TEXT-Fitch: Egypt fuel subsidy reform is likely to to be gradual

Tue Oct 9, 2012 10:39am EDT

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Oct 9 - Reform of Egypt's expensive fuel subsidy is likely to be gradual
despite the government's recently repeated intention to address the problem,
says Fitch Ratings.

Fuel subsidies account for about 20% of government spending and 73% of all 
subsidies. Successful reform of these subsidies is the single-biggest reform the
government can make to improve Egypt's fiscal position or free up revenue to 
spend elsewhere. 

We believe significant cuts will be difficult to agree this year and may have to
await next year's budget, which starts in July. But the government may decide to
make smaller reductions before the end of the year in order to start the process
and signal its intent, especially in the context of IMF negotiations.

Cutting fuel subsidies has been on the Ministry of Finance wish list for years. 
However, political resolve to address the issue seems greater since the fall of 
the Mubarak regime. As early as June 2011 the IMF acknowledged agreement on the 
need to cut the highly inequitable and costly system of subsidies' but said this
would not start before a social safety net had been put in place.

The success the government has had with better targeting subsidies shows that it
is now possible to distribute them more effectively. Wider use of coupon or 
smart card systems could be a compromise to reduce the overall cost while 
limiting the social impact. This could reduce the chance of wide spread social 
unrest, as was seen in Nigeria earlier this year when leaders attempted to scrap
its fuel subsidy overnight. 

However, the subsidy's entrenchment means the government will find removing it 
quickly or entirely will be difficult, notwithstanding political desire and 
likely IMF pressure. Prime Minister Hisham Kandil acknowledged this in a recent 
Financial Times interview when he stated that the aim is to save EGP40bn 
(USD6.56bn) this financial year, but that the most important thing is to start. 

If the government does begin cutting the subsidy and publishes a timetable for 
its eventual removal - probably a minimum IMF demand - then we would expect 
funds from the IMF and other donor organisations to provide Egypt with breathing
space. 


The above article originally appeared as a post on the Fitch Wire credit market 
commentary page. The original article can be accessed at www.fitchratings.com. 
All opinions expressed are those of Fitch Ratings.
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