x Abu Dhabi, UAESaturday 21 October 2017

Egyptians are preparing for a new era of austerity

Prices are rising fast as the government implements a series of subsidy cuts, devaluations and new taxes - part of a programme of promised to the IMF to secure US$12 billion in loans

Abdel Fattah El Sisi, Egypt's president, signed an initial agreement with the IMF on August 11 for a US$12 billion loan over three years to help fix its ailing economy. Nariman El-Mofty / AP Photo
Abdel Fattah El Sisi, Egypt's president, signed an initial agreement with the IMF on August 11 for a US$12 billion loan over three years to help fix its ailing economy. Nariman El-Mofty / AP Photo
A few years ago Imad would not have imagined himself queuing in the Cairo sun for a weekly ration of subsidised baby milk.

But rising prices mean his civil servant's salary barely lasts the month and the government is tightening its belt further.

"Electricity is up, food is up. The only thing that doesn't rise in Egypt is people's pay yet all they talk about is cutting subsidies," says Imad, who gives only one name. Smartly-dressed, like many in the line, he does not fit the common image of poverty.

Squeezed by economic and political turmoil since the 2011 uprising that toppled Hosni Mubarak, Egyptians are preparing for a new era of austerity.

The reforms are part of a programme to cut the budget deficit and rebalance currency markets promised to the IMF to secure US$12 billion of lending over three years.

But political opposition to measures involving subsidy cuts, devaluation and new taxes while tens of millions rely on state-subsidised food, make the programme ambitious.

The cost of failure, say economists, is high. The budget deficit is nearly 10 per cent of GDP. Inflation is 14 per cent. A shortage of foreign currency has hit imports.

Foreign investors are unable to repatriate profits and some are shutting up shop, hit by capital and import controls imposed over the past 18 months.

Businesses are unable to secure enough foreign currency to import components, or they pay a premium above 40 per cent to obtain dollars on the black market. They talk of survival not growth.

"It's very clear that circumstances have led Egypt to really need IMF support . it will have to make changes to ensure the implementation of the plan it presented to the IMF," says Angus Blair, the chief operating officer of Pharos Holding, a Cairo investment bank.

"The system in Egypt, as in overall governance, is slow . and this is a reform programme that calls for quick action and bravery, especially because some of the impact will be inflationary."

Successive governments have baulked at cutting subsidies after the late president Anwar Sadat removed them on flour, rice and oil in 1977, part of a previous effort to secure IMF-backed financing.

He reinstated them after poor Egyptians rioted, attacking symbols of the growing divide between them and wealthier classes they saw as the beneficiaries of Sadat's policy to liberalise the economy after more than a decade of socialism.

Although Egypt has returned to the IMF virtually every decade since the 1970s, implementation of reforms has been mixed. Many Egyptians are uneasy with a programme they see as being foreign imposed and are convinced it will hurt all but the richest.

More recently, Egypt negotiated two IMF deals that were never finalised, including a $4.8bn loan initially agreed in 2012. The reluctance with which policymakers have previously approached reforms means investors are not rushing back yet.

Chris Jarvis, the head of the IMF's Egypt mission, says those deals had failed due to a lack of political will at the top to implement reforms. This time, he says, political commitment appears stronger.

The current president, Abdel Fattah El Sisi, said last week he would not hesitate "for one second" to take the difficult steps necessary to ensure Egypt lives within its means.

Electricity prices were raised by 20 to 40 per cent this month under a five-year programme that will see power subsidies gradually eliminated. Petrol subsidies are next. Reforms to the bloated civil service have been passed by parliament, although heavily diluted.

But critics say change is late and leaves little breathing room. They say the billions of dollars offered to Egypt by Arab allies since the country removed the Muslim Brotherhood from power in mid-2013, were wasted.

"This support did more harm than good as it was not conditional on reform delivery, and actually removed the urgency to carry out critically needed policy changes," says VTB Capital in a note to clients. "Egypt now has a weaker macro/social starting point and requires deeper and, hence, more painful adjustment."

Egypt has announced plans to expand its social security net to mitigate the impact on the poorest but many fear measures will exacerbate inequalities that helped to stoke anger against Mr Mubarak before the 2011 revolt ended his 30-year rule.

A group of socialist parties have issued a statement rejecting the IMF deal they say saddles Egypt with more debt and leaves it beholden to foreign entities.

The government's first test is a law proposing VAT at 14 per cent that is being debated in parliament but faces opposition from policymakers worried about inflation.

Delays to the VAT changes have already held up the first tranche of a $3bn World Bank loan. The first $2.5bn IMF payment is not linked to specific measures but subsequent instalments are.

Another key issue is foreign exchange policy. Egypt has promised a more flexible exchange rate to ease the forex shortage and end the black market for dollars.

The move is certain to involve the second devaluation this year, raising inflation, but the central bank says it must first build foreign reserves from $15.5bn to $25bn, a figure it hopes to reach by year-end.

For Sami Khangy, who runs a printing press, the dollar shortage is urgent. His machines have been silent for weeks.

"You are talking about months and years. I am talking about weeks. If I can't get paper soon I'll have to sack my staff," he said. "I could be out of business by the time this money comes."

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