I mentioned a few days ago that Egypt was pursuing a very sensible economic policy by floating the Egyptian pound. Yes, that’s right, it will lead to a bolus of inflation in the economy – there is a huge dependence on imports in the country. But then the devaluation of the currency is rather the remedy for this problem anyway. It is also true that the Egyptian government has adopted another sane policy, reducing fossil fuel subsidies. It has put so much strain on the economy as a whole that getting rid of these subsidies entirely may only be a good idea. It also dovetails with the most basic economic idea about subsidies in the first place. Subsidize people, not products.
Floating the pound was a good idea that I mentioned before:
One of the great lessons of economics is that things are simply worth what they are worth. Nothing is worth more than someone is willing to give for it. So, if the black market value (for which the free market read) of the Egyptian pound was £ 18 to the dollar, then that is exactly what an Egyptian pound was worth. The government promising to buy and sell them for 8.88 just wasn’t going to work. Of course, this could be done for a while, but the longer it lasted, the more the Egyptian government was going to lose and the poorer the Egyptian people were going to be. It’s always true of pricing, it impoverishes people.
Getting rid of pricing and adopting the market rate will increase economic efficiency. Increased economic efficiency makes people richer.
Egyptian stocks rallied on a seventh day on bets that an unprecedented move to float its currency will help cement a $ 12 billion loan from the International Monetary Fund.
The EGX 30 index climbed 2.8% at 10:22 a.m. in Cairo, ready for the longest winning streak since March. Members of the benchmark gauge traded at the most expensive in 17 months based on future earnings, as the measure’s 14-day relative index rose further into overbought territory. Dubai stocks fell 0.6%, while Saudi Arabia’s rose 0.4%.
It is certainly possible that the idea of granting the IMF loan will raise stock prices. But there are also two other points to mention. A number of Egyptian companies earn their income elsewhere in the Middle East – that income and profit is now worth more in Egyptian pounds. But there is also the medium-term effect of the devaluation to consider on domestic revenues. An overvalued currency encourages imports rather than domestic production and discourages exports. Reducing this overvaluation will lead to three things. Fewer imports now more expensive, more exports now cheaper and third, the substitution of domestic production for these imports. These three elements stimulate the national economy. Yes, most certainly, life is hard in the face of the new rise in prices at the beginning, but the medium term is a revitalization of this domestic economy. Stock prices should go up when something so sane is done.
Which brings us to the other thing the Egyptian government did, reducing fuel subsidies:
Egypt is set to hike fuel prices for the second time since a tax reform program began in 2014, in a bid to cut a rising budget deficit hours after floating the exchange rate on Thursday , Reuters reported.
At midnight Thursday before Friday, the lower value of Octane 80 will increase by 46.8% to 2.35 LE per liter from 1.6 LE, the higher value of Octane 92 will increase by 34, 6% to 3.5 LE per liter from 2.6 LE, and diesel will increase by 30.5 percent to 2.35 LE per liter from 1.8 LE. Gas prices are forecast to rise 45.5% to LE 1.6 per liter from LE 1.1. The higher value of 95 Octane will remain at the same price of LE 6.25 per liter, according to the private newspaper Al-Shorouk.
In 2014, Egypt embarked on a plan to introduce a number of fiscal measures, including cuts in fuel subsidies that raised prices by up to 78%, as well as new taxes to alleviate a deficit. increasing budget which reached 12.2% in fiscal year 2014-15. Year. Fuel and food subsidies represent a quarter of the Egyptian state budget.
There are three points to make here. The first is that reducing these subsidies is good for all of us. The International Energy Authority has been emphasizing for years that the first thing to deal with climate change is to reduce fossil fuel subsidies. They are worth some $ 500 billion a year around the world and these are silly things to have.
No, we’re not talking about what the environmentalists are talking about, accelerated depreciation and so on. We are talking here about governments buying fuels at one price and selling them at another, lower. These occur almost entirely in developing or oil-producing countries and if we get rid of them we will have, by one estimate at least, 20% of our way to meeting climate goals just that. Because, of course, subsidies encourage overconsumption.
The second is that the Egyptian government simply cannot afford such subsidies. It is not, as we all note, a particularly wealthy country and according to one estimate, 25% of the budget is spent on food and energy subsidies. These numbers are not entirely accurate, coming from different years and sources, but they add flavor. Total government revenues are around $ 70 billion (less after devaluation of course) and the IEA estimates that oil subsidies alone amount to $ 16 billion (not reduced by devaluation). This is just not a good way to spend the income extracted from the population – let alone the large yawning budget deficit it helps to create.
Our third observation here is that of course it is absolutely right that there is a subsidy for people who need it. None of us want to see the incapable starve on the streets. But such a subsidy should be for people and not for products. Instead of subsidizing fuel, a subsidy that goes to everyone, big business, rich and poor, subsidize the poor by simply giving them money. Iran has made this change in recent years with great success, reducing subsidies on these fuels and increasing social benefits. It’s just more effective – for any given budget we can further reduce poverty by focusing on the poor, for any given amount of poverty reduction we want to do, it costs less.
No one will claim that such changes are easy, that there will be no pain in the short term. But these are moves in the right direction. The floating of the pound means that something is now costing what it costs. It is an increase in efficiency. And cutting fuel subsidies works the same way. We will now be more effective in reducing poverty. The medium term result will be richer people in a richer country with the capacity to do more against residual poverty as well. It’s just good economic policy.