Guest post by Isabel Esterman, a Cairo-based journalist. She blogs here. 

An estimated 13.7 million Egyptians are too poor to provide their families with safe and nutritious food, a new report from the UN World Food Program (WFP) reveals.

But what is more alarming is that Egypt’s food problem is not related to supply, the WFP says, but financial access to food.

“There is not a problem of food availability,” said GianPietro Bordignon, the WFP’s Egypt country director. “The problem is financial access to food.”

A series of economic shocks—including the 2006 bird flu outbreak, the global financial crisis and Egypt’s economic decline post-revolution —have left around 16% of the population unable to buy sufficient food for their household, according to the report produced by the UN in conjunction with Egypt’s government-statistics agency, CAPMAS.

In fact, access to nutritious food will only get worse as more Egyptians fall below the poverty line.

Between 2009 and 2011, 15.2% of Egyptians fell into poverty, while just 7.7% were able to move above the poverty line. An additional 12.6% of the population remained in chronic poverty.

The figures also reveal that around 17.2% of Egypt’s population suffered from food insecurity in 2011, up from 14% in 2009.

Unsurprisingly, rising food prices and inflation are the biggest culprit for struggling families, especially for the poorest households who in 2011 spent 51% of their total expenditure on food (compared to a national average of 40.6%), according to the report.

As grim as these figures are, more recent data shows that the current situation is even worse.

The latest issue of the Egyptian Food Observatory reveals that a staggering 88.9% of Egypt’s vulnerable households don’t have enough money to meet their basic needs and have tried to cope by buying cheaper and less food.

This is a substantial deterioration from even a few months ago.

Instead of eating nutritious fresh foods, families fill their bellies with cheap, calorie-dense, nutrient-poor foods—especially subsidised bread, sugar and oil. This is exacerbated by the country’s food subsidy system, which helps to cushion the poor against price spikes in key commodities like wheat, but is not designed to provide a balanced diet.

“If you eat bread, ful and tameyya as your staples, you will lack those essential nutrients that make a difference in early life,” said GianPietro Bordignon of the WFP.

Indeed, the most distressing finding of the new WFP is that just over half of children under five were anemic, based on tests in nine provinces. Nationwide, an estimated 31% of Egypt’s children suffered from stunted growth in 2011, up from 23% in 2005.

This is tragic for these children, and for the country as a whole.

Children who do not receive adequate nutrition in the first five years of life are limited from realising their full physical and cognitive potential, having a huge bearing on their own future prospects and that of the entire society and economy.

So what can be done?

Well, Rebel Economy has said it often enough, and so has everyone else: reform the subsidy system.

One of the key recommendations of the WFP report is to streamline and better target the subsidy system. Cash transfers offer economic savings, but surveys show that poor households overwhelmingly prefer in-kind assistance, fearing price inflation and poor market access.

In addition to bread, which is available regardless of economic status, 73% of families who are not poor have access to food ration cards, while 19% of poor families are excluded from the program. Prioritising needy families would let the government offer more nutritious food to those who need it without any extra strain on the budget.

Steps should also be taken to reduce waste and leakage, which is estimated at around 30% in the balady bread programme, and above 40% for fresh fruits and vegetables.

Enriching foods with micronutrients like Iron and Vitamin A (which is already done for subsidised bread and oil) is an imperfect solution, but with very little cost it can provide these nutrients to people who would not otherwise be consuming them.

In the long term, the Egyptian government needs to rethink the way it spends money if it wants to break the cycle of poverty and malnutrition.

Above all, nutritious food, good health and high productivity also depend on lifelong access to quality healthcare, education and sanitation. This is a mammoth, but inevitable task for Egypt and its government, and the least it owes for the next generation.

It is easy to get weighed down in the debate over energy subsidy reform in Egypt.

After all, the Egyptian government has done a good job of confusing us by announcing a multitude of different measures that have mostly evaporated into thin air.

In fact, major government measures have actually aggravated the problem. 

In December, the subsidy on 95-octane petrol used by the wealthiest Egyptians was scrapped. That drove some motorists to buy lower-grade fuel, raising the demand for subsidised 92-octane gasoline.

Then, in a bid to prevent smuggling and other abuses,the government restricted distribution of heavily subsidised low-grade gas oil used by trucks, tractors and buses to filling stations owned and operated by the military. All this caused was longer lines at the pumps and increased economic disruption.

