Egypt braces for austerity as it finalises IMF loan
Cairo - Egypt plans to reduce spending and raise revenues to be eligible for a $12 billion loan from the International Monetary Fund (IMF).
“We will reprioritise public spending to reduce this spending and also raise revenues,” Egyptian Deputy Finance Minister Mohamed Moeet said. “To raise revenues, among other things, we will include informal economic activities in the formal economy.”
The IMF assistance package, subject to regulatory approval, is a fraction of what Egypt needs financially over the next three years. Egypt says it has a funding gap of $30 billion.
Tourism, one of the country’s main sources of revenues, was down more than 70% in 2016 compared with the first eight months of 2015. Egypt’s exports have also fallen and foreign remittances have plummeted. Egypt spent about $90 billion in 2015 to import food, electrical appliances, cars and clothes.
Coupled with a drop in foreign aid, especially from Gulf countries that had offered Egypt up to $30 billion in cash and energy assistance over the last three years, the economy is heading towards dire straits.
Foreign currency reserves total $15.5 billion, hardly enough to cover food imports for the next three months. Public debt has risen to 98% of gross domestic product (GDP) and 12.5% of the workforce is unemployed.
The government said it will work to reduce the public debt to 88% of GDP in the next three years, which raised fears the reduction would come at the expense of the poor.
“The austerity plan will cause suffering to the poor because it will cause the prices of all services and commodities to rise,” said Salah al-Guindy, an economics professor from Mansoura University. “This will create pressure on the poor even more and render millions of people incapable of meeting their needs.”
Egypt’s poverty rate is 27%. Economists said measures to reduce spending will impinge on the ability of millions of Egyptians to live at subsistence levels.
Cairo’s austerity plan includes doing away with millions of dollars of food, electricity, energy, transport and water subsidies.
The government, which has already raised the price of home electricity, said it plans to eliminate $5.4 billion in electricity subsidies over five years. It plans to remove water and transport subsidies and exclude millions of people from the national food subsidy system.
The government will also impose new taxes, including a value-added tax, which has been approved by parliament.
All the measures are expected to lead to consumer price increases across the board, making life harder for millions of Egyptians.
The IMF and the government said keeping the social safety net intact is an intrinsic part of Egyptian economic reform.
“We will make sure that the poor are not negatively affected by any of the new measures,” Moeet said. “We just want to deliver the subsidies to those who need them.”
Commodity prices rose an estimated 30% even before the implementation of the new measures. Traders blamed the increase on the changes in the exchange rate of the US dollar.
Egypt imports almost 80% of its needs, the government said. Some economists say skyrocketing commodity prices and worsening financial conditions are due to an inefficient government that has failed to get the economy on a proper track.
“Instead of stimulating production, fighting corruption, attracting investments and encouraging exports, the government borrows money and imposes taxes on citizens,” said Samir Saad, an economics professor at the American University in Cairo. “This policy and the new austerity measures will just make the rich richer and the poor poorer.”
The IMF Executive Board is expected to consider the $12 billion loan in the coming weeks. The agreement is also contingent on Egyptian lawmakers, who are expected to soon debate the terms of the agreement and the economic reform programme.
“We cannot approve a programme that forces the poor to pay the heavy price of reform,” said independent MP Haitham al-Hariri. “The government needs to convince us that the austerity measures will not turn the people into street beggars.”