A New Pricing Mechanism for Petrole

On 30 December 2018, Prime Ministerial Decree No. 2764 of 2018 was published in the Official Gazette, setting a new pricing mechanism for petroleum in Egypt (the “Decree”).[1] The Decree establishes a technical committee to be in charge of automatic pricing for petroleum products, pegging domestic retail prices of 95-octane fuel as of the beginning of 2019 to international prices. Changes to actual domestic retail prices of 95-octane fuel are expected by April 2019.

Background

In November 2016, the Executive Board of the International Monetary Fund (“IMF”) approved financial assistance to Egypt in the form of an Extended Fund Facility (“EFF”) totalling USD 12 billion to be made through tranches over three years. The EFF’s stated aim is to support a comprehensive economic reform program in Egypt that addresses, among other things, the foreign exchange market, budget deficits and government debts, energy reforms, job creation, and social protection measures targeting the most vulnerable groups. With regards to petroleum products in particular, and in line with the IMF, the government’s reform program aims to gradually eliminate fuel subsidies by the end of 2019 to cut down on budget deficits and enhance the macroeconomic environment.[2]

The Decree

The Decree was published following the IMF Executive Board’s postponement of the disbursement of an EFF tranche, worth USD 2 billion. The Decree regulates the new pricing mechanism for 95-octane fuel in Egypt, which amounts to only 4% of the daily consumption of fuel in Egypt.[3] To begin with, the Decree establishes a committee for following up on the automatic pricing mechanism of petroleum products in Egypt (the “Committee”). The Committee is to include representatives of the Ministry of Petroleum and Mineral Resources, the Ministry of Finance, and the Egyptian General Petroleum Corporation, who are nominated by the relevant minister. It is to undertake the review of both the new pricing formula and the implementation of the automatic pricing mechanism. As for the new fuel pricing formula, the Decree tasks the Committee with reviewing it every three months to ensure that the domestic retail price of 95-octane fuel reflects the international price of Brent Crude and the exchange rate. The Committee is to also keep in consideration other factors, which remain undefined in the Decree, when reviewing the formula. Although the Decree does not identify these factors, it is not far-fetched to infer that these include distribution costs (including wholesaler and retailer margins) and tax levels for fuel products, as per a technical note published by the IMF’s Fiscal Affairs Department on automatic fuel pricing mechanisms in developing countries.[4] The Decree also assigns the Committee with the task of overseeing the implementation of the automatic pricing mechanism and proposing to the Minister of Petroleum and Mineral Resources, and the Minister of Finance recommendations and suggestions related to the effective implementation of said mechanism, including solutions to any shortcomings. Furthermore, the Decree specifies that the automatic pricing mechanism is to be implemented on 95-octane fuel, inclusive of value-added tax (“VAT”), as of the end of December 2018. However, this will only be reflected on the price of 95-octane fuel to consumers after the first quarter of this year, with the change – whether increase or decrease – being within a 10% range of the current retail price. As such, the Decree sets a price band on the magnitude of retail price changes. However, while the Decree refrains from touching on the pricing of fuel of other octane ratings, there were news reports that a similar mechanism will be announced for the other grades of fuel in June 2019.[5]

Conclusion

The Decree seems to follow the aforementioned IMF Fiscal Affairs Department’s technical note on both automatic fuel pricing and price smoothing mechanisms. According to the technical note, not only is it necessary for developing and emerging countries to adopt automatic fuel pricing mechanisms by which increases or decreases in international fuel prices are fully passed through to domestic fuel prices via measures such as a fuel pricing formula and pre-specified regular intervals to review and reflect international price changes, but it might be equally desirable to incorporate price smoothing mechanisms, such as price bands, over the medium term to avoid sharp changes in domestic prices which might negatively affect domestic consumers. However, these dual mechanisms of automatic fuel pricing and price smoothing are merely the first stage in transitioning to a fully liberalized fuel pricing and supply regime.   [1] Prime Ministerial Decree No. 2764/2018 establishing a technical committee for following-up on the automatic pricing mechanism of petroleum products and reviewing the new pricing formula on a quarterly basis, Official Gazette, Issue No. 52 (bis.) (a), 30 December 2018. [2] International Monetary Fund, “Key Questions on Egypt”, 2 July 2018, available through this link. [3] Al Masry Al Youm, “Linking 95 octane fuel to international prices in April”, Amira Saleh and Mohamed Abdel Aty, 7 January 2019, available through this link (in Arabic). [4] The Fiscal Affairs Department at the International Monetary Fund, “Automatic Fuel Pricing Mechanisms with Price Smoothing: Design, Implementation, and Fiscal Implications”, December 2012, available through this link. [5] Bloomberg, “Egypt Expects IMF Loan Installment in January as Talks Delayed”, Mirette Magdy, 24 December 2018, available through this link.