Finally, in April, Egypt raised the price of subsidised cooking gas canisters to 8 Egyptian pounds (roughly $1.17) from the previous 5 pounds ($0.73) but this also sparked scepticism considering only poorer households use gas cylinders and the money raised from price lift was minimal.

Meanwhile, many other initiatives have not moved forward.

In November 2011, the cabinet issued a decree to end subsidies on natural gas to energy-intensive industries in January 2012, but this did not occur. Similarly, the minister of supply and internal trade announced a new coupon system for distributing butane canisters in September 2011. The plan would distribute 14 million ration cards to the neediest Egyptians. It was supposed to be initially implemented in two sparsely populated governorates, then rolled out to other governorates, but was not.

Finally, the government continues to delay a nationwide plan to introduce ration cards nationwide for subsidised fuel. Once slated for July (which itself was a delay from April) is now planned for September, the country’s new oil minister Sherif Haddara has said.

One thing everyone agrees on is that energy subsidies must be reformed and the current system is untenable. Here’s why, in a nutshell:

Egypt has a system of subsidies for commodities such as petroleum and flour that is hugely expensive and works very poorly.

It spends about 20% of its national budget on keeping down fuel prices for the general public even though it pays out more to support wealthier households whose fuel consumption is higher than in needier ones. The public debt is further swelled by the fact that, because of Egypt’s declining domestic output and the sporadic disruption caused by strikes, a growing portion of the subsidised petrol and natural gas is imported.

However, the Morsi government is unlikely to tempt fate by altering the fuel subsidy status quo amid the uncertainty over the parliamentary election expected in October.

So what is going wrong?

Apart from the general incompetence of the Morsi administration, experts in the oil industry reckon Egypt’s proposed reforms just won’t work and the country needs to rethink its approach.

Rebel Economy spoke to Johnny West, who runs OpenOil, an energy consultancy which promotes transparency in the oil and gas industry. This is a brief overview of what he would propose: 

• Why won’t the ration card system work in Egypt?

Any solution which involves calibrated targeting (like ration cards) will fail because there has not been any history of successful implementation in the past.  Anything which involves targeted distribution, coupons or an allowance is going to be abused because it allows corruption or abuse of the system, and administrative error to potentially damage the system. 

Plus the administration is under increased pressure and decreased capacity to deliver.  It wasn’t even able to deliver in less-stressed times. 

• What do you propose?

There’s a much simpler way to do this which is to create direct cash dividend which is absolutely flat for everyone in the population and therefore does not needed to be targeted.  At the moment you have 93% of the gas subsidy consumed by 20% of the richest Egyptians, so this guarantees that everyone gets a fair share. 

• Through what mechanism?

You would encourage the mobile phone networks, or any number of other ID systems to act as a food distribution network system.  This type of system has also worked in far more degraded environments than Egypt, for example the United Nations used a similar food distribution network in Haiti after the 2010 earthquake. 

In addition, 10% of Kenya’s gross domestic product is transferred using a mobile-phone money transfer service called M-Pesa.  Egypt’s mobile penetration is almost 100%, so this system is realistic. 

• Talk us through how it would work.

 You wouldn’t liberalise all prices immediately but through quarterly implementations of staggered price rises over 5 years. Instead, all Egyptians would receive a dividend upfront so money is in their hand before any price rises take place. 

Based on the 2010/2011 budget, you are talking about 30 Egyptian pounds ($4.30) per adult per month. 

The system is entirely self-financing, and given the current urgency of the energy subsidy problem, Egypt would realistically implement this system, with very little preparation. You would need better demographic data of all Egyptians but than can be achieved in a month. 

• The system seems too good to be true. What criticism has it attracted?

There’s an inbuilt bias, particularly against the Muslim Brothers, that this system is unfair as it subsidises the rich. Everyone would get a subsidy, including Naguib Sawiris, but our perspective is that energy resources are not government-owned but belong to the people. 

In almost all countries of the world, apart from the USA and Canada, citizens are shareholders of the country’s resources and the government is only acting as steward on those resources. Therefore in all activities we see, revenues that would accrue from that would belong to the citizens. 

One objection is that it is bad to give something for nothing, while another is that it represents a weakening of the government because the system is less reliant on the state. But we say the government is about legitimacy not control.

Ultimately, a flat dividend has a much higher chance of gaining political consensus than targeted saving which would see some not get any subsidy, and others receiving a monthly welfare package. 

 The cost of subsidies is also very much a global issue, costing $600 billion. There is massive consensus on the need to reduce but different perspectives on how to do this.

