Presentation by Omneya Ramadan at the 7th annual meeting of the MENA Senior Budget Officials held on 10-11 December 2014. Find more information at http://www.oecd.org/gov/budgeting

1. Subsidy Reform:
Towards a New Economic Trajectory
Ministry of Finance
December 2014

2. 2
Outline
I.Introduction
II.Background
III.The Vision Behind Reform
Subsidy reform: Serving overall economic policy goals
IV.Sustaining the Reform Momentum
Moving from Vicious to Virtuous Cycle
Policy Options
V.Policy Lessons

3. 3
I. Introduction
For more than a decade, subsidy reform has been a top priority on the economic agenda of successive governments. However, moving forward with implementation has usually been fraught with political risks and fear of popular backlash.

4. 4
II. Background
Although the Jan 25 revolution heightened economic risks associated with elevated budget deficit and government debt levels, the accompanying political instability made the decision to adjust energy prices increasingly challenging : Vicious cycle.
Significant decline in economic growth
Notable jump in unemployment
9.4
9.0
11.8
12.6
13.2
2008/2009
2009/2010
2010/2011
2011/2012
2012/2013
Unemployment rate (%)
4.7
5.1
1.8
2.2
2.1
2.2
2008/2009
2009/2010
2010/2011
2011/2012
2012/2013
2013/2014
Real GDP Growth rate (%)
Source: Ministry of Planning (MoP)
Source: Central Agency for Public Mobilization and Statistics (CAPMAS)

5. 5
II. Background
During the three fiscal years leading to June 2014, the budget deficit has been persistently in the low double digit, whereas the total subsidy bill peaked to reach 9.4 percent of GDP, of which more than two thirds were allocated to inefficient oil subsidy
High and growing budget deficit
72
98
134
167
240
255
6.9
8.1
9.8
10.6
13.7
12.8
0
50
100
150
200
250
300
0
2
4
6
8
10
12
14
16
2008/2009
2009/2010
2010/2011
2011/2012
2012/2013
2013/2014
(%)
Overall Fiscal Deficit (EGP Billion, RHS)
Overall Fiscal Deficit(% of GDP, LHS)
94
94
111
135
171
188
179
9.0
7.8
8.1
8.6
9.7
9.4
7.7
0
2
4
6
8
10
12
0
20
40
60
80
100
120
140
160
180
200
08/09
09/10
10/11
11/12
12/13
13/14
14/15
Budget
In LE Billion
As % of GDP
High and growing subsidy bill
Source: Ministry of Finance (MoF)
Source: Ministry of Finance (MoF)

6. 6
Meanwhile, Egypt was undergoing a critical transition stage, ending by the adoption and implementation of a well-defined political roadmap.
Milestone
Due date
Action
•First draft of the constitution prepared by 10-person expert committee
August 2013
•Draft constitution prepared by 50-person expert committee representing all segments of society
December 2013
•Referendum on the constitution
January 2014
•Presidential Elections
June 2014
•Parliamentary Elections
March- April 2015
Still to come
II. Background

7. 7
Finally the return to political stability with the ratification of the new constitution and the election of a new president several factors come together to make the long overdue subsidy reform possible:
A combination of a strong political will, popular consensus about the high cost of subsidy, and a candid political outreach to the public and the business community.
II. Background

8. 8
“It is no secret that Egypt is currently undergoing extremely difficult economic ... Conditions …We will not avoid confrontation (of our problems) under any circumstances or over any political compromise. I have undertaken the mission and will accept nothing short of success.
Success however has a price, which we should all have to pay. You, the people have a fundamental role to play; by sensing and rising up to the responsibility.” (President El Sisi- June 30th, 2014)
Source: State Information Service
لا يخفى عليكم صعوبة الأوضاع الاقتصادية ... التي يمر بها الوطن... وإننا لن نفعل كما حدث في الماضي .. لن نتهرب من المواجهة «
تحت ذريعة الاعتبارات والمواءمات السياسية.. فلقد قبلت المهمة ولن أَرضى للنجاح بديلا بإذن الله. إلا أن هذا النجاح له ثمن يجب أن نقبل
جميعــاً سداده ... يتعين أن يكون دور )الدولة( مصحوباً بدور أساسي .. دورِكم أنتم.. دور وطني وفعال للمواطن المصري.. استشعاراً
الرئيس عبدالفتاح السيسي، - » للمسئولية وارتقاءً إلى مستواها 30 يونيو 2014
المصدر: الهيئة العامة للإستعلامات
II. Background

9. 9
On the 4th of July, a decision was taken to increase the prices of a wide range of energy products, with total savings equivalent to one third of the expected subsidy bill of FY 2014/2015.
Oil Price Adjustments (2014/2015)
Electricity Price Adjustment Plan (14/15-18/19)
34%
71%
47%
116%
43%
0%
20%
40%
60%
80%
100%
120%
140%
Energy
Intensive
Industries
Other
Industries
Low
Consumption
Households
High
Consumption
Households
Commercial
Use
%Change in Price
Electricity Average Price Increase over 5 Years
II. Background
Source: Ministry of Petroleum
Source: Ministry of Electricity and Renewable Energy
155%
114%
64%
42%
27%
0%
0%
20%
40%
60%
80%
100%
120%
140%
160%
180%
Diesel
Natural
Gas
Kerosene
Gasoline
Fuel Oil
LPG
% Change in Price
Petroleum Products Average Price Increase leading to savings of LE 46 bn in 14/15 (2% of GDP)

