Pump Up Power Up

July 16, 2017

 

Over the weekend, I woke up nice and early in anticipation of a much needed day trip away from the maddening crowd. My first stop was at a gas station to fill up before getting on with my day.

 

As one tends to do when at a gas station, I starred lazily at the pump as the price of my purchase went up and up and up. Slowly but surely, I found myself slipping into a dilemma – my brain knows I should be grateful because the government is footing the bill for most the petrol I will be using on this trip, but my gut is having a much less rational response to paying over EGP 300 filling up on gas.

 

Earlier this month, in their continued effort to reduce the cost of subsidies, the government announced hikes to the price of fuel as well as higher tariffs for electricity. The increases were substantial and puts further pressure on a population coming to grips with hyperinflation above 30% since the deep devaluation of the Egyptian pound 9 months ago.

 

But they were also inevitable and long overdue. The government have indicated for some time now that they want to remove all energy subsidies over the next few years and, like the IMF and the wider business community, see this as critical to the economic reform program. If you agree, then you should commend the government on sticking to their guns and continuing with what is an essential yet highly unpopular policy.

 

Of course, commending a policy and liking it are two very different things.

 

Most of the middle class are finding it difficult to adapt to the rising cost of living and every household has to make tough spending decisions. Between rising fuel costs, electricity, tuition, transport and everything else, the Egyptian middle class are quietly seething as they try to balance the books and get used to their new downgraded lifestyle.

 

For the poor, this is not a matter of lifestyle, but survival. They have to deal with a double whammy where the cost of making it through the day is getting higher and those who they would normally turn to for help can offer little solace as they themselves have to tighten the purse strings.

 

Even if you are optimistic about the future, the cure is proving to be bitter indeed and the situation today is tough for the vast majority of Egyptians.

 

There are, however, a few immediate things the government can do to try to alleviate the situation. First and foremost, they need to improve communication with the masses. Instead of everybody responding in shock and horror every July as energy prices are “unexpectedly” increased, the government should indicate a clear timetable for the full removal of subsidies and to demonstrate how prices could look like over the coming few years.

 

I suspect most Egyptians aren’t aware that the price of unsubsidized and untaxed petrol is around USD 1 per liter. Based on today’s FX rate, that means around EGP 18 per liter. With this knowledge in hand, suddenly EGP 5 per liter for 92 octane shouldn’t feel so bad.

 

More importantly, however, if I were told that next year it would be EGP 10 per liter and maybe even EGP 15 per liter the year after that, any rational person would start making drastic changes to plan for the future. For starters, most Egyptians will need to seriously reconsider their mode of transport. Car pooling, more efficient use of ride sharing and switching to public transport will become the norm.

 

I know this might come as a shock to some of you, but in Europe, where petrol is taxed as opposed to subsidized, unless you live in the suburbs or in rural areas, having a car is seen as a luxury. The faster you get used to this notion the better.

 

The burden should not, however, be born entirely by consumers and the government needs to invest a lot of the savings from the reduction of energy subsidies into public transport. To be fair, some decent progress is being made on this front with improvement of the quality of buses and more investment in the underground, trains and trams.

 

The government still needs to do a lot more and a lot faster so that the results are visible, as they have done with improved roads throughout the country. Again, there is little or no cohesive communication strategy to demonstrate the work being done on this front to the public.

 

In addition, the government needs to quickly come to the realization that ride sharing technology is part of the solution, not the problem – they should be supporting ride sharing, not opposing it. In my humble opinion, there will be little tolerance for any missteps on this front at a time when people are struggling to economize on transport.

 

As for electricity, it is more difficult to predict how prices will go as this depends on the energy mix, the level of investment in power infrastructure over the next few years to improve efficiency of transmission and distribution and, last but not least, the cost of fuel.

 

If we look at the US in 2016, on average, household consumers paid around USD 0.12 per kwh, which is around EGP 2.20 per kwh. That is significantly higher than the current highest tariff in Egypt, which is EGP 1.35 per kwh for the 1,000+ KW consumption bracket.

 

Assuming electricity prices in Egypt will converge to a price closer to liberalized electricity markets in the US and the EU, again households will need to start to plan ahead. Apart from more sensible energy consumption and some home improvements to increase energy efficiency, consumers should start to look at investing in residential solar solutions to either meet their consumption or to sell to the government to offset the cost of electricity.

 

Again, the government could be doing a lot more on this front, starting with relaunching the residential feed in tariff program in the right way and to work with the central bank to offer a promotional financing solution so that the high investment cost can be paid off over a long period of time. Carrot and stick initiatives should also be used with landlords and real estate developers to ensure they construct energy efficient homes built for the future.

 

Putting the energy subsidies to one side for the moment, there is another part of the equation that is not sufficiently discussed. While the government, the IMF and the business community will, for the most part, agree that energy subsidies are a waste of money, there is less clarity on what the savings will be used for.

 

As I recently discussed, putting that money into bankers’ pockets via increased interest rates is absolutely the wrong way to go. The government needs to demonstrate and communicate that they will be using the money wisely to invest in our future. We have already touched on some of the key areas, such as public transport and logistics.

 

But that is not enough. In order for people to truly buy into the economic reform program, they need assurances that the savings will be invested in the future, with better schools, better hospitals and better quality of life. Building that trust with a nation that is traditionally skeptical of the government won’t be easy. But it must be done.

 

Mansplaining will not get us where we need to go and will only inflame the situation further. The Egyptian people need to be convinced that the gain will be worth the pain.

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