A flat dividend would address the urgent need to reform subsidies, gain broad consensus and be a first step to more complex calibrated systems further down the line. 

More than two years after Egypt’s revolution, the country’s hunt for stolen assets is faltering. What started as an overly optimistic hunt for the former president’s ill-gotten gains with estimates as high as $70 billion, has evaporated to reveal the value of assets identified and frozen by foreign governments is disappointingly small and at little more than $1 bilion today.

Now the nation is at a critical juncture: either it jumpstarts its lifeless investigations or it strikes deals with members of the old regime.

Either way, it is not looking good for Egypt.

Farah Halime, the editor of Rebel Economy, spoke to Ashraf Khalil, TIME magazine’s Cairo correspondent and Bradley Hope, The National newspaper’s Cairo bureau chief, who have both conducted their own intense investigations into Egypt’s asset recovery efforts.

Neither are optimistic.  Ashraf says Egypt’s prosecutor’s office is “unfixable”, while Bradley describes the antiquated offices of the Illicit Gains Authority.

Special thanks to Cairo-based radio journalist Merrit Kennedy, who produced this podcast.

 

 

Middle East economists and analysts have tried and often failed to answer Egypt’s million dollar question: Will the country’s economy collapse and, if so, when?

Finally, someone has crunched the numbers to give us an answer.

London-based economist Ziad Daoud pored over Central Bank data and reckons the scare-mongering (of which the media is to blame of course…) of Egypt’s imminent economic collapse is largely unwarranted.

Egypt needs to raise $11.7 billion in the next 12 months, according to International Monetary Fund estimates.

The task seems “formidable,” Daoud writes in his blog post, “especially without the help of the central bank’s foreign currency reserves which are near their minimum safety level.”

A law that better regulates sukuk issuance has been mooted for several years, but the move to enforce a clear law became a priority after the revolution, especially considering the economic climate is increasingly being shaped by Islamic political parties.

So finally the “troubled passage for a bill” ends, Reuters reports and Egypt’s President Mohamed Morsi has approved a law allowing the state to issue Islamic bonds, or sukuk.  Here’s the full bill in Arabic.

There are high hopes for sukuk to shore up Egypt’s flagging finances.  Officials have thrown out figures to the public that signal these instruments could raise as much as $15 billion from domestic and foreign investors.

Well, I’m sorry to burst your bubble Mr President, but that’s not happening.

First comes love,

Then comes marriage,

Then comes bickering over money.

Qatar and Egypt are turning out to be a predictable couple.

Qatar, the sugar daddy in the relationship, has provided more money to Egypt than any other Arab ally. With $8 billion in loans, grants and deposits, it is by far the biggest financial backer of the Islamist-led government.

As a bonus, it’s also thrown in gas supplies to cover any shortages over the summer period.

This gives the Qataris power and easy access to the Arab world’s most populous country, even if Qatar’s Prime Minister Sheikh Hamad bin Jassim al-Thani insists that Qatar “did not ask for anything in return”.

Meanwhile, the aid strengthens Egypt, the damsel in distress, in her time of need.

But the relationship is doomed to fail.

Egypt is asking for more for less, while Qatar is not getting much in return as it sees that its cash is merely sustaining a costly budget that needs restructuring and allowing Egypt to delay its economic plans.

So the tables have turned. Qatar, previously quiet on its demands, is asking for 5% interest on $3 billion of bonds it wants to buy from Egypt.

This is not a generous deal and is in line with normal market rates (for instance, look in comparison at the $4.8 billion loan from the International Monetary Fund and the meagre 1.1% rate attached).

What’s more, if Egypt goes to the debt markets to raise more money for its deficit, it will likely pay more than 5%.   The yield on the Egyptian government’s $1 billion of benchmark 5.75 percent dollar-denominated bonds is around 7.1% in secondary markets, for example.

Egypt should consider Qatar a temporary donor, and one that is not looking out for its best interests.

It would be best served to expend its time negotiating energy contracts with Qatar because this is where Egypt is mostly struggling (energy subsidies are a huge weight on the budget and the inefficient system has led to fuel shortages that threaten livelihoods, cause nationwide electricity blackouts and miles-long queues for diesel).

Agreeing preferential rates on energy contracts with countries including Qatar, Libya and Iraq would be a huge boon for Egypt which spends almost two billion dollars every couple of months buying fuel, on top of the normal allocated amount in the budget.

