministry spokesperson Sara Eid, who notes that hedging will remain an important tool next fiscal year. This means that if prices don’t recover from their current crash, state coffers could pocket more savings than currently expected.

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