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Egypt expects to up energy subsidies, maintain food subsidies

CAIRO: Atef Malash, head of the finance ministry's state budget sector, announced that the ministry has ruled out requesting an additional LE 4.5-7 billion for fiscal year 2010/11 to meet food price increases, according to local news reports.

Al-Masry Al-Youm newspaper cited Malash as saying that the General Authority for Supply Commodities has sufficient funding and he sees no reason to require additional funds to be approved by parliament.

Last week, Trade Minister Rachid Mohamed Rachid told Reuters that Egypt may need the additional funds for the current fiscal year.

In its daily note, investment bank Beltone Financial said, "We had previously indicated that additional fiscal outlays as a result of a hike in global food prices are unlikely to have a significant impact on the overall budget deficit because of the relatively smaller share of food subsidies of total fiscal expenditure.

According to Beltone, food subsidies amount to around 4 percent of total spending, with wheat's share at 3 percent, compared to energy subsidies, which represents more than 15 percent of total government spending and around 65 percent of total subsidies.

The note added that the impact of "additional fiscal outlays is likely to be diluted by the more notable improvements occurring on the revenue side of the budget as a result of the ongoing enhancement in the administration, collection and automation of government receipts."

According to Jennifer Bremer, chair of the Public Policy and Administration Department at the American University of Cairo, the Ministry of Finance should have agreed to Rachid's suggestion.

"They may as well increase the provisions for the subsidies now because food prices are expected to rise, not only due to rising oil prices but because of more consumption around the world and recent flooding in wheat sources like Pakistan and Australia," said Bremer.

"Its good budgeting practices to put something on reserve," she added.

Bremer, citing a recent UN Food and Agriculture Organization report, pointed out that world food prices had risen to 2008 levels in September 2010 and are expected to rise even further in the current period.

She said that more funds for food subsidies should be raised by reducing energy subsidy spending. But talk about reductions in government energy subsidies which has come up over the past year has evaporated on now only appear to be increasing as world oil prices rise.

Abdulla Ghorab, CEO of the Egyptian General Petroleum Corporation (EGPC), said that Egypt's energy subsidy is expected to reach LE 86.8 billion for fiscal 2011/12 following a meeting with Minister of Petroleum, Sameh Fahmy earlier this week, according to the state-run Al-Ahram daily.

Egypt's output of crude oil is set to rise to around 720,000 barrels/day in fiscal year 2010/11 compared to 686,700 barrels/day last year, attracting $2.5 billion in foreign investment.

Beltone said that the preliminary estimate of fiscal year 2011/12 energy subsidy is in line with their forecast of LE 89 billion.

According to Beltone, the government spent LE 63 billion on petroleum subsidies during fiscal year 2009/2010, 40 percent of which went to diesel and 22 percent to butane, and this figure is expected to rise to LE 67.7 billion by the end of the current fiscal year.

Bremer explained that the government is just raising the energy subsidy spending as fuel prices rise. "If Egypt is going to continue subsidizing this way, it is eventually going to become really expensive," she said.

"It is true that the Ministry of Finance has done a good job bringing down the budget deficit, but the deficit remains large and ties up a lot of domestic saving in banks because financing the deficit requires borrowing from private banks, crowding out private sector credit," she said.

This is one of the main problems slowing down the economy with bank's preferring low risk government bonds to high risk private sector funding, she added.

Bremer called for the phase out of the energy subsidies pointing out that the subsidies mainly target the richest portion of the population which have cars and use the most energy.

"It makes more sense to maintain transfers to public transport systems or better targeted food subsidies instead of the untargeted energy subsidies. From the economic perspective it doesn't make sense and it is very regressive but it is understandable from the political side," she said.

Bremer said that this may be due to the fact that this is a presidential election year.

© Daily News Egypt 2011