Focusing on cash to buy Egypt’s debt and prop up its reserves is expensive and will only have to be re-paid later.

Egypt has the advantage with its Arab allies, who want a slice of Egypt more than it wants a slice of them. It’s time Egypt negotiated with this in mind.

هذا هو الجزء الثاني من سلسة ممتازة مكونة من جزئين من إعداد إيزابيل إسترمان وترجمة ريم مكين، تدور حول السندات الحكومية: أذون الخزينة وأدوات الدين الأخرى المباعة من قبل الحكومة (بما في ذلك الحكومة المصرية) لتسديد قروضها. الجزء الأول هنا.

هذه المرة ننظر إلى تأثير الإعتماد على السندات الحكومية لتغطية إحتياجات الإقتراض.

لا يوجد شك في أن إقتصاد مصر يعاني، لكن إذا انتبهت لإصدار السندات ونتائجها، فستجد أن الحلقة المفرغة من الدين مستمرة. طالما أن دين مصر ينمو أسرع من إقتصادها، فستصبح الأمور سيئة.

تحتاج مصر إلى تنظيم حساباتها عن طريق خفض الإنفاق (إعادة توزيع الطاقة والدعم على الطعام هي الأشياء الأولى البدء بها) ورفع العوائد (زيادة الضرائب، وإدخال التمويلات العسكرية والوزارية داخل الخزينة إن أمكن).  إذا لم يتم ذلك بطريقة صحيحة، فمن الصعب تجنب الإضرار بالضعيف أو إغضاب القوي، ومن الصعب رؤية كيف تمتلك الإدارة الحالية القدرة السياسية للقيام بذلك.

هذا هو الجزء الأول من سلسة مكونة من جزئين من إعداد إيزابيل إسترمان وترجمة ريم مكين، تدور حول السندات الحكومية: أذون الخزينة وأدوات الدين الأخرى المباعة من قبل الحكومة (بما في ذلك الحكومة المصرية) لتسديد قروضها.

في السنتين الماضيتين أعتمدت مصر بشدة على البنوك المحلية في محاولة لتقليل العجز وتمويل إحتياجات القروض.

اقتراض المال من المقرضين يشبه إلى حد كبير إقتراض شخص من البنك: يُقيم البنك تاريخ رصيدك، تقترض مبلغ X  من الدولارات وتدفع Y  في المائة فوائد.

إصدار السندات مشابه جداً لهذا المثال

الرسم بأسفل هو مقدمة عن السندات الحكومية والغرض منها. نشرح المزيد عن ما تسببه  لمصر في الجزء الثاني.

When the deal between Egyptian investment bank EFG Hermes and Qatar’s QInvest fell apart yesterday, some in the banking industry were not surprised blaming Egypt’s stagnant business environment.

“Since when did the regulator approve anything after the revolution?” lamented one banker.

The Cairo and Doha-based banks said a planned joint venture had ended after they reached a 12-month deadline without approval from the Egyptian regulator, the Egyptian Financial Services Authority. The two sides had received approval from countries including Saudi Arabia, the United Arab Emirates, Qatar, and Jordan.

It was seen as the latest casualty of Egypt’s struggling economy after January 2011.  But there is more to the story than meets the eye.

EFG Hermes’ top two executives, Hassan Heikal and Yasser El Mallawany are under investigation for alleged insider trading. They are among nine, including the two sons of former president Hosni Mubarak, alleged to have made an illegal profit of more than 2 billion Egyptian pounds ($331 million) through corrupt stock exchange transactions last May.

EFG’s CEOs and the other defendants deny the charges. The case is ongoing.

EFG spokespeople insisted there was no link between the delays in approving the joint venture and the investigations into the CEOs. But this is very difficult to believe when history shows that if any company is hit with any allegations of financial misconduct the heads of the company are usually the first to go.

The fact that Mr Heikal and Mr El Mallawany did not resign, despite investigations into a previous transaction, is likely to have put a dampener on the deal.

The CEOs reputation was no longer intact, innocent or not. Both are rumoured to have had close relationships to the former regime, especially Gamal Mubarak, within and outside the bank.

For some countries, this would be enough to prompt a resignation.

In Spain, for example, a rule of “professional virtue” is used as a prerequisite for those working in the banking industry and can be lost by anyone faced with a criminal record.

If the deal had gone through it would have paved the way for QInvest to buyout 60% of EFG, plug another $250 million into the banking business and give the CEOs a free ride out of their mess and responsibilities for the bank.

