Consumption down in Egypt but high commodity prices remain a problem

November 19, 2017

Cairo - Consumption is down across the country in Egypt amid an economic reform programme aimed at strengthening the flag­ging economy.
“Among other things, the reforms aim to stimulate production and re­duce consumption,” said Mohamed Maait, vice-minister of finance for treasury affairs, “and this is what is actually happening.”
Reforms, including the flotation of the Egyptian pound, a value added tax and the slashing of costly energy, electricity and water subsidies, were initiated in November 2016 to bridge a yawning budget deficit, increase foreign currency reserves and bol­ster investor confidence.
Although the currency flotation led to a rise in commodity prices, economists said they hoped the middle- to long-term effects would be positive.
As of July 2017, electricity con­sumption was 42% less than the previous year, the Central Agency for Public Mobilisation and Statis­tics said. Gasoline consumption fell 4.2% and diesel consump­tion 7.1% in the first quarter of the 2017-18 fiscal year, which began in July.
The reduction in energy consump­tion means savings of billions of dol­lars, Maait said. “The food, energy, electricity and water subsidies com­bined ate up one-third of spending in the state budget,” he said. “We are saving most of this money now thanks to the reduction in subsidies and consumption.”
Despite the savings, many Egyp­tians complained they are not seeing any overall positive effects, given high commodity prices.
One year after the currency flota­tion, commodities that were consid­ered basic staples are now viewed by many as luxury items. The prices of red meat and chicken are double what they were a year ago. The costs of fruit and vegetables also are high, with Egyptians expressing frustra­tion at their reduced purchasing power.
“The government can easily claim that it has succeeded in convincing the public to rationalise their con­sumption,” said Alia el-Mahdi, an economics professor at Cairo Uni­versity. “This is not rationalisation but an impoverishment of millions of people who are no longer capable of meeting their basic needs.”
Almost one-third of Egypt’s popu­lation — more than 30 million people — is considered poor and any rise in commodity prices would increase the number of Egyptians living be­low the poverty line.
The government has increased spending on social welfare pro­grammes and some food subsidies. About 70 million people are regis­tered in Egypt’s food rationing sys­tem. The government has increased funds allocated for the system and plans to specify more money next year with the total elimination of en­ergy, electricity and water subsidies.
However, a rise in the exchange rate of almost all foreign curren­cies against the Egyptian pound, induced by last year’s currency flo­tation, has led to a marked decline in imports and a rise in exports. The Trade and Industry Ministry said Egypt’s imports dropped almost $10 billion (19.8%) in the first nine months of 2017 compared to the pre­vious year.
Exports of many products are ris­ing, with textiles, vegetables, fruit and construction materials leading the way.
Economists expressed concern that rising inflationary pressures and a drop in the purchasing power of consumers would lead to a mar­ket recession and negatively affect investments.
The consumer inflation rate dropped to 30.8% in October, com­pared to 31.6% in the previous month, but the rate is still very high, economists said.
“True, consumers are rationalis­ing their consumption but this is be­cause they cannot cope with rising commodity prices,” said Farag Abdul Fattah, an economics professor at Cairo University. “A market suffering recession is the last place investors will like to go to.”