<p style="text-align: justify;">In this week's issue we take a deeper look at the consequences and policy options for fuel price hikes, the EU CBAM, and the expected rise in interest rates.</p>
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<h2><span style="color: rgb(6, 71, 137);"><strong>Expected Increase in Fuel Prices: What&rsquo;s New?</strong></span></h2>
<p style="text-align: justify;">The automatic pricing committee for petroleum products is <a href="https://egyptindependent.com/egypt-to-announce-new-fuel-prices-for-2023-within-a-few-days/">scheduled</a> to convene next week&nbsp;after several delays due to the global increase in the price of oil, and local increases in the cost of fuel imports and production resulting from the devaluation of the Egyptian pound. The committee&nbsp;meets quarterly to determine changes in the prices of various fuel items and by law may not move fuel prices by more than 10%.&nbsp;The automatic pricing mechanism relies on several market variables, including the US dollar exchange rate, the international price of Brent crude, refining and transportation costs, and other fees.</p>
<h3 style="text-align: justify;"><strong>Consequences of removing subsidies on petroleum products</strong></h3>
<p style="text-align: justify;">Among the International Monetary Fund&rsquo;s chief reform demands is the gradual reduction, and then complete elimination, of subsidies on petroleum products. <a href="https://www.asharqbusiness.com/article/43649/%D8%AF%D8%B9%D9%85-%D8%A7%D9%84%D9%88%D9%82%5b%E2%80%A6%5d-%D9%85%D9%84%D9%8A%D8%A7%D8%B1-%D8%AC%D9%86%D9%8A%D9%87/">According</a>&nbsp;to&nbsp;an official at the Egyptian General Petroleum Corporation, petroleum subsidies in Egypt jumped to&nbsp;EGP31 billion during the first quarter of fiscal year 2022&ndash;2023 due to the rise in global oil prices, compared to EGP6.9 billion a year ago, an increase of about 350%.<br>Fuel price hikes (gasoline and diesel) directly affect inflation rates in Egypt, increasing transportation costs and the prices of many commodities, most importantly food. Cutting government subsidies also contributes to widening inequality among citizens. In July 2017, the price of cooking gas used by poor Egyptians&nbsp;<a href="https://www.reuters.com/article/egypt-economy/update-3-egypt-raises-fuelprices-by-up-to-50-percent-under-imf-deal-idUSL8N1JQ1G5">rose</a> by 100%, while the cost of fuel&nbsp;oil used by cement factories rose by only 40%.</p>
<h3 style="text-align: justify;"><strong>What are the proposed recommendations?</strong></h3>
<p style="text-align: justify;">In her <a href="https://aps.aucegypt.edu/en/articles/942/policy-brief-towards-strengthening-socioeconomic-justice-in-egypt-amid-a-new-imf-loan">policy brief</a>&nbsp;&ldquo;Towards Strengthening Socioeconomic Justice in Egypt Amid a New IMF Loan,&rdquo; Shatha Abdulsamad, a researcher at Alternative Policy Solutions (APS) and a member of Al-Shabaka, the Palestinian Policy Network, presents a range of policy options and recommendations to mitigate the impact of austerity measures and the lifting of subsidies, to ensure a more inclusive approach to economic growth. Most notably, she proposes raising energy prices for energy-intensive factories without burdening the household sector, and avoiding price increases that would disproportionately affect low-income groups. This would entail continued subsidies for diesel fuel for microbuses, which are largely used by low-income commuters, and gas cylinders, used by residents in poor neighborhoods that lack piped-in gas at home. To limit the negative effects of the subsidy cuts on the economically vulnerable, the state can increase its revenue base by making the tax system more progressive, introducing a progressive income tax and taxes on property, capital gains, and luxury goods, and by redirecting the savings and revenue to education and health, especially in rural and marginalized areas.</p>
<p><img style="display: block; margin-left: auto; margin-right: auto;" src="https://mcusercontent.com/5e42bef7fee7e6a299c3d932d/images/0e9a8794-cf76-c830-e78d-4150eb6a28ce.png" width="543" height="431"></p>
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<h2><span style="color: rgb(6, 71, 137);">The EU Carbon Limits Adjustment Mechanism Pushes Non-EU Countries Toward Cleaner Production</span></h2>
