Egypt Slashes Fuel Subsidies to Ease Pressure on State Finances

(Bloomberg) -- Egypt's government slashed fuel subsidies as part of an economic overhaul backed by the International Monetary Fund, easing pressure on public finances but dealing a new blow to consumers already struggling with double-digit inflation.

The decision, effective July 5, raises the price of diesel, which is used by trucks, buses and other motorists by 22.7%. The price of higher-grade 95 and 92 octane gasoline rose by 16% and 18.5%, according to a statement from the oil ministry. Lower-grade 80 octane gasoline went up by 22.7%.

The hikes are the latest effort by the Arab world's most populous nation to curb government spending and cut the deficit. Egypt devalued the pound in 2016. The currency halved in value against the U.S. dollar, driving inflation to levels well above 30% before the pace of price increases began to cool.

The central bank has cut the benchmark interest rate only once in the past year, and is unlikely to act again until it can judge the inflationary impact of the latest fuel-price hikes.

Subsidies are the life-blood of many Egyptians, but eat up almost a third of the government's budget. Any effort to reform the food subsidy system is fraught with political dangers in a country where tens of millions rely on state-subsidized bread, so authorities have focused instead on electricity and fuel.

The government said last month that electricity prices would rise by almost 15% in the fiscal year that begins July 1, saving almost $1 billion. The next step in the fuel subsidy reform plan is an indexation mechanism that links local fuel prices to international ones. Subsidies on the highest-grade fuel, 95 octane, has already been lifted, with the gasoline now sold at market value.

--With assistance from Salma El Wardany and Mirette Magdy.

To contact the reporter on this story: Tarek El-Tablawy in cairo at teltablawy@bloomberg.net

To contact the editors responsible for this story: Lin Noueihed at lnoueihed@bloomberg.net, Michael Gunn

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