Egypt to cut energy subsidies for heavy industry

CAIRO Sun Jan 1, 2012 10:26am EST

CAIRO Jan 1 (Reuters) - Egypt's government will increase natural gas and electricity prices paid by heavy industries by 33 percent this month to narrow its growing budget deficit, Al-Ahram newspaper reported on Sunday.

The higher rates would be applied to steel, cement and ceramics industries and are part of a plan to shave 20 billion Egyptian pounds ($3.3 billion) off the deficit, the newspaper said, quoting finance minister Mumtaz al-Saeed.

The uprising that unseated Hosni Mubarak in February has hammered Egypt's economy, and the government has been struggling to find ways to finance its deficit as interest rates on some treasury debt soar to above 15 percent.

Al-Ahram quoted the central bank governor last week as saying the deficit in the year that began on July 1 could be as high as 182 billion Egyptian pounds compared to 134 billion pounds the government had forecast in June.

This would work out to about 11 percent of gross domestic product.

Economists say cutting energy subsidies, which represent about 20 of total spending, is one of the few practical options the country has to cut the deficit.

Saeed was quoted as saying the government would try not to hurt lower income groups.

"The government will take care that the increases do not affect domestic fertiliser prices," he was quoted as saying, adding that subsidies on gasoline and other petroleum products would remain untouched, and no new taxes would be introduced.

Most of Egypt's fuel subsidies are for gasoline and butane cooking gas.

Saeed said the government planned to increase its revenue by combatting tax evasion, stimulating the domestic economy and attracting more investment, both local and foreign.

This included 3 billion pounds it hoped to collect by cracking down on the sale of smuggled tobacco and alcohol products.

The ruling military council would soon issue a decree to force domestic tobacco and alcohol product makers to put watermarks on their products to prevent the sale of untaxed products, Saeed said.

Al-Ahram quoted him as saying the government planned to renegotiate notes it had sold to the state pensions authority.

"It has agreed to adjust the interest rate on 201 billion pounds in outstanding notes that carry an interest rate of 8 percent at their maturity in five years," Saeed said.

The government had fallen 140 billion pounds behind in payments to the pensions authority and would repay this amount by "issuing notes with an appropriate interest rate," he added.

The government was also studying the possibility of transferring state assets to the pensions authority in place of debt.

A delegation from the International Monetary Fund is due to meet Egyptian representatives in early January to discuss the country's economic problems, but has said any funding would have to be based on benchmarks that had broad political support.

Egypt negotiated a $3 billion financing agreement with the IMF in June, only for the ruling military council to reject the agreement weeks later. ($1 = 6.0307 Egyptian pounds) (Reporting by Patrick Werr; Editing by Ruth Pitchford)