<p style="text-align: justify;">The European Union is finalizing the <a href="https://www.europarl.europa.eu/news/en/press-room/20221212IPR64509/deal-reached-on-new-carbon-leakage-instrument-to-raise-global-climate-ambition">Carbon Limits Adjustment Mechanism (CBAM)</a>, which aims to stimulate clean industrial production in non-EU countries and regulate the prices of carbon-intensive commodities entering the EU. The CBAM transition period will start on October 1, 2023.<br>&nbsp;<br>In the long-run, the CBAM will impose taxes on imports from countries outside the EU to prevent &ldquo;carbon leakage,&rdquo; especially on the most polluting products such as iron and steel, cement and a number of their downstream products, fertilizers, aluminum, electricity, and hydrogen.</p>
<h3 style="text-align: justify;"><strong>How will the CBAM affect Egypt?</strong></h3>
<p style="text-align: justify;">The European Union is the main importer of Egyptian fertilizers, metallurgical industrial products, and textiles, and the destination of <a href="https://policy.trade.ec.europa.eu/eu-trade-relationships-country-and-region/countries-and-regions/egypt_en">21.8%</a>&nbsp;of Egypt's total exports, with an annual value of&nbsp;<a href="https://www.sis.gov.eg/Story/228969/%D9%85%D8%B5%D8%B1-%D9%88%D8%A7%D9%84%D8%A5%D8%AA%D8%AD%D8%A7%D8%AF-%D8%A7%D9%84%D8%A3%D9%88%D8%B1%D9%88%D8%A8%D9%89?lang=ar">EUR6.7 billion</a>.&nbsp;The CBAM taxes will place an additional burden on Egyptian companies that do not meet European requirements, and as these companies raise their prices to cover the tax increase, their products may lose their competitive edge in the European market. Many Egyptian exports to the EU are expected to fall short of the new European standards, given that they are produced in carbon-intensive industries with low levels of technological innovation.<br>&nbsp;<br>The Carbon Limits Adjustment Mechanism (CBAM), therefore, poses a serious threat to Egyptian exports in industries that do not use cleaner production mechanisms. Egyptian companies will now be required to report carbon emissions during the production process and obtain an "emissions certificate" based on EU carbon market prices if they exceed European requirements. It is estimated that EU climate-related initiatives, including CBAM, will lead to a&nbsp;<a href="https://www.worldbank.org/en/country/egypt/publication/egypt-country-and-climate-development-report">4%</a>&nbsp;loss in revenues from fertilizer and chemical exports, while electricity revenues will decline by&nbsp;<a href="https://www.worldbank.org/en/country/egypt/publication/egypt-country-and-climate-development-report">8.3%</a>&nbsp;and oil shipments will decrease by&nbsp;<a href="https://www.worldbank.org/en/country/egypt/publication/egypt-country-and-climate-development-report">4.3%</a>.</p>
<h3 style="text-align: justify;"><strong>What are the proposed solutions?</strong></h3>
<p style="text-align: justify;">Despite the threat posed to private sector companies and the anticipated losses associated with this shift, there are proposals to mitigate the damage in the long term. <a href="https://www.oxfam.org/en/press-releases/eu-carbon-border-tariff-passes-buck-least-responsible">Oxfam</a>, for example, suggests directing CBAM revenues to expand international climate finance, offering financial and technical support to suppliers in developing countries that will help them make the green transition. Researchers&nbsp;<a href="https://aps.aucegypt.edu/en/articles/804/addressing-the-climate-justice-implication-of-the-eu-cbam">Silvia Weko and Maria Apergi</a>&nbsp;argue that CBAM returns invested in climate finance, "should include additional support like technology transfer and capacity building, and use existing initiatives."<br>&nbsp;<br>In the&nbsp;<a href="https://aps.aucegypt.edu/en/articles/738/policy-paper-circularity-a-green-recovery-industrial-strategy-for-egypt">policy paper</a>,&nbsp;&ldquo;Circularity: A Green Recovery Industrial Strategy for Egypt,&rdquo; Dr. Dalia Sakr, an&nbsp;expert in energy, resource&nbsp;efficiency and climate change, notes the abundance of green financing in Egypt, currently estimated at more than USD 650 million, but largely directed solely at the energy sector. Sakr suggests that the government encourage both banks and donors to invest in key under-funded areas, such as infrastructure to reduce waste and emissions. This will promote green industry and have knock-on social and economic benefits that will boost exports.<br>&nbsp;<br>In the&nbsp;<a href="https://aps.aucegypt.edu/en/articles/926/policy-brief-green-impoverishment-implications-of-inequitable-climate-finance">policy brief</a>&nbsp;"Green Impoverishment: Implications of Inequitable Climate Finance," Farah Ghazal discusses the need to link climate mechanisms to equitable climate financing from developed to developing countries, drawing on the principle of Common But Differentiated Responsibilities (CBDR). In seeking to comply with European standards, developing countries should not bear the costs of transitioning to clean production alone. Ghazal suggests a guarantee that funds are appropriately matched with local needs and focus on several areas, including climate adaptation and green production.</p>
