Weakening currency complicates government's policy options

INSIGHT: Egyptians losing patience with Sisi as economy deteriorates

 23 Oct 2016 - 17:33

INSIGHT: Egyptians losing patience with Sisi as economy deteriorates
Egyptians gather to buy subsidized sugar from a government truck after a sugar shortage in retail stores across the country in Cairo, Egypt, October 14, 2016. Picture taken October 14, 2016. REUTERS/Amr Abdallah Dalsh TPX IMAGES OF THE DAY

By Lin Noueihed / Reuters

CAIRO: A cartoon which appeared on social media shows a drowning Egyptian, only his hand protruding from the depths, waving for help. The next strips show President Abdel Fattah al-Sisi diving in, taking the drowning man's watch and turning away.

The cartoon captures the mood of desperation and anger  among Egyptians clobbered by tax rises, soaring food price inflation and cuts in state subsidies. Some fear a repeat of the mass street protests that drove Sisi's two immediate predecessors from power.

Core inflation is at seven-year-highs, near 14 percent, as a foreign exchange shortage and a hike in customs duties bite hard in a country that imports everything from sugar to luxury cars.

The government raised electricity prices by 25-40 percent in August and is phasing in a 13 percent value-added tax approved by parliament in the same month.

As part of reforms aimed at clinching a $12 billion IMF loan needed to plug its gaping budget deficit, the government is also expected to cut petrol subsidies and devalue the Egyptian pound, prompting a further cycle of inflation in Egypt, where tens of millions rely on state-subsidised bread.

"Prices are rising daily, not monthly," said Gamal Darwish, a civil servant, as he queued to buy subsidised sugar in Cairo. 

"This situation will push people to do bad things. It could slip out of hand and the government will not be able to control it because if the poorest cannot get enough to eat they will steal. If someone has children to feed, what will he do?"

The government has tried to win public support for the austerity measures with a billboard campaign and media blitz and has also sought to expand social security schemes to shield the poorest from the effects of the rising prices.

But many Egyptians who would not qualify for such schemes complain they can no longer afford meat, while sugar shortages have driven fears of an impending food crisis.

Social justice was one of the key demands made by protesters during the 2011 revolt that ended Hosni Mubarak's 30-year rule. 

In 2013 Egyptians again filled the streets to protest against Mohammed Mursi, the Muslim Brotherhood official who was democratically elected after the uprising but presided over a year of power cuts, petrol shortages and economic turmoil.

Three years after Sisi, an army general, ousted Mursi and seized power, his promise to restore stability is wearing thin. 

The arrival of sugar in a government van caused a frenzy in the working class district of Sayyida Zeinab on Tuesday, as people jostled, 10-pound-notes in hand, for 2-kilo rations.

"After two revolutions, the Egyptian people are going backwards not forwards," said Abdel Hasib Ahmed Mohamed, a middle-aged court employee watching the sugar scrum. "We are heading for an explosion and this time it won't be peaceful."

NO EASY ANSWERS

For the government, the case for economic reforms and the need to seal a planned three-year lending programme with the International Monetary Fund is clear.

Egypt's economy is likely to grow 3.5 percent in the 2016/17 fiscal year, a Reuters poll showed on Thursday, missing the government's target of about 5 percent and dipping below last year's growth rate.

The budget deficit is near 10 percent of national output. 

The foreign currency shortage has made it hard for firms to import and foreign investors to repatriate profit. Some have shut shop after nearly two years of capital and import controls.

Dollar rationing at banks has driven businesses toward the black market where the dollar is now selling for more than 15.5 pounds - a huge mark-up from the official rate of about 8.8.

Egypt's IMF programme has yet to win the lender's final approval because the government must first muster $6 billion in bilateral financing, giving it the cash buffer it needs to devalue and ditch its fixed exchange rate. The IMF has said it is helping Egypt to secure the necessary funds.

The government said this week it had secured 60 percent of the bilateral funds, boosting foreign reserves to $19.6 billion in September.

Central Bank Governor Tarek Amer has said he would consider floating the pound once reserves hit $25 billion. 

But the rising prices and periodic shortages in state-subsidised food have forced the government to increase its purchases, burning rapidly through those newfound dollars when it is meant to be cutting spending.