Egypt is in for trouble with or without the IMF
Cairo, March 5, 2013
Egypt is at risk of a "revolution of the hungry" two years after Hosni Mubarak was ousted in a popular uprising, as food and energy prices will soar with or without an IMF deal.
Failure to get the $4.8 billion loan or some other funding would have dire consequences: if Egypt keeps burning foreign currency at the rate it has done since the 2011 uprising, it will have none left in little more than a year.
But success would also stir Egypt's boiling social and political cauldron. In return for a lifeline, the International Monetary Fund will demand reform of a subsidy system that long ago became unaffordable.
The rich benefit most from the energy subsidies that exhaust state finances but the poor will suffer most if they go.
"Whether we have the IMF or not there will be difficulty ... the IMF requires certain economic reforms," said Salah Gouda, an economics professor. "If we lift subsidies right away then you are looking at a revolution of the hungry."
The economic gloom has dragged Egyptians from the high of the "Arab Spring" revolution to deepening poverty.
Constant feuding between the ruling Islamists of President Mohamed Mursi and the opposition over the future character of Egypt has heightened tensions and cast serious doubt on any hopes for a political consensus on reforming the economy.
The United States, the largest shareholder in the IMF, is worried about how the economic crisis could further destabilise a strategic ally in a turbulent region.
"It is paramount, essential, urgent that the Egyptian economy gets stronger, that it gets back on its feet," Secretary of State John Kerry said on a weekend visit to Cairo. "It's clear to us that the IMF arrangement needs to be reached, that we need to give the market that confidence."
The figures speak for themselves. The foreign currency reserves have slid to $13.5 billion at the end of February from $36 billion on the eve of the uprising.
The dive slowed sharply last month. However, reserves have fallen roughly $865 million a month since the end of 2010, meaning the current levels would last only about 15 months if this rate were to continue unabated.
"Egypt's foreign exchange reserves are still extremely low and below what the central bank previously called a critical minimum level," said William Jackson of Capital Economics in London. "Our bigger concern is if there is a fresh eruption in political turmoil, and investors and Egyptians lose confidence."
If Egypt were to run out of money - both foreign and local currency - the subsidy system would probably collapse anyway, leading to shortages and price rises in a chaotic return to the free market. Such a scenario of upheaval in the Arab world's most populous country supports those who say an IMF deal is vital.
Confidence is already in short supply. The central bank has spent more than $20 billion trying to prop up the Egyptian pound but it has still lost 14 percent against the dollar since before the revolution - more than half of this since the end of last year.
This slide has added to the huge burden on the budget from the subsidy system which dates back to the rule of nationalist President Gamal Abdel Nasser who seized power in 1952.
Its cost has been soaring for years along with the population, most of whom are squeezed into the five percent of Egyptian territory that is not desert.
Now the government is having to buy most of the oil and much of the wheat for subsidised energy and bread on international markets with a devaluing local currency. Subsidised bread, which goes to the poor as better-off Egyptians prefer higher quality loaves, consumes about five percent of the state budget.
A far bigger problem is energy, which devours about 20 percent of the budget. Petroleum Minister Osama Kamal estimated last month that the energy subsidy bill would hit 120 billion Egyptian pounds ($17.8 billion) in the financial year to June.
Egypt cannot afford this kind of money. In an economic plan produced last month for the IMF, the government forecast the budget deficit would reach 189.7 billion pounds this financial year. That would equal 10.9 percent of Egypt's total annual economic output and assumes that reforms will go ahead.
Without such action, the deficit would reach 12.3 percent of GDP. By contrast Portugal, a country where living standards are at least three times those of Egypt, had to seek a bailout from the IMF and European Union in 2011 even though its deficit peaked below 10 percent.
Inevitably the IMF will be gunning for the subsidies in negotiations for the loan, which have yet to start.
Masood Ahmed, who heads the IMF's Middle East and Central Asia Department, says that blanket subsidies are an inefficient way of protecting the weakest in society.
In an article looking at the Arab countries in general, he said that only about 20 to 35 percent of spending on subsidies reaches the poorest 40 percent of the population.
"Now that budgetary pressures make it all the more urgent to reform generalized subsidies, it has become equally urgent to develop better and more robust safety nets that target the needy," he wrote in this month's edition of the IMF's online Finance and Development magazine.
Two fifths of Egyptians live on less than $2 a day and while the poor don't own cars a big rise in fuel costs due to subsidy cuts would feed through to higher transport costs which would push up the price of the food they buy. – Reuters