Egypt is about to roll out a new system for selling petrol as it tries to rein its extremely costly energy subsidies.
Starting on June 15, Egyptians will not be able to buy petrol at subsidised prices without a free, special card that the government has been distributing at traffic administration offices.
Unfortunately, the system appears to be deeply flawed, to the point where the original mission of subsidy reform seems imperilled. The goal was to reduce the heavy burden on the budget and to create a more socially just system.
A state-owned company, e-finance, has been busy distributing the cards, which are based on magnetic-strip technology.
It said this week that the cards had reached all but a handful of Egypt’s governorates, with the last to be delivered by ext Wednesday. Tiny three-wheeled tuk-tuks and agricultural machinery will eventually get the cards as well.
The cards will not involve any rationing, however. Cardholders will be able to buy as much petrol as they want.
The government says the system is designed merely to collect information in the first year, but it will eventually improve its allocation of subsidies to the poor and prevent leakage to the black market.
A reform of Egypt’s subsidy system is long overdue. For years, the government has been spending more on energy subsidies than on education and health combined. In recent years the energy subsidies have taken up 20 per cent of all government spending.
That declined after president Abdel Fattah El Sisi increased energy prices shortly after taking office last June and international oil prices plummeted.
In the nine months to April, he subsidies – including petrol, diesel and electricity – accounted for about 15 per cent of the government’s total expenditure of 490.6 billion Egyptian pounds (Dh235.42bn).
Not only are they expensive, the petrol subsidies are terribly unfair, benefiting the rich at the expense of the poor.
Only about 10 per cent of Egyptians have access to a private car. That means that most families use public transport, minibuses or the occasional taxi to get around. The 10 per cent of Egyptians who have cars and enjoy the benefits of subsidised petrol are overwhelmingly from the wealthy section of society.
To be sure, an increase in petrol prices would affect the poor. If you are supporting a family of four on 1,000 Egyptian pounds a month, it can be devastating if your fare for minibus rides increases, even if only by a little bit. That is one reason subsidy reform has to be gradual and carefully considered.
Egypt has long been working to get subsidies under control. The finance ministry had cards with electronic chips ready and waiting in warehouses before the uprising in 2011.
The family card, as it is called, has a chip that is capable of monitoring eight types of transactions including purchases of bread, groceries, petrol, health insurance and cash transfers. It was distributed to families based on their income level.
The government recently began allowing family-card holders to buy 15 pounds worth of goods a month from a long list of products at market prices. It replaces an older system of subsidised but rationed products. The programme has been well received by the public.
But rather than allowing the family card to be used for petrol purchases, the government devised a separate and parallel system based on magnetic cards provided by e-finance.
The first phase of the project began in 2013 when former president Mohammed Morsi was in power. The government first issued the magnetic cards to fuel stations for wholesale purchases of petrol from distributors. But since then, distribution to the public at large has been repeatedly delayed as the kinks are worked out.
A major problem with the magnetic card is that it is allocated based on the vehicle, not the family, according to Ahmed Darwish, who was minister of state for administration development from 2004 to 2011, and has been following the subsidy issue closely.
A rich person could have three or more cars and be able to buy subsidised petrol for all three vehicles. If he sets aside a car for a servant to run errands, the government will still pay part of the fuel cost, says Mr Darwish. That is hardly what the reform programme was supposed to be about.
That the magnetic card is not tied to the family card database will make it difficult to limit the subsidies to those who need them the most.
Another alternative would have been to issue cards akin to credit cards that are managed by banks. Either system would have been far cheaper than the magnetic strip system, says Mr Darwish.
The government’s plan is to collect consumer data from the magnetic cards over the next year, including vehicle size and fuel consumption for each vehicle. It will then consider the steps it can take to reduce the subsidy bill.
The government remains divided on whether to increase only the fuel price that rich Egyptians pay or to gradually increase all fuel prices across the board each year, says an economist who has been closely following the issue.
The government has taken an across-the-board approach with electricity prices, which it says will increase annually until they reach international market prices. The next increase is due on July 1.
Patrick Werr has worked as a financial writer in Egypt for 25 years.
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