SEARCH

Monthly Archives: January 2013

Egypt’s Frightening Food Divide

breadboy
Nasser Nouri

Egypt’s most vulnerable households don’t have enough money to buy food, clothes and shelter.

That’s the frightening conclusion of the Egyptian Food Observatory’s latest government survey.

Of the 1680 households surveyed (and 7532 household members) in September 2012, 86% said their income was insufficient for covering total monthly needs including for food, clothes and shelter, up from 74% in June 2012.

As food prices have steadily increased over the year, income levels have remained static as the country’s fragile economic climate impacts salaries.

The knock-on affect of this has left many families adopting increasingly extreme coping strategies, the report says, the most common of which has prompted families to consumer cheaper foods and borrow food or money.

fooddivide

The report says:

“Consuming cheaper food items” overtook “borrowing” relative to the previous quarter, suggesting that vulnerable households are adopting more radical coping mechanisms where incomes do not suffice.

Other coping strategies adopted included; reducing food intake either by reducing food portions or the number of meals, buying on credit.

But then we reach the heart of the Egyptian food problem.

Bread and other carbohydrates make up the bulk of vulnerable households’ daily consumption.  Bread subsidies, already widely recognised as imbalanced and unequal, are contributing to this food divide.  

The report spells out the biggest flaw in the subsidy system:

All Egyptian citizens are entitled to three loaves of subsidized “Baladi” (local) bread per day.  But there is no database listing households entitled to the subsidy, and thus no control over how much bread each person can access.

Anyone can queue at bakeries licensed to produce Baladi bread and can purchase up to 20 loaves at a time at the subsidized price of 5 piaster per loaf. Better-off Egyptians often do not take up this entitlement due to the queuing time involved and the poorer quality of subsidized to commercial bread.

In addition, the ingredients for making this bread are purchased at low or no cost from the government, but bakers charge their customers a similarly low price of 5 piaster that is barely sufficient to cover their production costs.  It has forced the creation of an unofficial black market for premium quality local wheat that is free of stones and contaminants. This wheat is used to produce better quality bread for commercial sale at 25 or 50 piaster per loaf, depending on the quality.

Aside from providing further evidence of how the country’s subsidy system wastes billions of dollars, this report highlights the human cost of misdirected, ill-thought-out subsidies.



Guest Post: Morsi’s First Six Months – an Appraisal

MohammedFadelTHIS POST HAS BEEN UPDATED WITH PART II – A SUMMARY OF MORSI’S TOP CHALLENGES

Guest post by Professor Mohammad H. Fadel, an Egyptian-American-Canadian lawyer and legal academic who practiced corporate finance, banking, and corporate and securities law at the New York law firm of Sullivan & Cromwell LLP. He blogs here and tweets here

As Egypt’s President Mohammed Morsi completes his seventh month in office, it is looking ever more doubtful that Egypt can build on the accomplishments of the January 25 Revolution; the risk of relapse into authoritarian rule increases with the passage of each day in which Egypt’s civilian political leadership prove themselves incapable of addressing the country’s seemingly endless problems.

For many opposed to Morsi, all the post-revolutionary problems facing Egypt can be laid at his doorstep, or at the doorstep of the Muslim Brotherhood, the organization to which he belongs.

But the truth is a little harder to swallow.

Egyptians have inherited from the Mubarak years a legacy of neglect and maladministration on an epic scale. It will take a generation of hard work to recover.

From this perspective, Morsi’s seven months have been a relative success, and his willingness to negotiate a loan with the International Monetary Fund, rather than being held against him and the Muslim Brotherhood as proof of a Machiavellian approach to politics where all principle can be sacrificed in the pursuit of power, should be taken as evidence of a pragmatic willingness to give reality greater weight than ideology.

From my perspective, economic reform must be the first priority because in the absence of a growing economy, it will be impossible to solve any of the problems facing Egypt, much less achieve freedom, dignity and social justice. I think all Egyptian political movements can learn from the pragmatism that the Muslim Brotherhood and Morsi have been willing to show with respect to the IMF.

Morsi certainly deserves no stars, but for Egypt’s democratic transition, that may also be his virtue. Some Egyptians may pine for a charismatic and brilliant popular leader at this phase in its history who will take bold and decisive action to solve the nation’s problems, but such a figure would have heightened the risk of authoritiarian relapse.

