Policy Brief: Energy Subsidies
Breakdown, potential streamlining measures, and likely implications
Published: February 2014
- 13 Pages
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The publication presents a recent and comprehensive analysis encompassing the historical development of fuel subsidies, their breakdown by product, the relative subsidization of each product compared to cost recovery levels, different scenarios for streamlining measures at the policy agenda, and last but not least, the main economic and social implications of possible streamlining measures.
The Energy Subsidies as a topic of choice comes after it has lately been of much concern to the government, business community and the public at large. The macroeconomic imbalances created by fuel subsidies, which make up an average of 20% of total government spending, stimulated policy makers to consider restructuring and streamlining spending on subsidized fuel products. The energy subsidies increasing bill during the past three years accompanied with a severe fall in dollar generating economic activities led to accumulation of arrears (estimated to be around USD 6.5 billion) due to petroleum companies operating in Egypt, which in turn could not proceed with their investment plans in the past years. Accordingly, the net Foreign Direct Investment (FDI) in the Oil and Gas sector recorded a net outflow of USD 100 million and USD 200 million for the FY2010/11 and 2011/12, respectively. Mild improvement occurred in the FY2012/13 with a net FDI inflow of USD 300 million. These figures come from a five years average net FDI inflows of USD 3.6 billion prior to FY2010/11 Â Additionally, the arrears had its negative implications on the real output of oil and gas companies (extractive industries) operating in Egypt with the real output declining by -2.7% during the FY2012/13.
Despite the previous, the government approach is envisaged to streamline/restructure fuel subsidies conservatively due to the potential spillovers to the cost of production and consumer prices, as well as the social implications pertaining to the accessibility and affordability of fuel products to the poorer segments of the population.
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