Is unrest unavoidable in Egypt after IMF loans?

Sunday 02/10/2016
Government is ex­pected to take drastic measures to reduce budget deficit

LONDON - Egyptians who lived through the 1970s are not about to forget the wide­spread riots and demon­strations that took place in January 1977. Analysts in Cairo wonder whether such a scenario will be re-enacted after the recent International Monetary Fund (IMF) loans to Egypt.

The popular uprisings of the ‘70s were triggered by unexpected and significant hikes in the prices of basic staples, including bread, rice and sugar. In the face of major pro­tests, then Egyptian president An­war Sadat had no choice but to roll back the increases and call on the military to quell the demonstra­tions to re-establish order.

The lessons were painfully learned by subsequent administra­tions in Egypt that steered clear of raising prices of bread and sugar and other commodities deemed basic to the daily life of the aver­age Egyptian citizen. The Egyptian government stayed away from the IMF until 1991 when Atef Sedki was appointed prime minister during the Mubarak regime. Sedki’s gov­ernment took out an IMF loan to finance privatisation efforts and financial market reforms. Prices of basic commodities were not af­fected.

In the minds of Egyptians, the IMF is often associated with re­moving subsidies, raising prices and making worse the misery of the poorer classes. In exchange for its easy-term loans, the IMF often im­poses on borrowers the adoption of policies that give the private sector a wider share in economic activities while reducing government inter­vention in the market and limiting the scope of the public sector.

The IMF also recommends the speedy privatisation of state-owned companies, the liberalisa­tion of currency prices and the gradual phasing out of subsidies from the state budget.

The IMF’s policies are not per­ceived as taking into consideration the huge effect of those measures on the lives of the middle and poor classes nor of paying enough atten­tion to issues of social justice.

Egyptians of modest income fret over the measures their govern­ment is likely to introduce follow­ing its recent agreement with the IMF over a $12 billion, four-year loan. The disbursement of the first instalment of $1 billion was an­nounced on September 9th.

The Egyptian government is ex­pected to take drastic and effective measures to reduce the enormous budget deficit, which is estimated at 12% of gross domestic product (GDP) in the 2016 budget. Egypt’s debt has reached more than $250 billion in internal debt and about $53 billion in foreign debt, despite a generous flow of financial aid from Gulf countries, particularly from the United Arab Emirates and Saudi Arabia.

A major step towards this end will be the reduction of subsidies in the energy sector. The Egyptian government has announced an in­crease of 40% in electricity prices. Natural gas costs have also been substantially increased.

The plan is to do away with sub­sidies in the energy sector in three or four years. Egyptians will then be paying market prices for their energy needs.

Energy subsidies to many public sector companies, such as the rail­way company, will also be gradu­ally lifted. All of these reductions in public expenditures will be combined with measures to in­crease state revenues. Recently, the Egyptian government enacted a value-added tax (VAT) on a long list of goods and services, which is expected to account for a 13% in­crease in tax revenues.

The IMF has asked the Egyptian government to switch to more flexible foreign exchange policies based on offer and demand. The Financial Times recently quoted Chris Jarvis, the IMF mission chief for Egypt, as saying that his institu­tion has asked the Egyptian gov­ernment to apply for an additional $5 billion-$6 billion in facilities to shore up the country’s reserves in foreign currency before the expect­ed drop in the value of the Egyp­tian pound.

The official exchange rate in Egyptian banks is 8.88 pounds to one US dollar. It is 13 pounds to the dollar on the black market. If the Egyptian Central Bank adopts liber­al foreign exchange policies driven by offer and demand, it will result in the devaluation of the Egyptian pound.

The natural consequence of such a step is a substantial increase in the prices of most goods and ser­vices because Egyptian industries rely heavily on imports of machin­ery, spare parts and raw materials.

All of these measures will inevi­tably remove subsidies from some basic services for Egyptians, such as electricity and transport. With VAT, the majority of goods and ser­vices will become very expensive. The continuing devaluation of the Egyptian pound against the dollar means Egyptians will be earning less, not more.

In a country where 40% of the population live below the poverty line, the majority of the remaining 60% have limited incomes and the per person daily income is $1 and an estimated 40% of job-seeking young people are unemployed, such drastic measures will place tremendous pressure on the major­ity of Egyptians.

Recently, spontaneous demon­strations by hundreds of parents flared up after subsidies of infant milk formula were lifted. Prices doubled in an instant. These par­ents were not exercising any politi­cal activity but were spontaneous­ly reacting to their sudden inability to provide milk for their children.