My approach to solving Egypt’s energy challenges (Simplified)

My approach to solving Egypt’s energy challenges might seem radical amidst the current suggested approaches, especially those which are mainly focused on Subsidy Removal.

Like any family in Egypt facing financial difficulties, we have two primary options, either cut cost (spending) or increase income. The optimal solution is to do both simultaneously. The secondary option is to borrow money, and this seems to be the main focus of the current government.

Their current approach has been placing an emphasis on building global financial credibility (credit worthiness) by convincing the International Monetary Fund that the government can curb the explosive budget deficit through a series of economic measures such as the removal of subsidies, increases in taxes, vamping up custom duties on products and commodities and a reduction on importation of some essential and many non essential goods.

This in my opinion is a very narrow minded approach to Egypt’s economic challenges especially concerning the Energy sector.

The only way that the Egyptian Government can satisfy the IMF conditions for a USD4.8 Billion loan is to revert back to the thinking of the famous free-market economist Milton Friedman, which promotes minimal government intervention and places an emphasis on free markets as a way to control the economy.

Yet does this solution really stand in the best interest of the current leadership of Egypt? The answer would simply be NO. Like the military leaders who ruled Egypt for the past 60 years, today’s current leadership also lacks the political will to make any real structural economic changes, still preferring the notion of a controlled economy; that is, an economy that would obey orders.

Economic thinkers and historians from around the world can attest to the fact that free markets undermine political centralization and political control, and according to Friedman there is an inescapable link between free markets and freedom.

A perfect example of this theory is Chile’s amazing yet arduous economic and political transformation in the mid 1970’s , which saw a nation that embraced a government controlled economy, nationalization, and price controls, transform into one of the leading free economies in Latin America and the world.

What Chile’s experience really taught us is that true economic reform and transformation comes at a very heavy price and that it is the poor who suffer the most during the transition period. So with over 50% of the 92 million Egyptians still living under the poverty line, the current leadership is facing a very difficult and critical political position/decision.

On the other hand, the current leadership has been sending all the wrong messages regarding its economic reform plan, strategy and vision. While approaching the IMF with promises of free market reform, they clearly seem to be implementing an economic dependency policy internally.

In their desperate need to achieve high domestic economic growth, they are increasing barriers and tariffs which are further restricting the flow of imports into the country, while placing restrictive regulations on the capital markets further hindering capital flows through the stock exchange.

So the real question would be how can Egypt approach reducing or eliminating fuel subsidies while avoiding or minimizing adverse effects such as supply-shock inflation and social unrest?

Unfortunately the Post revolution leadership of Egypt has wasted almost two years in trying to satisfy conditions for an IMF reform related loan which Egypt really does not need.

Instead of being focused on dictated reforms, Egypt needs to focus on GDP growth. Egypt’s GDP in 2011 was approximately USD 230 Billion, of which only USD 12 Billion were spent on fuel subsidies.  To put this number into perspective; During its worst performing year Egypt’s tourism industry brought in just under USD10 Billion in revenues. Experts in the field believe that Egypt’s tourism sector can reach its true potential of USD50 Billion if properly managed.

So why has Egypt been focusing all its efforts and resources in trying to reduce or eliminate USD 12Billion in government expenditures versus focusing on achieving full potential for the tourism industry and gain USD 40 Billion. The same would be true for many other underperforming sectors such as manufacturing, trade and services.

Fuel subsidies in Egypt without a doubt need more practical regulatory measures; management and implementation, but by no means will eliminating them solve any of Egypt’s core economic problems. Urban communities across Egypt, farmers and factory owners large and small are now more in need of fuel subsidies than ever before. The elimination or even reduction of the fuel subsidies will result as already demonstrated over the past year, a social backlash which will surely have a more adverse impact on the economy than the original USD 12 Billion used for fuel subsidies.

The way forward should be the gradual reduction of all subsidies over a period of 15-20 years at the least. The subsidy amount saved every year through the gradual reduction schedule would then be used as incentives for the development of renewable and alternative energy sources such as solar power, wind and bio fuels.

Fuel Subsidies are the backbone of Egyptian society and businesses and it is a necessity that it is “surgically” dealt with, in the meantime a focus on economic growth, production, development, research and innovation should be the prime concern of Egypt political decision makers.