By Jonathan Wright
CAIRO (Reuters) - Egypt said on Tuesday it will abolish gas and electricity subsidies for energy intensive industries over three years to cut inefficiencies in the market and help reduce the budget deficit.
The trade and industry ministry said it will gradually reduce the subsidies, which are a main factor behind the country's deficit, and then set prices based on the international market.
"The reduction in subsidies would save the government 15 billion pounds over the coming three years," Trade and Industry Minister Rachid Mohamed Rachid said.
The ministry said it will increase the prices within that period "until they reach cost recovery."
"After the abolition of subsidies the price of gas and electricity will vary according to a formula linked to cost and world market prices," it said. Prices would then not be allowed to rise more than 15 percent per year, it added.
The cut in subsidies, which will apply to 40 companies, will increase the efficiency of Egyptian industry and introduce clarity and predictability in energy pricing, the ministry said.
Energy subsidies to non-energy intensive industries will continue for 6 years, Rachid said without elaboration. The government raised fuel prices by 30 percent for standard petrol in July 2006.
Spending on subsidies in general will reach 64.5 billion Egyptian pounds in the 2007/2008 budget, from 51 billion pounds the previous year, the Egyptian cabinet has said.
The subsidies, most of which go to energy products, were projected to reach 6.9 percent of gross domestic product this year.
PRICE RISES
"This is a very good step," said Angus Blair, head of research at Cairo-based investment bank Beltone Financial.
"Subsidies in Egypt are significant and were creating inefficiencies in the market because people were not paying the full market price."
Analysts have said the decision could have a short-term marginal impact on inflation but added that it should not pose severe challenges to the energy-intensive sectors because of their high profitability.
The government said inflation rate stood at 8 percent in July, the lowest since June 2006.
About 55 percent of energy consumed by industry goes to energy intensive sectors, the ministry said. These sectors absorb 75 percent of the subsidies on gas and 61 percent of the subsidies on electricity, it added.
The ministry said it will increase the price of natural gas to $2.65 from $1.25 for every million joules.
Electricity prices will rise from 0.111 pounds to 0.178 pounds per kilowatt/hour for maximum voltage, 0.134 pounds to 0.216 pounds for high voltage and from 0.183 pounds to 0.295 pounds for medium voltage, the ministry said.
The ministry also said Egypt will raise the export duty on cement to 85 Egyptian pounds per tonne to stabilise local market prices. The government had imposed a tax of 65 pounds per tonne, Trade and Industry minister Rachid Mohamed Rachid said in May.