10. 10
III. The Vision Behind Reform
This decision to cut one-third of the energy subsidies at once was a bold step backed by unwavering political commitment and a comprehensive vision determined to put the economy back on track, while also setting the stage to ensure that Egypt’s future growth would be more inclusive
Energy price adjustments are geared towards reducing the budget deficit and helping to achieve fiscal consolidation and recalibrating the budget structure.
Together, they serve the following goals:
Promoting Economic Growth
Restoring Macroeconomic Stability
Enhancing Social Equity

11. 11
Reform has been placed within a clear medium term plan. This will create a more visible and stable macroeconomic environment, conducive for both domestic and foreign investment.
Gradually adjusting energy prices will provide the right signals to ensure the optimal allocation of resources and help shift investment decisions to more labor intensive industries.
Subsidy Reform: Serving Overall Economic Policy Goals

12. 12
Energy subsidies are well known to be regressive. The new system directly creates more equity, while bringing about important economic, employment and fiscal gains.
Social Spending vs. Subsidies
Inequality in Fuel Subsidies
80.1%
59.2%
38.1%
22.3%
19.0%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
Gasoline
Natural Gas
Electricity
LPG
Kerosene
Amount of Fuel Subsidies received by the Wealthiest 20% of Society
Expenditure on Health, 31.6
Expenditure on Education, 73.1
Electricity Subsidies, 8.6
Petroleum Subsidies, 120.0
0
20
40
60
80
100
120
140
160
180
LE Billion
Expenditure on Energy Subsidies (Electricity and Petroleum Materials) exceeds Expenditure on Health and Education in FY12/13
Source: Ministry of Finance (MoF)
Source: Central Agency for Public Mobilization and Statistics (CAPMAS)
Subsidy Reform: Serving Overall Economic Policy Goals

13. 13
Subsidy Reform: Serving Overall Economic Policy Goals
Simultaneously, the government is embarking on a wide-ranging social package.
●Wage Adjustments:
1.Second round of minimum wage increase (to reach 1200 EGP)
2.Increasing salaries for teachers and medical professionals
●Doubling the number of beneficiaries from the Social Solidarity Pensions (from 1.5 million to 3 million)
●Increasing the purchase price of wheat from farmers (EGP 420/bushel)
●Overhaul of ration card subsidies in favor of a better targeted food subsidy scheme
●National Housing Projects:
1.Launch of 1 million low-income housing units to be implemented over five years across various governorates (224 thousand units complete)
2.Launch of 150 thousand middle-income housing units to be implemented over four phases.
In the medium term, a constitutional mandate, will require the expansion of health, education and scientific research expenditure to be increased by 3 – 4 percentage points of GDP.

14. 14
III. Sustaining the Reform Momentum: Moving from Vicious to Virtuous Cycle
Fiscal Consolidation
Gradually Building Credibility
Creating Consensus for Reform
Further Implementation of the Reform Agenda
Better Macroeconomic Environment
Enhanced Delivery of social Services
More Inclusive, Job Creating Growth

15. 15
IV. Sustaining the Reform Momentum: Policy Options
a) Medium-term Strategy for Energy Sector Reform
Rolling out the smart card system (envisaged before the end of the fiscal year)
Revisiting the energy mix (Renewable energy, Wind/Solar)
Expanding production (new players: public, private, PPP)
Further price movements to reduce subsidy and rationalize consumption
b) Redirection of Spending to Social Programs
Improving the quality of expenditure on Health/Education/R&D
Expansion of existing cash transfer programs (Takafol and Tadamon Programs)

16. 16
14.0
16.0
17.3
17.9
17.6
13.7
12.8
10.4
8.5
6.8
5.9
4.7
9.9
9.3
8.7
7.9
0
5
10
15
20
25
2012/13
2013/14
2014/15
2015/16
2016/17
2017/18
2018/19
(%)
Overall Fiscal Deficit Projections (as % of GDP) over the Medium-term
Baseline Scenario
Reform Scenario (Excluding H, E and R&D)
Reform Scenario
 The government has deliberately opted for a gradual, balanced and sustainable path.
IV. Sustaining the Reform Momentum
Source: Ministry of Finance (MoF)

17. 17
V. Policy Lessons
There is no optimal time for reform: Social and political costs are inevitable - political will is indispensable.
Reform creates winners and losers. Losers of this reform will have a strong interest to impede it.
Good communication is crucial : Timely, frequent and frank outreach to the public will help dampen resistance and create apt environment for implementation.
A balanced socioeconomic approach is necessary for the sustainability of reform. Initially, the government could start with quick fixes or low hanging fruits. In the medium to long term, it is necessary to embark on more far-reaching and inclusive development programs.