Egypt's prime minister seeks to justify fuel subsidy cuts

CAIRO Sat Jul 5, 2014 11:42am EDT

Egypt's Prime Minister Ibrahim Mahlab talks during a news conference at the presidential palace in Cairo, March 2, 2014. REUTERS/Al Youm Al Saabi Newspaper/Files

Egypt's Prime Minister Ibrahim Mahlab talks during a news conference at the presidential palace in Cairo, March 2, 2014.

Credit: Reuters/Al Youm Al Saabi Newspaper/Files

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CAIRO (Reuters) - Egypt's prime minister has sought to justify politically sensitive subsidy cuts on fuel and natural gas which took effect on Saturday, saying they were a necessary part of fixing an economy hammered by three years of turmoil.

Egypt had overnight on Friday slashed its subsidies for car fuel and natural gas, increasing their prices by more than 70 percent.

The move prompted scattered protests, with several minibus drivers for instance protesting in the cities of Suez and Ismailia and demanding a rise in fares to compensate for increased fuel costs. Police fired tear gas to disperse them.

However the move - taken during the Islamic holy month of Ramadan, when inflation is usually high due to increased food consumption - showed the government's determination to reduce the subsidies which eat up to a fifth of its annual budget.

"The decisions were taken after delicate studies," Prime Minister Ibrahim Mehleb said at a press conference on Saturday. "How can I achieve social justice while I am subsidizing for the rich on the expense of the poor?

“We are at war, we are fighting poverty and ignorance,” Mehleb said, adding that money saved from the subsidy cuts would go into the education and health sectors.

Mehleb's cabinet was appointed last month by newly elected President Abdel Fattah al-Sisi, who also issued a 10 percent tax on stock market gains and increased the price of electricity.

The economic austerity measures are part of Egypt's attempts to reduce its deficit to 10 percent of gross domestic product in the next fiscal year, from an expected shortfall of 12 percent in 2013/14.

Such efforts, particularly those applying to basic items such as fuel, could trigger a backlash from many of Egypt’s 86 million people, of whom half are poor and illiterate.

But some analysts welcomed the subsidy reductions.

"It's a very positive first step and clear statement of intent. These moves have been talked about for a decade," said Simon Williams, Middle East chief economist at HSBC.

"They won't resolve the budget imbalances on their own, but it's encouraging to see a new regime finally putting them into practice," Williams added.

Some car drivers and users of public transportation in Cairo complained about the rise in fuel prices and many gas stations were deserted. "This is unfair, already the prices of everything is increasing, so why does the government do that and increase fuel prices now?" said Ibrahim Ali, a public sector employee and owner of a car.

"The people won't like that, this could turn the people angry and against the state."($1 = 7.1501 Egyptian Pounds)

(Additional reporting by Yusri Mohamed in Ismailia; Writing by Yasmine Saleh; Editing by David Holmes)

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