In November 2016, an agreement was signed between the IMF and Egypt providing for a $12 billion loan to be delivered in five steps in the course of three years.
By ZVI MAZELABDEL FATTAH AL-SISI(photo credit: VASILY FEDOSENKO / REUTERS)
On July 9, Egypt ended all oil subsidies. The price of gas rose anywhere from 18% to 30% according to the type. Egyptian streets remained quiet. President Abdel Fattah el-Sisi had just completed the sweeping reform he had promised upon being elected in 2014. That momentous step was hidden in the national budget for the year 2019/2020 beginning on July 1: $95.8 billion. Henceforth, according to an official communique published on July 6, the price would reflect production cost. At the beginning of next year, the government would implement a new automatic system, increasing or lowering prices every three months according to fluctuations of international oil prices.An exception was made for domestic gas bottles used for cooking and heating. The 30% price hike does not cover costs and the government will keep on subsidizing this staple. Public transportation was directly impacted by the move, and tariffs are expected to rise by 10% to 15% according to regional conditions. Provincial governors were instructed by the Interior Ministry to make public the new prices and to deal harshly with attempts at fraud. It is expected that industrial and agricultural products will also be impacted in line with the amount of oil involved in production, though the ministry of supply hastened to declare that there would be no increase in the price of bread.Oil subsidies to the tune of $17 billion accounted for 21% of the 2012/2013 budget, putting an intolerable strain on the nation’s economy, already in shambles following Hosni Mubarak’s ouster and the bumbling policy of the Supreme Military Committee which had taken over. Nevertheless, Sisi’s predecessors, beginning with Abdel Gamal Nasser, had found subsidies a useful tool to keep down the cost of staples, thus limiting popular opposition to the regime and ensuring social peace.While Western countries were implementing more liberal political and economic policies, Middle East dictatorships, and especially Egypt, tightened their grip, limiting development. However, they had to increase subsidies to keep pace with population growth and minimize as best they could comparisons with the rising standard of living in the West. President Anwar Sadat did try in 1977 to put an end to this ruinous policy. He increased the price of bread, which is the basis of most Egyptians diet, but had to back down when violent protests threatened to topple the regime. Mubarak’s attempts to tackle the issue failed as well.Sisi had solemnly pledged in his election campaign to reform the economy to stop the country’s collapsing in poverty and anarchy. While launching his mega-projects in the fields of infrastructure, transportation and agriculture, he turned his attention to the weight of subsidies, which prevented him from diverting substantial funds to productive projects as well as to improve education and welfare. He started in 2014 to whittle some subsidies – knowing that he was endangering his presidency – and devise means to ensure that subsidized goods would only be available to the needy. He provided them with smart-cards and established which industries still needed help and which could cope with market prices.HIS EFFORTS were viewed with skepticism by international media. It was thought that they were bound to fail and that the people would rebel against higher costs of petrol, transportation, electricity and industrial goods. They were proved wrong. The country remained calm. Egyptians apparently understood that there was no other way, and showed themselves willing to accept the measures taken, perhaps trusting their president to put the country on the path of development and progress.This first success led Sisi to turn to the International Monetary Fund for assistance in planning and implementing the necessary reforms. By accepting, the IMF was in effect showing that it was giving its moral and economic backing to the plan. By involving itself, it was demonstrating to the international community that it had faith in Egypt and that it intended to help develop the economy and open it to foreign investment. Mubarak had weighted a similar approach but backed down for fear that the required steps would lead to a wave of protests as well as “insult national pride.”In November 2016, an agreement was signed between the IMF and Egypt providing for a $12 billion loan to be delivered in five steps in the course of three years, each step conditional on checking compliance with a number of conditions. Reforms implemented so far to the lender’s satisfaction include floating the Egyptian pound, introducing a value-added tax and gradual elimination of energy subsidies as well as passing legislation to protect weaker elements and to liberalize rules concerning trade and finance.This led to a significant – 30% – overall yearly price rise, severely curtailing the purchasing power of the Egyptians, but once again there were no protests. Within a year-and-a-half, annual growth reached 4%, then 5% and the new budget has a 6% target, with an expected 6.5% to 7% for the following years. Inflation is down to 13% and the dollar, once trading at 18 Egyptian pounds is now at 16.50. Unemployment went from 15% to 11%. Foreign investments are on the rise, though far from the required level. All these indicators show that reforms are working. For the process to continue, the government will have to keep adhering to the road map adopted in agreement with the IMF and not give in to vested interests.That being said, Egypt has a population of more than one hundred million, half of them below the poverty line – two dollars a day according to UN. The birth rate remains dramatically high, with two million new mouths to feed every year, and illiteracy still at 20%. There is a lack of skilled workers. The Sinai insurgency has not been eliminated and the threat of terrorism remains high. The Egyptian president will have his work cut out to overcome these negative factors. But as the saying goes, nothing succeeds like success.
