E N E R G Y S U B S I D Y R E F O R M FA C I L I T Y ( E S R F ) MARCH 2017 EGYPT • Just-in-time technical assistance through analytical inputs to the reform process and capacity building • Energy subsidies were slashed, allowing the THE CHALLENGE percent of GDP spending on health and education to exceed subsidies for the first time In the aftermath of the Arab Spring, Egypt’s economy was adversely affected by a growing energy deficit, slowing • Engagement opened doors for broader sector economic growth, increasing poverty, and socioeconomic reform dialogue, leading to a three-year transition. The Government of Egypt faced growing development policy loan program fiscal pressures. With fossil fuel subsidies being a major contributor to the deficit, energy subsidy reform was a strategic priority for the government. These subsidies were not only highly regressive and The Government of Egypt reformed prices of electricity favored energy intensive sectors, but also hindered and petroleum fuels several times over the course of the transparency and financial performance of public util- 2000s, but rising international oil prices meant that fossil ities, discouraging much needed investments in the fuel subsidies increased dramatically over the last decade. power sector. In 2013, spending on energy subsidies comprised a large share of budget expenditure (22%). Fossil fuel THE RESPONSE subsidies amounted to 7% of Egypt’s GDP, which was greater than the combined expenditures on health and In 2013, the government requested the World Bank’s education (5%). Cost recovery in the power sector was support. With rapidly mobilized resources for technical only at 30%, particularly low in liquefied petroleum gas assistance through the Energy Sector Management (6%), diesel (22%), and gasoline (23-31%). Assistance Program (ESMAP), the World Bank provided analytical inputs to the reform process and capacity E N E R G Y S U B S I D Y R E F O R M FA C I L I T Y ( E S R F ) building to various ministries following a cross-sectorial Building upon this initial engagement, during the sec- and phased approach. ond phase of technical assistance in 2015-16, thanks to ongoing support from ESMAP through the Energy During the first phase of technical assistance in 2014-15, Subsidy Reform Facility (ESRF), the World Bank provided just-in-time analytical inputs to the reform process and just-in-time advisory support to the Egyptian Government reviews of global experiences on subsidy reforms were on subsidy reform decisions and reforms to social safety provided. This included a presentation to the Cabinet nets. The support included a comprehensive study of of Ministers of estimated direct and indirect impacts of gas pricing options; a diagnostic of social protection different subsidy reform options, based on a simulation mechanisms and their ability to mitigate impacts in of alternative scenarios, as well as a communication the immediate and medium term; support to the mod- strategy, a political economy assessment, and just-in- ernization of databases for safety net targeting; and time technical notes on various subsidy reform issues. communication materials. Further during this phase, This support contributed to the comprehensive and assistance focused on strengthening the Government ambitious fuel and electricity reforms in July 2014. of Egypt’s capacity to model fuel price reforms, their impacts, and mitigation mechanisms. The project also conducted a backward-looking analysis of Egypt’s 2014 reforms, including detailed distillation of key lessons, a review of some of the policy enhancements, and a roadmap for medium-term reform with policy options. Phase II support provided timely inputs to the electricity reforms in both July 2015 and August 2016, as well as major reforms to fuel prices and social safety net pro- grams in November 2016. OUTCOMES The first comprehensive reforms were publicly announced in July 2014. The Government increased prices of electricity and major categories of fuels by 40 to 78% with the goal of reducing fossil fuel subsidies to 0.5% of GDP by 2019 through periodic increases of fuel and electricity prices. The 2014 reform changed how fuel subsidies are allo- cated between the electricity and oil and gas sectors. As part of the 2014 fuel price reform, the power sector purchase price for natural gas was increased by 69% from US$1.77/MMBtu to US$3.00/MMBtu. Helped by the international fuel price decline, the fuel price reforms in 2014 and 2016, and electricity tariff reforms in 2014, 2015, and 2016, cost recovery reached E N E R G Y S U B S I D Y R E F O R M FA C I L I T Y ( E S R F ) roughly 60% on average for petroleum fuels in the budget have had many weaknesses, including fragmentation for fiscal year 2017. and poor coordination; low coverage of the poor; poor targeting performance; and low poverty impact. Egypt’s Supported by the World Bank’s technical assistance, non-subsidy social safety net system has also been social programs were reformed substantially to mitigate among the least generous in the world, amounting to reform impacts. only about 10% of the