Egypt braces for austerity as it finalises IMF loan

Sunday 21/08/2016
IMF head of delegation for Egypt Chris Jarvis (L) and Egyptian Minister of Finance Amr el-Garhy attend a news conference in Cairo, on August 11th.

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.”