Egypt raises fuel prices in response to local currency depreciation

The Egyptian government has increased fuel prices significantly, a decision likely to increase the inflationary burden on the already beleaguered populace. The decision, announced on the Cabinet’s Facebook page, saw an increase in the cost of diesel, the primary fuel used in the transport of people and goods, rise from 8.5 Egyptian pounds to 10 pounds per litre. The action was not limited to diesel, with an increase in the price of 95 octane gasoline from 12.5 to 13.5 Egyptian pounds per litre.

The government attributes these hikes to the depreciating local currency leading to increased costs of energy importation, along with the global surge in energy prices triggered by the upheaval in the Red Sea. In early March, the country’s Central Bank switched to a market-based exchange rate after nearly a year of defending an overvalued local currency. This resulted in the pound’s official rate dropping from approximately 31 to 51 per U.S. dollar before appreciating by almost 10% in recent weeks due to large inflows of foreign currency into the banking sector.

Butane gas cylinders’ costs have also seen dramatic changes, with a considerable increase from 75 Egyptian pounds each to 100 pounds. This is a particular concern, given that Egypt’s citizens consume approximately 800,000 butane cylinders daily, with 50% of those being imported. These price hikes are predicted to negatively affect consumer purchasing power and elevate inflation rates, after the annual urban inflation rate already increased to 35.7% last month from 29.8% in January.

Hikes in fuel prices coincide with loan conditions stipulated by the International Monetary Fund (IMF) for future disbursements to Egypt. Earlier this month, the IMF and Egypt agreed to an increased bailout of $8 billion, up from the initial $3 billion. The IMF has consistently encouraged the Egyptian government to depreciate the local currency further and adopt stricter monetary and fiscal policies, including reducing government subsidies.

The Egyptian economy has been dramatically hit hard given years of government austerity measures, combined impacts of the coronavirus pandemic, the effects of Russia’s invasion of Ukraine, and the recent Israel-Hamas conflict in Gaza. Additionally, Houthi attacks on trade routes in the Red Sea have led to a significant decline in Suez Canal revenues, a major source of foreign currency for Egypt. This has resulted in a shift in traffic from the canal and around the southern tip of Africa. Though last month, the United Arab Emirates announced a $35 billion investment along Egypt’s Mediterranean coast intended to assist the country.