Egypt's Gas Prices Jump 70%, And Economists Are Thrilled?

Egypt's new austerity measures are a headache for the country's people, but could be a blessing for the country's economy.
Posted at 11:26 PM, Jul 05, 2014

Egypt's fuel prices soared dramatically overnight thanks to fresh austerity measures, prompting serious backlash from the country's commuters. But economists say there's a silver lining to this cloud for the debt-stricken country.

Egypt's new president Abdel Fattah el-Sisi announced the country is slashing fuel subsidies as part of its 2014 budget. Egypt's government usually spends $24 billion subsidizing gasoline, diesel, and electricity for citizens. (Via Al Jazeera)

The new austerity measures have prompted an extreme markup of fuel prices, in some cases by as much as 78 percent. It's a price hike the country's citizens can hardly afford — over half of Egyptians live below the poverty line. (Via CNN)

One cab driver told The Wall Street Journal"The government doesn't care about us working people. ... Just look at the way they did this: without any notice and by a drastic fraction."

Another Egyptian complained to Bloomberg the new transportation costs would strain his family's budget. "I have to cut one of my family’s small expenditures. ... What do you suggest? Cut food spending and leave my kids to die of hunger, or get them out of schools to save the money? Really what am I going to do?​"

Slashing fuel subsidies has been a hugely unpopular move in Egypt, and it's raised fears that other government welfare measures could be next on the chopping block. Given the country's political instability, the move could prove to be a dangerous one for Sisi as well.

And yet a Forbes contributor literally cried "Hurrah!" when writing about the news. What gives?

Well, turns out fuel subsidies are something of a dirty word in financial circles. While the practice is popular in many Middle Eastern and North African countries as an easy welfare safety net, economists have long argued that subsidizing fuel is a waste of GDP that distorts the economy and creates all sorts of pollution and congestion problems. (Via The Economist, Freakonomics, The Epoch Times)

Eradicating fuel subsidies has become an important issue for the international community in recent years. The International Energy Agency estimates fuel subsidies cost the world around $500 billion each year.

And in a March 2014 report, the International Monetary Fund concluded "Energy subsidies do not provide effective support to the poor, and they weigh on public finances. They also create distortions that are harmful for the economy. ... [and] are highly inequitable as they mostly benefit upper income groups." To illustrate this last point, the IMF pointed out that 71 percent of Egypt's diesel subsidy benefits go to the top 20 percent of their economy — while the bottom 20 percent sees just 1 percent of those benefits.

Egypt's been facing pressure to cut its own subsidies for years now. Former Egyptian president Mohamed Morsi refused a $4.8 billion IMF loan after the agency demanded Morsi slash subsidies as part of the loan package. Morsi rejected that deal over fears that austerity measures would provoke public unrest.

But Egypt's economy continued to slide regardless, and Morsi was toppled in 2013. A writer for The Huffington Post claims "Morsi's crime when it came to Egypt's economy was not so much mismanagement as his refusal to administer austerity on Egypt's subsidy-dependent poor."

Sisi, it seems, is determined not to make the same mistake. The country's new president has been aggressively pushing for an end to the subsidies — even leading a bike rally to advocate sustainable transportation. (Via The Guardian)

Of course, a writer for Daily News Egypt points out subsidy cuts alone won't revive Egypt's struggling economy without investment in other areas.

"Most of us, Egyptians, understand the need to cut subsidies but we also believe that the government should not deal with this in isolation of other measures. ... Without giving the people any services in healthcare, education, security and a proper implementation of social justice, subsid[y] cuts are unacceptable."

The subsidy cuts come just one day after anti-government protesters took to the streets in a "day of rage" to commemorate the one-year anniversary of former president Morsi's ouster.