The document summarizes the results of a study that used an economic model to estimate the impacts of Egypt's economic reforms, including energy subsidy reform and currency devaluation, on different economic sectors and households from 2014-2025. It finds that the reforms negatively impact the macroeconomy in the short-run but accelerate growth long-run. Sectors are affected differently, with mining, construction and some services benefiting most. Household consumption declines, especially for rural households, but social protection programs help mitigate the impacts on the poor. The reforms are estimated to benefit the overall economy if accompanied by policies to improve labor mobility, business climate and scale up social protection.

1. Phasing Out Energy Subsidies as Part of Egypt’s Economic Reform Program
Expected Impacts and Policy Implications
Mariam Raouf*, Askar Mukashov+, Manfred Wiebelt+, Clemens Breisinger*
*International Food Policy Research Institute
+ Kiel Institute for the World Economy
This study was funded by the World Bank

2. Country context
• In order to address long-standing economic challenges, in 2016 the
Government of Egypt (GOE) put in place a major economic reform
program to restore macroeconomic stability and to promote
inclusive growth
• The economic reform program included the floatation of the
currency, energy subsidy reform (starting in 2014) and the
introduction of a value added tax
• Egypt also expanded its social safety net, incl. the introduction of a
national cash transfer program (in 2015) and the reform/expansion
of food subsidies

3. What does the literature tell us?
Expected impacts of energy subsidy cuts:
• Positively affect the government budget, trade balance (for net energy importers),
energy use efficiency, and investments in alternative energies
• Negatively affect economic sectors (through higher input costs) and households in
the short-run (through higher prices, labor market effects)
Expected impacts of devaluation:
• Positively affects the balance of payments, competitiveness of domestic
industries and services (incl. tourism)
• Negatively affect economic sectors (through higher import costs) and
households in the short-run (through higher prices for imported goods, labor
market effects)
But, these impacts are country specific and depend on, among others:
• Macro: Import and export intensities
• Sector: Energy intensities
• Household: consumption and employment patterns
• Policies (public expenditure patterns, labor markets, etc.)

4. Key questions and how we address them
• Key questions addressed in this presentation:
• What are the estimated impacts of energy subsidy reform and the
devaluation in Egypt on economic sectors and different types of households?
• How do these estimated impacts vary under different assumptions,
especially regarding short/long term and labor market flexibility
• To what extend did the expansion of the social safety net help to mitigate
some of the expected negative welfare effects on households?
• How can the ongoing reform be complemented to be even more effective?
• Methodology:
• Literature review
• Key database is a 2012/13 SAM estimated by CAPMAS
• A dynamic computable general equilibrium model (DCGE) for Egypt,
estimating total impact from 2014-2025

5. Structure of the presentation
1. Flowchart with key transmission channels
2. CGE models: what they can and cannot do
3. Scenarios
4. Selected results
5. Conclusions

6. Flowchart of CGE model
Firms
Product
Markets
Factor
Markets
Rest of the
World
Households Government Saving/INV
Factor
Costs
Wages
Demand for
Intermediate
Inputs
Sales
Revenues
Private
Consumption
Taxes
Domestic Private Savings
Government
Recurrent
Expenditure
Gov. Savings
Investment
Expenditure
Import Payments
Export Receipts Foreign Savings
Domestic Demand for Final
Goods
Transfers

7. From flowchart to Egypt DCGE model: Key data and
assumptions
• Based on 2012/13 SAM of CAPMAS
• Trade-focused dynamic computable general equilibrium model
(DCGE) model à la Dervis et al. (1982) with product differentiation
on supply and demand side (IFPRI: Diao, Thurlow 2013).
• Scenarios have been discussed and implemented during three CGE
training courses with the Ministry of Planning, Monitoring and
Administrative Reform
• We reflect energy price changes, devaluation and changes in social
protection as observed during 2014-2017 in the model
• From 2018 to 2022 we assume that all energy prices adjust to world
market prices (=phase out of all subsidies), social protection
measures remain constant

8. What can CGE models do and what not?
• CGE models do not:
• Serve as a projection tool for predicting macroeconomic indicators or
economic growth
• Replicate exactly the observed development path of a country (macro
indicators, GDP by sector, etc.) since such indicators are determined by a mix
of thousands of interdependent policies, internal and external events
• Include financial markets
• CGE models can:
• Capture direct and indirect economic effects
• Link macroeconomy with households
• Isolate and estimate the impacts of specific policies or policy packages such
as energy subsidy reform, i.e. compare a situation with and without a specific
set of policies or policy packages
As a CGE model is best compared to a virtual laboratory of the
(Egyptian) economy to test the likely impact of policies under
different assumptions and time horizons.

