Steep energy prices in Egypt hit both companies and households

The significant increase of electricity prices throughout 2017, coupled with other economic reform measures, placed considerable strain on both individual Egyptians and businesses in the country. Households and firms alike are banking on this short-term pain leading to long-term gain in the form of new investments across industries.

PRICE HIKE: As highlighted in a 2017 report from the Egyptian Initiative for Personal Rights (EIPR), electricity costs have been steadily increasing in recent years, jumping by 160% since 2012.

This trend continued in 2017, with a July announcement from the Ministry of Electricity and Renewable Energy reporting electricity price rises of up to 42% for households, depending on consumption levels, to compensate for growing generation costs. Electricity tariffs for industrial and investment activities increased by 30-40%. The minister of electricity and renewable energy, Mohamed Shaker, estimated in local press that the cost of production of 1 KWh was LE0.62 ($0.04) before the November 2016 currency devaluation and jumped to LE0.91 ($0.06) after. This price hike was also seen as part of Egypt’s efforts to maintain the repayment terms of a three-year, $12bn IMF loan agreement.

MAINTAINING SUBSIDIES: To soften the blow of these price increases, the government also announced that electricity subsidies, originally scheduled to be phased out by the end of FY 2018/19, would be provided until FY 2021/22.

According to Shaker, electricity subsidies cost the government LE64bn ($4.2bn) during FY 2016/17, more than double the budgeted LE30bn ($2bn), due to higher importation costs for liquefied natural gas (LNG). Egypt’s reliance on natural gas to fuel its power plants has been a cause of uncertainty since 2014, when the country began importing LNG and became subject to global price fluctuations. The electricity price rises that took effect in August 2017 are expected to cut Egypt’s electricity subsidy spending to LE52.7bn ($3.5bn) in FY 2017/18 and then to LE43.4bn ($2.9bn) in FY 2018/19.

CONSUMERS: With the simultaneous increased costs of many goods and services, consumers have felt the pinch. Despite the fact that the new tariffs were established based on consumption brackets, the move has nonetheless placed particular strain on lower-income families. As estimated by the EIPR, low-income families have faced average bill increases of 167%, forcing them to dedicate 2.2% of their household income to electricity. High summer temperatures meant that electricity consumption did not decline significantly, despite the price rises.

PAY-OFF: Egypt’s government hopes that undergoing this challenge will lead to positive outcomes for consumers, and the signs are promising so far.

In a September 2017 press conference on the status of Egypt’s economic reforms, the IMF announced, “On the expenditure side, wage restraint and reforms of energy subsidies have helped alter the path of budget expenditures and that contributes importantly to arresting the rise in public debt ... when public debt declines, interest payments decline. When interest payments decline, it opens up more space to spend on social programmes and also to spend on increasing human capital in the labour force, and increasing required investment in infrastructure, which will ultimately lead to more jobs and more growth and more income.” Egypt’s GDP growth rose 4.9% in the fourth quarter of FY 2016/17, from 4.3% over the previous three months.

While electricity costs have been difficult for households and businesses in the immediate term, with the stabilisation of inflation and the imminent capacity to fuel power plants with domestic gas, prices should not remain at such high levels indefinitely. The savings gained should help Egypt to achieve its reform goals and rebuild the economy.