Egypt´s Brewing Crisis: Subsidies (WSJ) WALL STREET JOURNAL) By MATT BRADLEY CAIRO, EGYPT 03/23/12)
WALL STREET JOURNAL
WALL STREET JOURNAL Articles-Index-Top
Cairo Faces Public Wrath if It Reforms Bloated and Corrupt System,
but Alternative Is a Budget Morass
CAIRO—Egypt´s interim government has just months to tear apart the
country´s bloated subsidy system before the nation faces a budget
crisis, economists and government officials say.
Pressure to address the issue mounted Thursday, when an International
Monetary Fund representative left Cairo with few signs that
politicians are nearing a deal for a much-needed $3.2 billion loan.
Delays could deepen Egypt´s troubles: The country´s subsidy system
will cost substantially more if IMF-backed reforms aren´t made before
a widely anticipated fall in the value of Egypt´s currency.
Egypt´s generous subsidies on food and fuel are widely seen as
The interim government, grappling with a hollowed-out economy
following last year´s revolution, has propped up the Egyptian pound
by purchasing the currency in the market. Those operations have drawn
down the country´s once-robust stock of foreign reserves—which the
government also uses to buy the imported fuel and wheat it offers its
population on the cheap.
Economists believe Egypt will have no choice than to abandon its
support of the pound, making devaluation imminent. A weaker pound
will lead to higher prices for imported food and fuel, further
burdening Egypt´s tight budget and raising fears that the government
could be forced to abruptly drop subsidies on which tens of millions
of Egyptians rely.
Subsidies already absorb at least 28% of Egypt´s budget outlay of 476
billion Egyptian pounds ($79 billion). About two-thirds of that goes
toward fuel and energy, with the rest aimed at reducing food prices,
particularly for wheat.
Politicians here have for decades lacked the political will to cut
the subsidies, which critics say have also created corruption and
waste. But the programs now appear to be a time bomb for an
administration without the political capital to carry it out. That
leaves the interim government facing a dilemma: It can reform the
subsidies regime and face public wrath, or have a budget disaster.
The country´s interim military leadership hasn´t commented on the
subsidy regime, leaving public statements to the civilian government
it appointed. Officials, speaking anonymously, acknowledge that the
subsidy system is rife with inefficiency and offers an open window
"There is wide social agreement on removing and reforming subsides,"
said a high-level policy maker in the Egyptian government. "Nobody
has been brave enough to take this decision."
Secretary of State Hillary Clinton on Friday plans to waive
congressional democracy-promotion conditions to allow the release of
up to $1.5 billion in aid to Egypt, a senior State Department
official said, despite concerns the country is backsliding on
commitments it made to democratic governance. These funds won´t have
an impact on subsidies since they can only be used to pay U.S.
defense and security companies for contracts with Egyptian military.
Elected politicians have yet to fully embrace the IMF´s overtures to
extend a $3.2 billion loan that Egypt´s military rulers rejected in
July. IMF representatives are expected to reconsider the country´s
loan application at the end of March. Before that, Egypt´s finance
ministry is due to release an economic strategy to which it says
subsidy reductions will be central.
Egyptian financial officials hope that IMF assent to the loan will
entice foreign investors and inspire Arab Gulf states to pitch in
with billions of dollars worth of aid promises that were never
But the loan´s prospects were dealt a further blow Thursday. The
Muslim Brotherhood´s Freedom and Justice Party, which enjoys a nearly
50% plurality in Egypt´s lower house of Parliament, is opposed to the
loan because the government hasn´t adequately explored other means of
raising money domestically, said Brotherhood spokesman Mahmoud
Ghazlan. This week, other Brotherhood leaders had said the group is
open to the loan.
Egypt is the largest per capita wheat consumer and largest wheat
importer in the world, relying on foreign supplies for about 60% of
domestic consumption. Much of that wheat goes toward an Egyptian
dietary staple, a round pita bread called aish, or "life." For the
40% of Egyptians who live on less than $2 a day, subsidies provide a
While a sliding pound would significantly raise the cost of feeding
this nation of more than 80 million people, reformers consider bread
prices largely untouchable. When then-President Anwar Sadat attempted
to lift the subsidies in 1977, the country descended into nationwide
Egypt also imports about 14 million tons, or about 40%, of its
petroleum and fuel products each year. Already, prices are rising:
Public expenditure on energy is likely to increase by 25% to 120
billion Egyptian pounds during the next fiscal year thanks to a
global rise in energy prices, Egypt´s Minister of Petroleum said
Egypt´s blanket fuel subsidies ostensibly allow all Egyptians to
purchase butane, a cooking gas, for about EGP2.8, just under 50
cents, compared with an international price of nearly $13 for a 12.5-
kilogram cylinder. In reality, most Egyptians pay about $5 for an
underfilled cylinder of about 10 kilograms. Fuel importers blame the
markups on multiple layers of middlemen and corrupt side-sales.
This week, the government blamed "leakage"—a euphemism for smuggling
the subsidized gasoline out of the country, where can be sold at a
markup—for fuel shortages that have recently caused motorists to line
up at gas stations throughout the country.
Economists say the prime beneficiaries of across-the-board energy
subsidies are wealthy Egyptians, who pay the same rock-bottom prices
for gasoline, cooking fuel and electricity as do the country´s poor,
but who each consume much more in their cars and homes.
Economic policy makers´ calls to cut such spending have gained
urgency. Instability sparked by last year´s uprising against then-
President Hosni Mubarak has sent foreign investors and tourists
scurrying. Egypt´s industrial production has plummeted.
Economic growth for the 2011-12 fiscal year, which runs through June,
is expected to be 1%, according to Capital Economics, a London-based
research firm. That marks a significant decrease from about 5.1% in
2009-10, according to the Ministry of Finance.Net foreign direct
investment in Egypt declined to $440 million during the first quarter
of the 2011/2012 fiscal year, compared to $1.6 billion during the
same period in 2010/2011.With foreign-currency inflows curtailed,
Egypt has spent more than $20 billion of the $36 billion foreign-
exchange reserve it held before the revolution began in January 2011.
The defense of the pound has aimed to avoid the kind of inflation
that could produce more instability after a year of street rioting
that has left more than 1,000 people dead.Egypt´s foreign reserves
offer little more than three months of import cover, economists say.
They say the country´s Central Bank will be compelled to allow the
Egyptian pound to weaken within the next several months.
Even the rosiest predictions expect the pound to fall to at least 7
Egyptian pounds to the dollar from its current exchange rate at just
above 6 Egyptian pounds.
Though Egyptian finance officials project a budget deficit of about
8.6% of gross domestic product, many economists expect the shortfall
to exceed 11% of GDP even before factoring in the higher subsidy
costs. A diminished pound could send the local-currency cost of
energy subsidies up by as much as 30% to 40%, said Magda Kandil, the
executive director of the Cairo-based Egyptian Center for Economic
Studies, a liberal-minded think tank.
The government is currently reviewing plans to shift the blanket
subsidy system to a direct-payments regime, under which the state
gives poor consumers cash handouts to cover for higher prices. Pilot
programs for a "smart card" plan, in which poor Egyptians could
purchase low-cost fuel and bread with an electronic card, have been
operating in Egypt for the past several years. Write to Matt Bradley
at email@example.com (Copyright © Dow Jones & Company, Inc.)
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