Friday,20 July, 2018
Current issue | Issue 1284, (25 February - 2 March 2016))
Friday,20 July, 2018
Issue 1284, (25 February - 2 March 2016))

Ahram Weekly

How painful?

The government has announced painful measures to get the country out of the current economic slump, reports Sherine Abdel-Razek

Al-Ahram Weekly

Between a rock and a hard place is where the economy is currently located. While the dollar crunch has attracted the most publicity, other underlying economic problems have also become too great to ignore, including a persistent budget deficit, low growth rates and increasing unemployment.

This is in addition to the implications of the dollar crisis for production lines that have been shut down because manufacturers can’t pay for machinery or raw materials. The crisis is also affecting the government’s ability to secure the supply of subsidised commodities to millions of ration-card holders.

Over recent weeks, imported commodities like cooking oil have been in short supply as the dollar shortage makes it harder for state importers to secure regular supplies. Shortages have been reported across the capital and in cities from Alexandria to Minya.

With these problems in mind, the government has not been promising better days. On the contrary, it has said that conditions may worsen further.

It has recently raised the rhetoric on the need to reduce spending on subsidies, for example, with President Abdel-Fattah Al-Sisi saying in a recent speech that there is a need to further reduce costly subsidies, pointing to those on water in particular.

Meanwhile, Petroleum Minister Tarek Al-Molla said the country is “suffering” because of fuel subsidies, and that from a development perspective it would be more appropriate to divert spending towards health care and education.

The government has yet to reveal its complete plans, but the agreement recently signed with the World Bank arranging a $3 billion loan includes important economic reforms.

According to the agreement signed in December, the bank will only disburse the money if Egypt makes progress in reforms like introducing its value-added tax (VAT). Hani Kadry, the minister of finance, said on Sunday that the new tax will come into force in the second half of 2016 and is expected to yield LE40 billion annually. However, the tax still needs to be ratified by parliament.

The bank also wants to see Egypt’s public-sector wage bill reduced from 8.2 per cent of GDP in the 2014-2015 fiscal year to 7.3 per cent by 2018-2019. It also wants to see a reduction in energy subsidies as a percentage of GDP, from 6.6 per cent in 2014-2015 to 3.3 per cent by 2016-2017.

The government also plans to increase average electricity tariffs across all consumer groups, from LE0.226 per kilowatt hour in 2014-2015 to LE0.451 by 2018-2019 — almost double current tariffs. The bank has called on both electricity and natural gas prices to be raised in Egypt to further reduce government deficits.

The loan agreement comes with an effectiveness deadline of mid-June, after which it will be cancelled if the conditions are not met. However, most of the conditions are controversial and will affect the day-to-day lives of nearly all Egyptians, 40 per cent of whom live under the poverty line.

“The government has no other alternative. It is currently managing a crisis. It is in a kind of economic isolation as no international agency will grant it money while it is muddling through all these political and economic problems, neither is a foreign investor willing to pump money to it,” said Omar Al-Shenety, managing director at Multiples group.

“The only way out is to limit the budget deficit to convince the donors to give them money to kickstart the economy again,” he said.

Talk of limiting the government’s wage bill has raised fears of protests, particularly after this almost doubled in the three years starting in 2011, and after the massive increase in wages and salaries of around 25 per cent in fiscal year 2014. Following the introduction of its minimum-wage law, the government has now decided to introduce wage controls.

These, according to Eman Negm, a senior analyst at Prime Securities, include prohibiting all government agencies from hiring personnel outside the regular system, in order to halt the employment of temporary labour; the cancellation of income-tax exemptions on bonuses; and the tying of new hires in the public sector to those retiring from it.

These moves have reduced the compensation of government employees in fiscal year 2015 to LE198 billion, only adding 10 per cent to the figure of the previous year.

A closer look at the figures also reveals that the wages of government employees as a proportion of public expenditure have only increased by around two per cent in the past five years, rising slightly from 23.3 per cent of spending in 2009-2010 to 25.4 per cent in 2013-2014.

“In other words, the increase in public wages was not an outlier, but simply part of the more general trend of increased government spending,” said Ashraf Hussein, director of the Economic and Social Justice Unit at the Egyptian Initiative for Economic and Social Rights, an NGO, on the online news outlet Mada Masr.

Hussein said that, measured as a percentage of public spending, the wages of government employees comprise 28 per cent of the budget in high-income countries, 31.8 per cent in middle-income countries (like Egypt), and 25.8 per cent in low-income countries.

“Compared with many states, and even considering the hike in the overall wage bill after the 25 January Revolution, Egypt is still lower than average, with wages accounting for 25.4 per cent of public expenditure in 2013-2014,” he said.

However, the inflationary pressures created by such moves are still worrisome, and the raft of energy price hikes announced in mid-2014 pushed up inflation by around 3.5 per cent. According to a note by Jason Tuvey, Middle East economist at Capital Economics, inflation is likely to remain at or close to double digits for much of this year.

“Admittedly, Egypt stands to benefit from the weakness in global food prices. The country is the world’s largest importer of wheat, and prices of the grain are currently at five-year lows. But Egypt’s poor food storage and distribution infrastructure mean that there are regular supply bottlenecks and food inflation is structurally high. Food inflation has averaged more than 12 per cent year on year in the past five years,” Tuvey said.

Prime Securities puts the inflation figure at 10.2 per cent for the current fiscal year and 10.5 per cent for the year after, which is expected to witness the application of the long-awaited VAT.

Higher inflation and a lower wage bill will certainly affect private consumption, which contributes to GDP growth by 81 per cent. There has already been a decline in consumption, with 2014-2015 witnessing the slowest consumption growth rate since 2011 and amounting to 2.8 per cent, compared to an average of six per cent in the preceding three years.

According to Prime Securities, the slowdown in consumption came on the back of the partial lifting of subsidies and the increase in energy prices by around 30 per cent that took place in mid-2014, in addition to the successive devaluations of the Egyptian pound.

The lower the consumption, the lower the growth rates and the job opportunities the economy can create. The unemployment rate in the first quarter of 2015-2016 increased to 12.8 per cent, compared to 12.7 per cent in the previous quarter.

“All this is expected. We will see a recession, but there is no alternative, especially since the Central Bank of Egypt [CBE] is insisting on not devaluing the pound until it has built up higher reserves out of fears of higher inflation,” Al-Shenety said.

CBE Governor Tarek Amer told a TV talk show on Sunday that there is no intention of floating the pound before the reserves have reached between $25 billion and $30 billion. They currently stand at $16 billion.

“If we succeed in meeting the conditions of the World Bank loan, this will be a stamp of confidence and will be followed by others, meaning that we may then be able to tap the Eurobond market,” Al-Shenety said.

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