Is Subsidy Good or Bad? An Evaluation of the Energy Sector Subsidy Reform in Egypt

27 Pages Posted: 23 Apr 2015

See all articles by Mona Alashaal

Mona Alashaal

Paris ESLSCA Business School - Ecole supérieure libre des sciences commerciales appliquées

Date Written: April 20, 2015

Abstract

“Lifting or keeping the subsidy” has been a controversial issue, precisely in Egypt it has always been too “hot to touch” when it comes to the right of the unfortunate few. But this has proved for over 50 years to be a sheer myth. Billions of subsidized money has been landing in the pockets of the large industries and higher income sector members, only to increase poverty to over 40% of the population. Poorly implemented energy subsidies are economically costly to taxpayers and damage the environment by creating distorted price signals and result in higher energy consumption or production or barriers to entry for cleaner energy substitutes.

In the wake of this the government has taken serious steps in 2004 towards reforming the subsidy on the entire energy sector to wean it gradually and return to full cost as of 2014, only one phase of this plan has been executed on removing 20% of the electricity subsidy, but the remaining phases where put on hold since 2009 due to the global crisis. Talks have been resumed on an implementation plan for the removal of nearly 50% of the subsidy on all energy sectors as of this year, and the return to full cost by 2013. No further details were officially announced regarding this plan.

This paper illustrates the advantages and disadvantages of subsidies, and its applicable impact on some aspects of the Egyptian economy, the possible expected outcomes and social/economic implications, should it be abolished based on other countries experiences and the proposed mitigation procedures that the government must carry out to offset the ramifications and compensate the poor.

We found that the benefits of subsidy removal by far outweigh the costs on the long run and after adjustment, there is no one-size fits all. The two major concerns are; first, will the government provide transparent and clear information about the detailed plan before, during and continuously share feedback on both levels; the impact on the economy and the people and how much has been saved and where will it go. Second, will the government be wise enough to closely monitor the progress of the reform plan and be able to quickly revert or halt and revisit the plan should the outcomes not meet the anticipated?

Keywords: Subsidies, economics, energy, Egypt, Price Control, Price Policies

JEL Classification: E650, E640, H230, O210

Suggested Citation

Alashaal, Mona, Is Subsidy Good or Bad? An Evaluation of the Energy Sector Subsidy Reform in Egypt (April 20, 2015). Available at SSRN: https://ssrn.com/abstract=2596621 or http://dx.doi.org/10.2139/ssrn.2596621

Mona Alashaal (Contact Author)

Paris ESLSCA Business School - Ecole supérieure libre des sciences commerciales appliquées ( email )

1 rue Bougainville
Paris, 75007
France

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