If Morsi’s weakness and indeciviseness are his greatest vices, his greatest virtue is that he has not acted in a fashion consistent with the stereotype of “one-man, one-vote, one time” that has been attributed to Islamists and indeed, the Middle East generally: Egypt is on the cusp of instituting a viable, even if imperfect, system of electoral politics, which has the possibility, given the magic of compounding over time, to begin to solve Egypt’s structural economic problems.

Until Egypt’s structural problems are on the road toward a solution, however, it is fantasy to be believe that Egypt will get anything more than minimalist democracy. Egypt’s opposition must rise to the occasion, desist from actions that inflame the situation, and always act to reinforce the nascent democratic institutions that are available, always with the hope of deepening and broadening them in the future.

Instead of continuing to fight yesterday’s battle, the opposition needs to organize effective political parties and formulate clear political programs that address Egypt’s practical problems. Uniting around an anti-Muslim Brotherhood agenda is a recipe for civil war, not for solving Egypt’s problems. So, the ultimate judgment on the competence of Morsi and his government must be made not only in light of the historical legacy of virtual social collapse inherited from Mubarak, but also on the relative competence of his adversaries, and here the saying that “the one-eyed jack is king in the land of the blind,” is perhaps only too apt.

PART II 

Assessing the performance of Morsi and his government over the last seven months is crucial in thinking about what kind of policies any Egyptian government at this stage could reasonably be expected to pursue.  To do this, we need to step back in time, and first assess the problems that any post-Revolution government will have to face.  In short order, these include the following:

1.       A deeply-divided population: despite the beauty of the pictures from Tahrir Square during the 2012 Revolution, Egyptian society is deeply-divided along lines of class, religion, ideology, and region.  The various rounds of voting, beginning with the March 19, 2011 referendum have confirmed these sharp differences, and the free-wheeling political competition among Egypt’s various political entrepreneurs have, if anything, only exacerbated these differences in the meanwhile.  Given this reality, the idea that Egyptians could produce a constitution based on a deep social consensus was nothing more than a “Tahrir Square moment”-induced fantasy.

Accordingly, the constitution essentially reflects only those relatively few points on which there was deep agreement: the end of absolutist presidential rule; the end of unlimited emergency rule; the end of arbitrary police powers; and the end of a closed-political system by instituting regular elections that are genuinely contested.  As for the extent of personal rights or social rights, these are, for good or ill, objects of deep contention in Egypt and at the present moment, it is inconceivable that there could be any resolution of these questions which would represent a social consensus.  The constitution therefore delegates these questions to democratic politics.  Disappointing, but certainly not an unreasonable strategy, and certainly not consistent with either an Iranian or Saudi approach.  Passage of any kind of constitution in this circumstance would have proven extremely difficult for any Egyptian politician, and if this constitution is annulled as many in the opposition are demanding, it’s hard to see that a new constitutional assembly would do a better job in preparing a consensual document.  In short, any post-revolutionary government will have to navigate a public that is fractured, and until the material background conditions improve significantly, there is little hope to expect healing in the body politic.

2.       An economy on the verge of collapse: The current crisis in the Egyptian economy, exemplified in the recent panic about the persistent decline in the Egyptian pound, reflects a generation of failed economic policies.  From 1980 to 2000, for example, the average rate at which capital per worker increased in Egypt was a paltry 1.14%.  While I have not come across post-2000 data, there is no reason to believe that the rate of capital investment has substantially improved.  Egyptian investments as a percentage of GDP in 2011, for example, was only 15%, while in Indonesia it was 32% for the same period.  The systematic over-consumption and under-investment in the country’s human and physical capital has debilitated the ability of the country to be competitive in the international market and, as the recent train wreck and apartment collapse in Alexandria demonstrate, are literally endangering the lives of thousands of Egyptians on a daily basis.

We should not forget the problem of youth unemployment, which is effectively in the range of 75%: According to a recently published report on youth unemployment in the Arab world that included statistics from Egypt, the youth participation rate in the workforce is the lowest in the world, standing at 35%, and despite that extremely low participation rate, the Arab world still has the highest youth unemployment rate at 25%.

There are no easy answers to Egypt’s structural economic crisis, and any plausible set of answers will all involve pain and sacrifice on a people who are already struggling.  The best we can do is ensure that it does not call on further sacrifices on those Egyptians who are struggling to survive. In this respect, the government’s determination to enter into an agreement with the IMF is something to be commended, not to be dismissed based on visceral hatred of anything that smacks of Mubarak’s policies, especially in light of the absence of credible alternatives from the opposition.  (I have previously defended the proposed IMF loan elsewhere, here and here, so there is no need to rehearse in details its advantages for Egypt, particularly in light of this blog’s own excellent analysis of the loan here and here).