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<h2><span style="color: rgb(6, 71, 137);">Another Interest Rate Bump: What Does it Mean?</span></h2>
<p style="text-align: justify;">The Central Bank of Egypt's Monetary Policy Committee (MPC) <a href="https://dailynewsegypt.com/2023/01/29/cbe-to-hold-first-monetary-policy-meeting-in-2023-after-year-of-ups-downs/?__cf_chl_tk=amVdDv00vkFM98ttUYt.SVRz_i9QR0jI0CeeDEV6SYo-1675168633-0-gaNycGzNCFE">will hold</a>&nbsp;its first meeting this year next Thursday to discuss interest rates. In its last meeting on December 22, 2022, the committee approved a&nbsp;three-point increase&mdash;the&nbsp;<a href="https://english.ahram.org.eg/News/483060.aspx">fourth hike</a>&nbsp;last year&mdash;bringing the rate to 16.25% for overnight deposits, 17.25% for lending, and 16.75% for the main operation rates.<br><br>By raising interest rates, the CBE seeks to contain the effects of inflation -which hit a five-year high of&nbsp;<a href="https://www.capmas.gov.eg/">21.9%</a> in December-&nbsp;while ensuring a fixed, safe return for household savings; not subject to price fluctuations and speculation and attracting flows that would benefit from interest rates differences. Given that inflation remains high, experts expect the&nbsp;MPC to raise interest rates again at its coming meeting.</p>
<h3 style="text-align: justify;"><strong>What are the repercussions of a higher interest rate?</strong></h3>
<p style="text-align: justify;">Although higher interest rates may help curb inflation, Egypt's experience since 2017 has proven this policy&rsquo;s <a href="https://aps.aucegypt.edu/en/articles/778/fighting-inflation-fiscally">inability</a>&nbsp;to stabilize the prices of basic goods and services. Interest rate hikes also lower overall demand, thus slowing economic growth.<br><br>In his background paper "<a href="https://aps.aucegypt.edu/en/articles/788/background-paper-finance-does-it-kill-or-create-jobs">Finance: Does it Kill or Create Jobs</a>?" Osama Diab, a researcher in economic rights and development, argues that the high-interest system enriches bankers and investors (many of them foreigners) at the expense of low- and middle-income taxpayers, thus exacerbating income and wealth inequality. Countries that respond to inflation by raising real interest rates are also likely to see increased unemployment, especially among women. This is because these policies encourage banks and financial institutions to invest in unproductive activities -such as budget financing and trade deficits- rather than directing finance and capital to productive, job-generating activities.</p>
<h3 style="text-align: justify;"><strong>Are there alternatives?</strong></h3>
<p style="text-align: justify;">In his discussion of alternatives to high-interest monetary policies, Diab proposes improving the mobilization and management of public resources to direct financing towards productive, job-generating capital investments. He recommends a combination of fiscal and monetary measures to manage hyperinflation when necessary, such as the sale of foreign currency on the spot market (known as open market operations) and the temporary manipulation of indirect taxes on consumer, capital, and durable goods. In addition, state-owned commercial banks can be incentivized to increase lending to the private sector and small and medium enterprises (SMEs) to support production during crises.</p>
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<p style="text-align: justify;"><em><a href="https://aucegypt.us17.list-manage.com/subscribe?u=5e42bef7fee7e6a299c3d932d&amp;id=e0d95df1c1&amp;mibextid=Zxz2cZ">Subscribe to the weekly edition</a></em></p>
<p style="text-align: justify;"><em>"Adasa" is a weekly policy digest by Alternative Policy Solutions. "Adasa" provides an analysis of a select number of policy developments and their effect on inclusive development and socioeconomic change &nbsp;&nbsp;</em></p>

عدسة

Adasa

الطاقة

Energy

السياسات الاقتصادية

Economic Policies

تغير المناخ

Climate Change

السياسة النقدية

Monetary Policy

توقعات بارتفاع أسعار الوقود

Expected Increase in Fuel Prices

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