The World Bank has approved a $500 million dollar loan to Egypt for the Household Natural Gas Connection Project. This will be a major boost in solving Egypt’s energy crisis, and a welcome confidence building measure for the new government under El-Sisi.
The Household Natural Gas Connection Project will go towards helping households switch from propane to the more affordable national gas grid. Liquefied petroleum gas, or propane, is one of the many subsidized goods in Egypt that is crippling the economy. By linking households to the national gas grid the government can save up to 301.5 million annually in subsidies.
Subsidies cost the Egyptian government roughly a third of its public spending, or the equivalent of 13 percent of its gross domestic product. This year alone Egypt is $9.8 billion over budget on energy subsidies – a massive problem that harms investment confidence.
El-Sisi’s government is beginning to take steps to address the subsidy and investment crisis. This past month the government raised prices on fuel in an effort to curb consumption on some of the highest subsidized gasoline ratings. The cost for 80-octane gasoline increased by 78%, diesel by 63% and 92-octane by 40%.
Meeting domestic demand for energy in Egypt has been a struggle over the past several years as production declined amid political and economic chaos. Egypt at one time was a major natural gas exporter, but has recently been “forced to reserve its reduced output for domestic demand and increasingly seek costly imports.” The debt incurred to foreign companies by attempting to cover the energy costs has risen to $6 billion; an astronomical amount that the government will struggle to repay unless it continues to work toward reforming subsidies and increasing production capacity.
Cairo has recently released its new plan to boost domestic gas production by 500 million cubic a day by the end of 2014. In order to increase production, Egypt must calm foreign investors and convince them that Egypt is on a firm path toward stability. The World Bank’s approval of the new $500 million dollar loan is a promising start, but Egypt has a long way to go to remedy the subsidy curse and pay back foreign debt.