Phasing Out Energy Subsidies as Part of Egypt’s Economic Reform Program - Impacts and Policy Implications

In order to address long-standing economic challenges, in 2016 the Government of Egypt (GOE) put in place a major economic reform program to restore macroeconomic stability and to promote inclusive growth. As a result, there are early signs that the economy is rebounding and Egypt’s economic outlook is becoming more favorable. However, it is less clear how the ongoing reform program is affecting households, especially the poor. To shed light on this question, this paper uses an economy-wide model to estimate the distributional impacts of the energy subsidy cuts in 2014, 2016, and 2017, the currency devaluation at the end of 2016, and the expected complete phasing out of energy subsidies over the coming years.

Results suggest that the reform program reduces economic growth by a modest 2.5 to 2.6 percent in the short-run, but accelerates economic growth in the longer run by 0.6 to 1.8 percent, even if energy subsidies continue to be phased out. In the short-term, only mining and construction are likely to benefit from the reform program, whereas in the longer-term other sectors, such as agriculture, agro-processing, and non-transport services stand to gain. Results also show that household consumption may have gone down between 3.8 and 4.6 percent overall, but that the increase in food subsidies and the introduction of the cash transfer program, Takaful and Karama, helped to mitigate the impacts on the poor.

The findings of this paper suggest that the positive momentum that the economic reform program has created should be sustained, including the phasing out of energy subsidies. Yet, there are several measures that would likely accelerate the positive impacts of the reforms, including a more business friendly environment, measures that increase labor market flexibility and restraint in raising public and private sector wages to reap the benefits of real depreciation. Finally, targeted social protection measures should be continued and scaled up.