Iran Offers Egypt Limited Lesson in Subsidy Reform

Agenda-Setting Financial Insight.
April 26 2012 5:28 PM

Iran Offers Egypt Limited Lesson in Subsidy Reform

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In the end, Egypt’s model of subsidy reform will be a pick n’ mix of swapping expensive fuel oil for gas, raising the price of the most expensive diesel, and establishing a system that weans industry off cheap fuel.

Photo by Peter Macdiarmid/Getty Images

Iran offers Egypt a limited lesson in reform. The International Monetary Fund says the Arab state should look to the Islamic Republic as a model for how to cut subsidies. Iran ventured where few of its regional rivals dared in 2010 when it raised fuel prices. But the vast differences in wealth between these two countries make the comparison unhelpful.

Iran and Egypt share a common need to reform. An overhaul of subsidies had been debated in Iran for years before Tehran took action to address its $60 billion bill - under the pressure of necessity, after the United States tightened sanctions. Egypt, similarly, has long considered trimming energy subsidies, which now gobble up 20 percent of the budget. The matter is becoming more urgent after the revolution left the country with a double-digit fiscal deficit, increasing debt and shrinking foreign reserves.

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Egypt may learn a thing or two from Iran’s extensive public relations campaign prior to the raising of prices. Iranian media went to great lengths to emphasise the social inequity of subsidies. To minimise social unrest, Cairo must ensure the country’s poor understand that they are not the main beneficiaries of the current, absurd system - if only because they live without air conditioning and drive old cars, if any.

The real reason that Iran’s reforms were a political success comes down to a model that Egypt cannot afford. Tehran raised fuel prices and handed out a cash equivalent to the majority of the population. That may have achieved the aim of reducing energy consumption. But it also increased inflation, and it is still unclear whether Tehran actually saved any money.

The Iranian model is inappropriate for a country like Egypt that needs to quickly rein in its spending and cannot afford to keep paying subsidies to everyone, including the wealthy, like Iran. In the end, Egypt’s model of subsidy reform will be a pick n’ mix of swapping expensive fuel oil for gas, raising the price of the most expensive diesel, and establishing a system that weans industry off cheap fuel. For that, Egypt needs a single, multi-pronged comprehensive plan that will look nothing like Iran’s simple formula.

Read more at Reuters Breakingviews.

Chris Swann is a Reuters Breakingviews columnist, based in New York. He writes about hedge funds, commodities and asset management. He joined from Bloomberg News, where he covered global poverty issues and the International Monetary Fund.

Una Galani is Reuters Breakingviews Middle East correspondent, based in the United Arab Emirates.

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