Egypt Needs Economic Reform

Ahmad Raheem writes that the Egyptian government must address economic reform.

al-monitor El Haj Hussien, 67, tends to his shop selling wheat and pulses in Cairo, April 4, 2013. After two years of political upheaval, foreign currency reserves have fallen to critically low levels, limiting Egypt's ability to buy wheat, of which it is the world's biggest importer, and fuel. Photo by REUTERS/Amr Abdallah Dalsh.

Topics covered

fuel subsidy, unemployment, islamist, inflation, imf, food, egypt, economic

Apr 17, 2013

Despite the severe political crisis in Egypt, the economic woes remain very dangerous for the new regime, in light of additional negative indicators linked to the citizens’ lives in the first place.

After the public budget, which was proposed by the government for the next fiscal year, anticipated a rise in the budget deficit of as much as 197.5 billion Egyptian pounds [$28.7 billion], the Central Agency for Public Mobilization and Statistics (CAPMAS) announced that the unemployment rate rose to 12.7% in 2012, after it reached 9% in 2010. It said that this is due to the circumstances in Egypt and the consequent slowdown of economic activities.

These data show the need to embark on an economic reform program that prevents the government from relying on foreign aid, loans and deposits in order to provide the resources, after foreign currency reserves at the Central Bank of Egypt have fallen to a dangerous level, according to the [central] bank.

The government has been engaged in negotiations with the International Monetary Fund (IMF) to get $4.8 billion in loans, which requires measures to reduce the budget deficit. Therefore, the government adopted a plan to restructure energy subsidies, which cost the state 120 billion Egyptian pounds [$17.4 billion].

Although the government expected the deficit to rise to 200 billion Egyptian pounds [around $29 billion] in the new budget, the budget deficit may exceed this figure, in case the [state doesn’t] start the reform program. The government has expected the deficit in the current budget to reach 135 billion Egyptian pounds [around $19.5 billion], however, it is nearing 190 billion [around $27.5 billion].

At the end of the final round of negotiations between the government and the IMF, the IMF announced that “progress was made regarding the loan,” without reaching a final agreement. The IMF mission met with Prime Minister Hisham Qandil, Governor of the Central Bank of Egypt Hisham Ramez, Finance Minister Mursi Hijazi, other officials and loyalist and oppositionist political leaders.

The IMF said in a statement that “the Egyptian authorities have already taken valuable first steps to improve the targeting of energy subsidies. They intend to build on these steps with further actions to address, in a socially balanced way, the country’s fiscal and balance of payments deficit, and create conditions for a sustained recovery of the economy.”  It noted that “the [IMF] mission was encouraged by the constructive positions and views expressed by the representatives of political parties on economic reforms and a possible IMF support. All sides concurred on the need to protect the vulnerable sectors of society when implementing reform measures.”

Yet, Planning Minister Ashraf el-Araby who has assumed a key role in the negotiations with the IMF said in a TV interview that the negotiations “are hard,” and noted that they will be completed in the IMF meetings in Washington next week. He admitted that “the current economic situation is not good at all.”

The economic reform have been always linked to the difficult political situation, as a result of the expected consequences [which will be reflected in] the rise in prices and high burden on poor families. This could probably decrease the popularity of the regime, which will engage in a bitter struggle with the opposition in the parliamentary elections that are expected to take place before the end of the year.

After the government had announced that the program to restructure energy subsidies will be initiated in April [2013], and accordingly, specific shares of subsidized gasoline will be allocated, according to a specific priority, and then gasoline will be sold at free prices, the government then retracted. Experts explained that this is due to fearing its [the program] political impact, in light of expectations that the raising transport costs may cause protests.

Ahmed el-Najjar, member of the economic committee at the Freedom and Justice Party (FJP), the political arm of the Muslim Brotherhood, and advisor to the minister of finance denied to Al-Hayat that initiating the economic reform program is linked to the political situation. He said that “the program to restructure energy subsidies is developed as part of a comprehensive economic reform program, and could be probably postponed due to procedural steps, most importantly preparing the main infrastructure, preparing the gas stations for the use of smart cards and controlling the warehouses. The government is working on all these issues.”

He explained that restructuring energy subsidies does not only cover gasoline. It is a program that consists of all energy derivatives, whether gasoline, diesel, fuel oil and liquefied gas. He added that the objective for restructuring energy subsidies “is not to rationalize it, but to give support to those who deserve it, and to choose the best ways to deliver it.”

On the expectations that implementing this program could cause protests, in the event of a price rise, Najjar said: “The government is restructuring the system in general, because the leakage rate is very high, and the section of society that benefits the least from energy subsidies is the poor. ... Restructuring [energy subsidies]  is required, regardless of whether or not, it will result in a financial abundance.”

He stressed that overcoming the unemployment problem needs increased investment, and added that the economic crisis following the revolutions “are nothing unusual”. He said: “In the short term, some problems will be overcome, and reforming the country's economy may take years.”

The opposition forces believe that saying that the economic reform program will not be negatively reflected on the poor “is incorrect.” Khaled Ali, former presidential candidate and head of the Egyptian Center for Economic and Social Rights, who sued Morsi in order to stop negotiations regarding the IMF loan said: “The price for these actions will be only paid by the poor, in the absence of the state control over producers and manufacturers, while leaving the people a prey to the investors’ wishes.”

Speaking to Al-Hayat, he said: “They are talking about increasing energy prices, which are paid by factories that produce strategic goods, then they let the investors raise the price of their products at a rate higher than the rate of energy prices rise. At the end, the citizen is the one who pays a double bill. For this reason, they postpone the implementation of these programs until after the elections, because they are aware of their negative impacts on the poor.”

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