Was the head of Egypt’s regulator, Ashraf El Sharkawy, prepared to take this responsibility, knowing it would give the men a free pass?

It’s unlikely.

The Financial Times alludes to this too:

According to a person familiar with the deal: “It fell through because no one in Egypt now wants to make a decision or affix their signatures to a piece of paper.”

Businessmen in Egypt have complained that, since the 2011 revolution which ousted Hosni Mubarak as president, officials have shied away from making big decisions because of fears over possible allegations of corruption.

What now?

EFG has turned to Plan B. It will sell “non-core” assets and return most of the cash to shareholders to cut costs by 35%.

In light of the deal falling apart, and another lost business opportunity, perhaps it’s time for Mr Heikal and Mr El Mallawany to do the right thing and step down, taking responsibility for their case until it is resolved.

Egypt’s Orascom Construction Industries has agreed to pay a settlement of LE7.1 billion for the tax claims to the country’s Tax Authority.  Payments will be made over a 4-year period till 2017 and in ten instalments.

In short, and according to the statement from the company, OCI admits that it did not want to face a “prolonged legal battle with unpredictable outcomes” but insisted that it had done nothing wrong and not broken the law.

The question is: Did OCI break the law, get caught and thereby decide to settle? Or is the company wary of Egypt’s bureaucracy and the harm it would do to the company’s expansion plans if it got entangled in a drawn-out legal case? OCI is in the process of relocating to Amsterdam and splitting its construction and fertilizer business. It needs the back-up of the government to carry out any of these plans and any rifts won’t help.

As Rebel Economy has mentioned before, however, companies will always outsmart governments and OCI did just that. 

This is the full statement emailed to reporters and investors, with Rebel Economy’s emphasis:

 

EMAIL: 30TH APRIL 2013

OCI Agrees to Payments in Settlement of Tax Claims in Egypt

OCI S.A.E. Receives Regulatory Approval on General Meetings for OCI N.V. Transaction

OCI N.V.’s subsidiary, Orascom Construction Industries (OCI S.A.E.), announced today that it will pay the Egyptian Tax Authority (ETA) ten instalments during 2013 – 2017 totalling EGP 7.1 billion less EGP 182 million in existing tax credits to end a dispute regarding tax claims for the years 2007 to 2010.

During that period, OCI S.A.E. divested its cement business through the sale of a listed subsidiary, Orascom Building Materials Holding (OBMH). The agreed amount is based on the originally disclosed tax claim by the ETA of EGP 4.7 billion including accrued interest and delay fees.

The settlement amount was reached following months of challenging negotiations. In conjunction with this agreement, the ETA has determined that there was no tax evasion by the Company and is exonerating management and the Company from any wrongdoing related to the transaction.

The payments shall start with an initial payment of EGP 2.5 billion in Q2 2013, EGP 900 million in December 2013, six equal instalments of EGP 450 million and two final instalments of EGP 500 million in 2017 totalling the agreed to EGP 7.1 billion. OCI N.V. will loan its subsidiary OCI S.A.E., the Egypt listed company, the necessary funds required for the tax settlement through intercompany loans to be coordinated and channelled into the country through the Central Bank of Egypt.

With the settlement of the tax claim, OCI N.V. expects to proceed with its filing for the tender offer for the ordinary shares of OCI S.A.E. with details to be announced in due course.

OCI N.V. Chairman Mike Bennett commented, “Having concluded this matter, OCI and its management look forward to a positive relationship with the Egyptian Government where our investments in Egypt can prosper and the Company is able to channel its resources towards growth and potential new investments.”

OCI N.V. Chief Executive Officer Nassef Sawiris commented, “As we end the prolonged period of uncertainty, the Company will now regain its focus on growth initiatives.”

The payment follows an almost year-long dispute with the Egyptian government, in which the Board and management were faced with two choices: 1) enter in to a prolonged legal battle with unpredictable outcomes; or 2) make the payment to the government, despite the unified view by the board, management and auditors KPMG that all laws and regulations were soundly applied and followed at all times. However, the Board and management concluded that a prolonged legal process would not be in the best interest of the Company’s stakeholders, including its 45,000 employees in Egypt, who represent 50% of the group’s employee base. In addition, a prolonged legal process would take up a significant part of management’s time and attention, stall our future investment and growth plans, and cause greater uncertainty for our shareholders, creditors and other stakeholders.

The company confirms that there are no travel bans on any of its executives.