News Analysis: Oil price hikes pressure Egypt's budget amid tight reform program

Source: Xinhua| 2018-10-14 04:08:25|Editor: ZX
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by Mahmoud Fouly, Abdel-Maguid Kamal

CAIRO, Oct. 13 (Xinhua) -- As Egypt is going through a strict economic reform program which was started in late 2016 to contain a budget deficit and economic slowdown, the recent skyrocketing oil prices add further burdens on the country's state budget for the ongoing 2018/2019 fiscal year.

Egypt's fiscal year starts in early July and ends in late June.

"The oil price per barrel rose to range between 80 and 85 U.S. dollars after we used to buy it at about 40 dollars seven or eight months ago," Egyptian President Abdel-Fattah al-Sisi told a military seminar on Thursday, noting that it affects the country's budget that struggles to provide fuel for local consumption and operation of power stations.

The price of Brent crude oil recorded 80.43 dollars per barrel as of Saturday.

Egypt has recently announced self-sufficiency of liquefied gas and decided to stop importing it from abroad thanks to the increasing production of its giant Zohr gas field, which was discovered in 2015.

Still, the rising prices of oil that Egypt imports perplex the current budget whose preparation was based on old prices.

"The state budget was prepared according to prices ranging between 65 and 67 dollars per barrel, so when the price exceeds 80 dollars, it imposes vast burdens on the budget," said Walid Gaballah, expert in economic and financial legislation.

"It will increase the country's spending and require new finance resources to maintain or reduce the budget deficit that stood at 9.8 percent of GDP in the 2017/2018 FY," the expert told Xinhua, noting that the government is unlikely to impose further taxes to make up for the deficit as "the market cannot take any more taxes."

However, Gaballah expects Egypt's self-sufficiency of gas, which saves the country about 2 billion dollars, to help finance the deficit caused by the rise of oil prices.

Egypt's austerity-based reform program, including subsidy cuts and tax hikes, is supported by a 12-billion-dollar loan from the International Monetary Fund, two thirds of which have already been delivered.

In mid-June, Egypt increased fuel prices by up to 66.6 percent to meet the IMF deal terms and continue the implementation of the country's reform, while the government plans to completely remove subsidies on all oil products, excluding butane gas, by the end of June 2019.

"As long as we're handcuffed by subsidies in everything in Egypt, the country will not be able to achieve its desired goals," President Sisi said on Thursday.

Fuel subsidies alone, without energy, cost Egypt 110.15 billion Egyptian pounds (about 6.14 billion dollars) in the 2017/2018 budget and they have been reduced to 89.1 billion pounds (about 5 billion dollars) in the 2018/2019 budget based on previous oil prices, according to the country's Finance Minister Mohamed Maait.

Salah Hafez, oil expert and former deputy chief of Egypt's General Petroleum Authority, said that the 13-dollar difference per barrel between old and new prices is a trouble that will further the state budget deficit.

He attributed the oil price hikes to "political reasons" that affect the supply and demand worldwide, such as the U.S. sanctions imposed on Iran, which is a member of the Organization of Petroleum Exporting Countries (OPEC).

"Iran as an OPEC member produces 4 million barrels per day; it uses 1 million barrels and exports the other 3 million. So, when Iran stops production, fuel and energy prices undoubtedly rise and affect several economies around the world including Egypt's," Hafez told Xinhua.

He added that conflicts in some OPEC members like Iraq and Libya also influence the supply and demand as well as the oil prices.

Egypt has an ambitious plan to reduce budget deficit in the the 2018/2019 FY to 8.4 percent of GDP compared with 9.8 percent in the previous year, yet the unexpected surge of oil prices has risen as a major challenge for the government's plans.