UAE says Egypt Subsidy Cut ‘First Step’ in Broader Strategy

The United Arab Emirates, which is backing Egypt with billions of dollars in aid, said its ally’s decision to raise fuel prices is the “first step” in a broader energy strategy to reduce subsidies and the budget deficit.

Sultan Al Jaber, the U.A.E. minister overseeing assistance to Egypt, said the government of President Abdel Fattah al-Sisi was also seeking to expand “the tax base and the reduction in wasteful expenditure, while protecting spending on social sectors.” The government is planning to introduce value-added taxes before June, he said in an e-mailed answer to questions.

Al-Sisi, a former army chief who was elected after leading the ouster of his Islamist predecessor, is struggling to reduce one of the highest budget deficits in the Middle East and revive an economy battered by more than three years of turmoil. He raised the prices of fuel and natural gas by more than 70 percent last year, going a step further than previous governments, which had shied away from tackling subsidies to avoid a public backlash.

The U.A.E., the second-biggest Arab economy, stepped in to back al-Sisi after the ouster of Mohamed Morsi in July 2013, spending about $10 billion on projects from schools to wheat silos as well as supporting the central bank’s foreign-currency reserves. Al Jaber urged the government in June last year to shore up public finances while investing in infrastructure to boost economic growth.

‘Courageous Actions’

“On the fiscal side, the government has taken courageous actions to reduce fiscal imbalances, and in particular reform energy pricing, as a first step in implementing a broader energy subsidies reform,” Al Jaber said last week by e-mail.

Al-Sisi inherited an economy stuck in the worst slowdown in two decades. The budget deficit is expected to widen to more than 11 percent of economic output in 2015, according to the median estimate of eight economists on Bloomberg. Al-Jaber said that U.A.E.’s aid to Egypt has helped to create more than 900,000 jobs in little over a year.

Signs of economic recovery are in the offing. Gross domestic product may expand 3.4 percent in 2015, according to the median estimate of nine economists on Bloomberg, compared with 2.2 percent in 2014. Fitch Ratings raised the country’s credit worthiness one level in December to B, five levels below investment grade. The government said it plans to tap the international bond market in the first quarter this year for the first time since 2010.

Affordable Rates

Low global borrowing costs as well as “Egypt’s improving credit story and a very low stock of external debt will be sufficient for the country to regain access to international capital markets at affordable interest rates,” Al Jaber said.

The U.A.E. is also helping Egypt prepare for an investment conference in March to mobilize aid needed to stem the decline in currency reserves and lure foreign investments. Reserves fell to $15.3 billion in December as the pick-up in economic activity boosted demand for imports.

The conference shouldn’t be viewed as a “silver bullet” for the economy, Al Jaber said. “It is part of a multi-year” process to ensure sustainable recovery, he said.

Source: Bloomberg