Is unrest unavoidable in Egypt after IMF loans?
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.