Impact of fuel subsidies removal on foreign investments

CAIRO – 29 June 2017: The removal of fuel subsidies is an anticipated decision within the economic reforms plan adopted by the Egyptian state. That raises many inquiries and concerns among different sectors. Investors, who are the cornerstone for development and job creation in Egypt, wonder how such measure would impact their production costs, and thus sales and competitive advantage on the global scale.

The Egyptian government has requested a type of loan from the International Monetary Fund (IMF) called Extended Fund Facility (EFF) coupled with the Structural Adjustment Program (SAP). Within the program, IMF would secure a ‘financial buffer’ to the Egyptian state while addressing “longstanding structural programs.”

The tranches of the 12 billion loan will be delivered semi-annually till the completion of the state’s three year economic program. The loan will be repaid over a 10 year period.

The program includes decreasing energy subsidies to direct the spending to immediate needs, such as education and health. The whole aim of the programs is curbing the general government debt to 88 percent of GDP in 2018/2019 from 98 percent of GDP in 2015/2016.

The fuel subsidy reform was launched in 2014 as fuel subsidies benefitted the wealthy disproportionately, and contributed “to increased budget deficits and public debt, resulting in lower spending on key social expenditures such as health, education and infrastructure,” according to IMF.

Energy subsidies reached $14 billion in the fiscal year 2013/2014 eating up to one quarter of the budget, marking a 60 percent decrease from the fiscal year 2012/2013 when being $100 billion, according to the Economist.

The portions saved from the budget would enable the Egyptian state to repay its debts to oil companies, which stopped their drilling works and hydrocarbon exploration following Egypt’s inability to deliver the financial dues in the aftermath of January 25 Revolution.

In order to attract foreign investments, boost tourism, and decrease imports, the Central Bank of Egypt made a decision on November 3, 2016 to float the currency which makes a significant difference for foreign investors as the pound value against the U.S. dollar dropped from 8.87 to 18.

Hence, it is expected that pound floating would counterbalance the effect of removing fuel subsidies. That is in addition to the fact that competent labor and human resources are available in Egypt in abundance and in low costs.

What’s more is that Egypt would significantly decrease its oil imports after Zohr gas field starts production by the end of this year decreasing electricity production costs, and making Egypt self-efficient in terms of electricity.

The Zohr gas fields will start production through three phases. The first will be launched in a few months with an output of one billion cubic feet daily. After the all seven fields are complete, that amount will increase by 2019 to 2.7 billion cubic meters daily.

In June 2015, Siemens signed a series of contracts with the Egyptian government to build the world’s largest-ever gas-fired combined cycle power plants in addition to 12 wind parks with some 600 turbines, increasing Egypt’s electricity generation capacity by 45 percent and adding 16.4 gigawatts to the grid.

As part of the megaproject, Siemens—together with local partners Elsewedy Electric and Orascom Construction—are building on a turnkey basis three natural gas-fired combined cycle power plants, each with a capacity of 4.8 gigawatts. The three power plants, in Beni Suef, Borollos and the New Capital, will be powered by 24 Siemens H-Class gas turbines. The scope of supply also comprises 12 steam turbines, 36 generators, 24 heat recovery steam generators and three 500 kilovolts gas-insulated switchgear systems.

Egypt already targets to reach some 25 percent renewable sources in the energy mix by 2025. That mix includes nuclear energy generated by the prospective nuclear power plant in Dabaa over 60 years.