poorest quintile’s consumption Egypt’s fossil fuel subsidies, which had been on a expenditure (prior to the increase in 2013). Strengthening long-term growth trajectory, decreased from 7.0% in public transportation and promoting fuel switching are FY2013/14 to 3.0% in FY2015/16 and 2.7% in the budget other key mitigation measures. for FY2016/17. Pricing reforms being responsible for Egypt’s subsidy reform efforts face further challenges about one-third of the decline in subsidies between given the recent floating of the Egyptian Pound, which FY2014 and 16. introduced significant exchange rate volatility and led Fiscal savings from the energy subsidy reforms were to a major devaluation in November 2016. In order to redirected towards social spending, namely health and keep the subsidy reform program on track to achieve its education, which, in FY2015, out-stripped spending on target of 0.5% of GDP by FY2018/19, the Government is energy subsidies for the first time. planning to move to more frequent adjustments of fuel and electricity prices to counterbalance external factors. The engagement on energy subsidy reforms opened doors for broader reform dialogue laying the ground- work for programmatic dialogue that led the Government of Egypt to request for a three-year, multi-billion, multi-donor Development Policy Loan series, which have been partly completed. Energy subsidy reforms being both important prior action, trigger, and target of this Development Policy Financing. Financed in parallel by the African Development Bank (AfDB) and the Agence Française de Développement (AFD), this loan program prepared the groundwork for a three-year, US$12 billion International Monetary Fund (IMF) program, featur- ing energy subsidy reform as a main pillar, which was approved a year later. LOOKING FORWARD The Government of Egypt will need to continue reforms while sustaining buy-in to fulfill its targets and commitments to the international community. Major pricing reforms are still needed, even as the population faces economic pressure from price inflation and slow wage growth. Egypt needs to strengthen and consolidate its social safety net system, in particular, the targeting, communi- cation, and roll out of smart cards. The existing programs E N E R G Y S U B S I D Y R E F O R M FA C I L I T Y ( E S R F ) NEXT STEPS CONCLUSION During next phase of technical assistance planned With energy subsidies on a long-term growth trajectory, for 2017-19, the World Bank’s engagement will focus reform was urgently needed. ESMAP’s support made the on building technical readiness for price indexation, World Bank’s timely assistance possible. It provided the including design and implementation support for both tools and models to project the impacts of the reform, fuel price and electricity tariff indexation mechanisms, convincing the government that energy sector reform and fostering coordination between the Energy and could be achieved in a socially responsible manner. Social Ministries. Additional reform will be challenging as future oil price Technical assistance will be provided on strengthening declines are unlikely. Comprehensive, sustained, and fiscal reporting and budgetary projections of net fiscal socially responsible reform will depend on inter-ministerial impacts of energy subsidies. Additional support for coordination. Further technical assistance will be needed strategic communication, and synchronizing social pro- to help the government implement its ambitious plan. tection program reforms with subsidy reforms through inter-ministerial coordination are also planned. ESMAP’s $20 million Energy Subsidy Reform Facility Technical assistance to the social ministries will focus on (ESRF) was set up in 2013 to help countries remove mitigation and improving social safety nets by develop- fossil fuel subsidies while protecting the poor. ing a unified registry to integrate existing databases, ESRF provides technical assistance to governments, develops tools for assessment and decision-making, such as the food ration program database with that and facilitates knowledge-exchange for a global of the traffic office, pension fund, utility billing, vehicle community of reformers. registration, etc. 1 Aggregate energy sector recovery cost weighted by cost 2 For a range of octanes 3 Over 90% of the gasoline subsidies went to the richest 20% of the population. ABOUT ESMAP The Energy Sector Management Assistance Program (ESMAP) is a global knowledge and technical assistance program administered by the World Bank. It provides analytical and advisory services to low- and middle-income countries to increase their know-how and institutional capacity to achieve environmentally sustainable energy solutions for poverty reduction and economic growth. ESMAP is funded by Australia, Austria, Denmark, the European Commission, Finland, France, Germany, Iceland, Japan, Lithuania, Luxembourg, the Netherlands, Norway, Sweden, Switzerland, the Rockefeller Foundation, and the United Kingdom, as well as the World Bank. ESMAP | 1818 H Street, NW | Washington DC 20433 | 202.522.3018 | www.esmap.org