9. From flowchart to DCGE: Key data and assumptions
Results from all simulations are presented in the paper
Savings - Investment
closures
a) Energy subsidy savings used to finance
investment exclusively
b) Energy subsidy savings finance both
public investment and consumption
Scenarios
i) Short-term time
horizon (low labor
mobility)
ii) Short and long-
term time horizons
(high labor mobility)
i) Short-term time
horizon (low labor
mobility)
ii) Short and long-
term time horizons
(high labor mobility)
Base (reference) Baseline scenario
(BASE)
Baseline scenario
(BASE2)
Baseline scenario
(BASEa)
Baseline scenario
(BASE2a)
Energy subsidy reform Energy subsidy reform
(ESR1)
Energy subsidy reform
(ESR21)
Energy subsidy reform
(ESR1a)
Energy subsidy reform
(ESR21a)
Energy subsidy and
devaluation reform
Energy subsidy and
devaluation reform
(ESR2)
Energy subsidy and
devaluation reform
(ESR22)
Energy subsidy and
devaluation reform
(ESR2a)
Energy subsidy and
devaluation reform
(ESR22a)
Energy subsidy,
devaluation, and food
subsidy reform
Energy, food subsidy,
and devaluation
reform (ESR3)
Energy, food subsidy,
and devaluation
reform (ESR23)
Energy, food subsidy,
and devaluation
reform (ESR3a)
Energy, food subsidy,
and devaluation
reform (ESR23a)
Energy subsidy,
devaluation, food
subsidy, and cash
transfer reform
Energy, food subsidy,
devaluation, and cash
transfer reform (ESR4)
Energy, food subsidy,
devaluation, and cash
transfer reform
(ESR24)
Energy, food subsidy,
devaluation, and cash
transfer reform
(ESR4a)
Energy, food subsidy,
devaluation, and cash
transfer reform
(ESR24a)

10. Estimated (macro) economic impacts
The increase in energy prices and devaluation negatively impacts the macroeconomy in
the short-run, but accelerates economic growth in the longer run
• High labor mobility reduces the negative impacts and can turn negative impacts into
gains, even in the short term
• Higher energy prices lead to a redistribution from consumption to investment
• Exports increase and imports decrease, mainly driven by the impact of devaluation
Short-term (2014-17) Long-term (2014-25)
Low labor mobility High labor mobility High labor mobility
Absorption -3.0 -0.3 0.3
Private consumption -4.6 -2.6 -4.0
Fixed investment 2.6 3.9 25.0
Government consumption 0.9 10.9 0.0
Exports -1.1 1.0 3.5
Imports -3.0 -1.6 -3.3
GDP at market prices -2.6 0.4 2.0
Net indirect taxes -11.8 -10.4 -11.2
GDP at factor cost -2.9 0.0 1.6

11. Estimated sector-level results
Economic sectors are affected differently from energy subsidy reform and devaluation in
the short-term. In the longer-term, more economic sectors are expected to benefit.
• Mining and construction are the main sectors that benefit from reforms and higher
investments, especially in the short run and with more labor mobility.
• For other sectors, the direction of impacts depends mainly on the energy use intensity and
import/export orientation
• In the long run, aggregate agriculture, industry and service sectors benefit, but with
differences across sub-sectors
• Sub-sectors that tend to benefit most are: fishery, clothing, leather, wood, paper, chemicals,
hotels and restaurants as well as financial and business services.
Short-term (2014-17) Long-term (2014-25)
Low labor mobility High labor mobility High labor mobility
Agriculture -3.0 -0.5 1.5
Industry -2.3 -0.9 2.3
Mining 0.1 0.2 2.6
Manufacturing -5.3 -3.0 -4.4
Agro-processing -2.7 -1.2 -0.2
Other manufacturing -5.7 -3.2 -5.0
Utilities -6.4 -3.5 -7.5
Construction 1.4 2.7 21.5
Services -3.4 0.8 1.0

12. Estimated household-level impacts
Despite these overall gains and positive impacts on the economy, the impact on household
consumption in the short and longer-term is projected to be negative
• Income effect: Household welfare is negatively affected due to reduced income generation in the
private sector, especially for households working in energy and import dependent sectors.
Remittances (in non EGP) help households to cope with devaluation
• Consumption effect: Households that are more dependent on imports and energy intensive
goods tend to be hit harder
 Because of these income and consumption effects, rural households are more negatively
affected compared to urban households.
Short-term (2014-17) Long-term (2014-25)
Low labor mobility
High labor
mobility
High labor mobility
All households -5.3 -3.3 -7.1
Rural households -5.6 -3.9 -10.1
Poor households -4.0 -2.7 -8.5
Med. inc. households -4.8 -3.3 -9.7
High inc. households -7.5 -5.3 -11.6
Urban households -4.9 -2.6 -3.9
Poor households -7.6 -5.6 -13.2
Med. inc. households -4.3 -2.3 -3.9
High inc. households -4.2 -1.6 0.1

13. Social protection results
The increase in food subsidies and the introduction of the cash transfer program helps
mitigate the negative impact on the poor
-2.0 -1.5 -1.0 -0.5 0.0
RuralpoorUrbanpoor
Without additional social prtection With social protection
• The social protection helped to mitigate the negative impacts on poor households,
especially in rural areas
• The larger impact on rural poor is because the cash transfers were focusing on rural
areas during 2014-2017.
Average annual change in household welfare during 2014-2017 (%)

14. Summary and recommendations
Policy
• Phasing out energy subsidies by 2022 is expected to benefit the economy
• However, there are several measures that would likely accelerate the
positive impacts of reform
• Further improve business climate
• Improve labor market flexibility, incl. through education
• Targeted social protection measures should be continued and scaled up
in parallel to phasing out energy subsidies to mitigate impacts on
households
Research
• Availability of data has substantially improved over the past years and
this trend should continue
• CGE models are one of several tools in an economist’s toolbox that can
help making evidence-based and informed decisions