Egypt to slash fuel subsidies as it nears end of IMF program

Fuel prices in Egypt have increased steadily over the past three years. (File/AFP)
Updated 06 April 2019
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Egypt to slash fuel subsidies as it nears end of IMF program

  • Removal of subsidies will mean increasing the price to consumers of gasoline, diesel, kerosene and fuel oil
  • The IMF loan program began in 2016 and is tied to reforms that have included a sharp devaluation of the Egyptian pound and the introduction of a value-added tax

CAIRO: Egypt will remove subsidies on most energy products by June 15, it told the International Monetary Fund in a January letter released by the IMF on Saturday as part of a review of Cairo’s three-year, $12 billion loan program with the lender.
This will mean increasing the price to consumers of gasoline, diesel, kerosene and fuel oil, which are now at 85-90 percent of their international cost, said the letter, which is dated Jan. 27.
The letter from Egypt’s finance minister and central bank governor was included in an IMF staff report dated Jan. 28 and published following the disbursement in February of the fifth out of six tranches of the loan.
The loan program began in 2016 and is tied to reforms that have included a sharp devaluation of the Egyptian pound and the introduction of a value-added tax. They have helped steady Egypt’s economy but also put millions of Egyptians under increased economic strain.
Fuel prices have increased steadily over the past three years. LPG and fuel oil used for electricity generation and bakeries are not included in the commitment to reaching full cost recovery through subsidy cuts, the letter said.
The government said in its letter that after starting to link less-used Octane 95 petrol to international prices — which it accomplished in April — it would introduce similar indexation mechanisms for other products in June, with the first price adjustments expected in mid-September.
The government noted it had also put in place a hedging mechanism to protect against shocks in oil and other commodities. In its review, however, the IMF “advised caution in using financial instruments with upfront costs that protect only temporarily against extreme price movements,” referring to hedging.
Debt target
Since starting the IMF loan program, Egypt has borrowed heavily from abroad.
In its letter, the government said it intended to reduce its general debt from a projected 86 percent of Gross Domestic Product (GDP) by the end of June to 72 percent by June 2023. Debt was equal to 93 percent of GDP in June 2018.
It also committed to fully eliminating arrears held by the state-owned Egyptian General Petroleum Company (EGPC) by the end of June this year. The arrears stood at $1.043 billion at the end of 2018.
Egypt said it had capped the government’s ability to borrow from the central bank via an overdraft account at 66 billion Egyptian pounds ($3.82 billion) in 2018/19, equal to 10 pct of the previous three years’ revenue, as a way of managing liquidity and reducing inflation.
The central bank would gradually phase out subsidised lending to small- and medium-sized enterprises and social housing programs and instead these programs would be financed directly from the state budget, the letter said.
The sale of stakes in at least 23 state-owned enterprises over between 24 and 30 months starting in April 2018 was expected to raise around 80 billion Egyptian pounds, it added.
The IMF said in its review that Egypt’s reform program was “broadly on track.”
“The progress on structural reforms has been mixed, but the program objectives remain achievable,” it said.
“Sustained efforts are needed to advance critical reforms in competition, industrial land allocation, transparency and governance of state-owned enterprises, and public procurement.”
A recent tightening of global financial conditions had worsened the balance of risks, with Egypt vulnerable to any unexpected increase in oil prices, the IMF said.
“Calls on state-guaranteed loans, which have been increasingly used to finance large infrastructure projects by public entities, or other contingent liabilities could also put pressure on public debt,” the report said.
The IMF did not explain the delay in publishing the review.


Lufthansa profit warning spooks European airline sector

Updated 17 June 2019
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Lufthansa profit warning spooks European airline sector

  • Ryanair Chief Executive Michael O’Leary last month warned of the impact of what he called ‘attritional fare wars’

FRANKFURT: Germany’s Lufthansa sent shockwaves through the European airline sector on Monday as it cut its full-year profit forecast, with lower prices and higher fuel costs compounding the effect of losses at its budget subsidiary Eurowings.
The warning follows gloomy comments last month from Irish budget airline Ryanair, which vies with Lufthansa for top spot in Europe in terms of passengers carried. Air France-KLM also reported a widening quarterly loss last month.
In a statement issued late on Sunday, Lufthansa forecast annual EBIT of between €2 billion and €2.4 billion, down from the previously targeted €2.4 billion to €3 billion.
“Yields in the European short-haul market, in particular in the group’s home markets, Germany and Austria, are affected by sustained overcapacities caused by carriers willing to accept significant losses to expand their market share,” it said.
European airlines are locked in a battle for supremacy, with a surfeit of seats holding down revenues and higher fuel costs adding to the pressure. A number of smaller airlines have collapsed over the past two years.
Lufthansa cited falling revenue from its Eurowings budget business as a key reason for the profit warning.
“The group expects the European market to remain challenging at least for the remainder of 2019,” it said.
It also pointed to high jet fuel costs, which it said could exceed last year’s figure by €550 million, despite a recent fall in crude oil prices.
Ryanair Chief Executive Michael O’Leary last month warned of the impact of what he called “attritional fare wars” and said four or five European airlines were likely to emerge as the winners in the sector.
“No signs that anyone is prepared to reduce capacity, therefore we would anticipate the wave of consolidation in European short haul is not over,” said analyst Neil Wilson, analyst at London-based broker market.com.
Earlier this month global airlines slashed a widely watched industry profit forecast by 21 percent as an expanding trade war and higher oil prices compound worries about an overdue industry slowdown.
Lufthansa’s problems are centered on its European business, with a more positive outlook for its long-haul operations, especially on transatlantic and Asian routes.
Eurowings management is due to implement turnaround measures to be presented shortly, Lufthansa said, adding that efforts to reduce costs had so far been slower than expected.
Lufthansa’s adjusted margin for earnings before interest and tax (EBIT) was forecast between 5.5 percent and 6.5 percent, down from 6.5 percent to 8 percent previously, it said in a statement.
Lufthansa also said it would make a €340 million provision for in its first-half accounts, relating to a tax matter in Germany originating in the years between 2001 and 2005.