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The subsidy-crisis, 95 Octane and Egypt's public debt

The solution of taking the excess money of cutting fuel subsidies & channel it towards paying back Egypt’s public debt sounds great - but is it real?
It has word that Prime Minister Hisham Qandil’s government is planning to perform subsidy reforms, in order to fix Egypt’s economy. As the news-story goes back and forth about whether it will be implemented or not, Qandil mainly referred to the cut of energy subsidies, which account to a quarter of government spending.

It seems undeniable that especially petroleum prices will rise, since petroleum subsidies offered by the State Budget - Fiscal Year 2012/2013 will be decreased by 27%, and thus, it will not be possible to keep the fuel prices as low as they are now.

According to Petroleum Minister Osama Kamal, annual subsidies amount to 114 billion EGP, and – as he describes it – “only benefits the wealthier people” in Egypt. At first glance, it seems as though the official aim of the cuts is to channel subsidies to those who need it, and thus, rumor has it that the only type of petroleum whose subsidies will be cut is 95 Octane, which is used by 1% of the population.

Several sources bring up the solution of taking the excess money of cutting fuel subsidies and channel it towards paying back Egypt’s public debt.

Yet, one needs to look at the bigger picture and some solid facts: Currently, Egypt has a public debt of almost $210 billion, according to The Economist, which means that with a population of 87 million, each Egyptian citizen would have to pay $2400, in order to be “debt-free”. With an annual debt-increase of about 13%, this amount is skyrocketing upwards.

According to Kamal, the amount of subsidies currently channeled at 95 Octane is 40 million EGP, so hypothetically speaking, those will not be taken as a serious amount for paying back the country’s public debt. Unfortunately, even the government’s numbers and statements are inconsistent, since a few months back, Investment Minister Osama Salah told Ahram Gate that 95 Octane receives subsidies worth 300 million EGP.

The question is: If fuel subsidies will be cut, where will the overflow money really be heading? Economists and financiers beg to differ about the answer.

Wahid Haggag – Vice President of Arab International Bank – claims that it all depends on the conscience of the government, but seems optimistic. “The best option would be to pay back public debt before it gets out of hand,” he adds.

Looking at it from another angle, Amr ElGuezery - Chief Audit Executive at Audi Bank - believes that the government has no other choice than to use this money to start paying back the country’s debt. “Cutting subsidies from any sector – be it energy, education, health or other – will always negatively affect the poor, not the wealthy. What Egypt needs is not an increase in money flow inside the country, but fresh investments from abroad,” ElGuezery explains. Paying back public debt is an essential prosperity sign which could boost foreign investors’ confidence and motivate them to start and support businesses in Egypt.

Discussions have been flooding online and offline media about how good or bad the removal of subsidies on petroleum would be. Several accuse the government of raising the issue for propaganda purposes, while others find it essential to cut subsidies in order to move forward.

The problem remains: With public debt on the rise, it is essential to understand where budgetary surplus is going and what the real benefits of subsidiary cuts lie.