Rhein on Energy and Climate

Egypt is again in urgent need of reform.

It has failed to replace the Mubarak regime by legitimate governance; and its economy, that had shown a remarkable performance during much of the first decade is out of step, with high unemployment, rising inflation, high budget deficits and depreciation of its currency.

It had no choice but to call upon the IMF for assistance; and the two parties are in the process of negotiating a loan package in the order of $ 4.8, hopefully to be agreed before the end of April.

As the EU has witnessed in the past three years, the IMF does not lend for free, its loans subject to policy reforms undertaken by the borrowing country to secure long-term economic sustainability.

Even a quick look at the Egyptian macro-economic data shows that the economy is far from sustainable:

  • During the last 10 years budget deficits have never descended below seven per cent of GDP.
  • The public debt ratio to GDP now exceeds 80 per cent.
  • Interest payment on public debt absorb more than one fifth of total expenditures, depriving the government from investing in priority fields like education and infrastructure.
  • Subsidy payments have become the single most important expenditure, accounting for one third of total government spending.
  • Two thirds of the subsidies are being paid to keep fuel products – diesel, natural gas, gasoline – far below cost prices.

It is therefore crucial for Egypt to overcome the vicious circle of budget deficits and rising public debt and to end the addiction to low energy prices, which make Egypt – together with Russia, Ukraine and Kazakhstan – one of the most energy-intensive economies on earth, hampering the development of labour- intensive manufacturing.

Short of competitive manufactured products, Egypt exports gas to neighbouring countries, though its reserves are tiny compared to Qatar, Iran or Iraq and its needs for a population of 82 million. At the same time business and households suffer from regular power cuts, due to wasteful use of cheap electricity and lack of investment in power generation and transmission.

The government is aware of the non-sustainability of the situation. But at present it seems more afraid of the Street than of complying with painful demands from the IMF, especially with parliamentary elections due to be held in the coming months.

The IMF has most recently blamed its member countries for granting $ 500 billion subsidies on fossil fuels and failing to tax them by $ 1.400 billion for aggravating climate change It would therefore be logical if it were to insist that Egypt radically reduces its energy subsidies.

This would be the more legitimate as most of these subsidies benefit the better-off and not the poor.

The EU should support a strict IMF approach by fixing a parallel conditionality for its assistance programme to Egypt.

Brussels 10.04.2013 Eberhard Rhein

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