3.       An ineffective and bloated bureaucracy: The Egyptian civil service is, at once, incompetent, corrupt, and bloated.  Even the best strategy of reform will require a competent civil service to implement that policy.  The professionalism of the current bureaucracy, however, has been systematically undermined since the Free Officers’ Revolution, when they made the catastrophic decision to use the lure of government employment as a means to win the loyalty of the educated urban class rather than as an instrument of rational governance.  There are too many state employees who do nothing, and not enough to do what is needed.  Nor is it clear that the bureaucracy has enough skills to implement the kinds of policies that Egypt obviously needs.  Take the desire to implement subsidies targeted specifically to the poorest 40% of Egyptians. Execution of such a policy requires a fairly sophisticated bureaucracy which is capable of identifying those individuals, making sure they can get the appropriate electronic subsidy card, and then establishing some mechanism so that merchants can process payments through these subsidy cards.  In the alternative, the state could provide direct cash subsidies to these 40%, but that would require that the poor have bank accounts, etc.  In short, even the best-formulated and most rational policies require complicated logistical steps for implementation, and it is not at all clear that the Egyptian bureaucracy can be relied upon, even if it was willing to go along with new governmental policies, to execute competently these new policies.

4.       The Rule of Law: While the excesses of the police in the Mubarak era are well-known, it is not by any means clear how a post-revolutionary Egyptian government will be able to reform the police over the short-term when the police itself was as much the target of the Revolution as Mubarak himself.  In short, how does one radically transform an institution which itself is required to maintain law and order over the short and medium terms? But, the police are not the only problem.  Egypt’s courts are notoriously slow, due largely to unreasonably high case loads placed on judges.  The inability of the average Egyptian to rely on the judicial system to enforce his rights in a timely fashion means that, for the most part, the legal system of rights and duties is ineffective, and the people must rely on informal means, sometimes involving violence, to enforce their rights.  Add to this the problem of transitional justice, and the need to hold accountable members of the Mubarak regime and their allies within the security services, and one is left wondering how Egypt’s judiciary, even if it were the most honest judiciary in the world, could reasonably be expected to uphold the law effectively for all Egyptians?   This week’s tragic outcome in Port Said illustrates the difficulty.  Again, any post-Revolutionary government will have inherited a broken judiciary system that in its present condition is incapable, even if it is willing, to provide effective justice to Egyptians, whether in political cases or even disputes involving private property.



Port Said: Egypt’s Statue of Liberty

Port Said, postcard 1915
Port Said, postcard 1915

After yesterday’s deadly clashes with as many as 30 killedIt’s hard to imagine how the Port Said of today was once the object of a sculptor’s fascination.

In the 1850s, French sculptor Frederic Auguste Bartholdi planned to build what is now known as the Statue of Liberty at the entrance to the newly constructed Suez Canal at the coastal city of Port Said.

He fell in love with the colossal statues in Luxor on the Nile, the Wall Street Journal’s William McGurn wrote in February 2011 when Egypt’s revolution signified children on their parents shoulders at Tahrir Square, not masked men.

Inspired by Egypt’s granite beings, he proposed a huge statue of a robed woman.  It was to be called “Egypt Bringing Light to Asia”:

Like our Lady Liberty, the Egyptian version featured a woman holding aloft a torch. Like our Lady Liberty, the Egyptian woman was to stand on a large pedestal. Where ours has rays of light coming out of her crown, however, the Egyptian woman has light emanating from under a headdress.

 But the Egyptians would not pay, McGurn writes:

Eventually Bartholdi made his way to America. Here he discovered an island off Manhattan that would make an ideal site for a grand statue. Though he would deny any relationship between the two, a comparison suggests otherwise.

A century later, the sculptor’s instincts would be proven correct and the city would thrive on being a duty-free port and tourist resort, where people would flock to see the town’s exceptional 19th Century Italian and Greek architecture.

The city grew to become one of the richest governorates in Egypt with an economy built on fishing and industries such as chemicals, processed food, and cigarettes. It was also a critical harbour for exports of Egyptian cotton and rice.

Of course, like any developing city dependant on tourism and specific industries, it faced many problems that threatened the livelihood of Port Said’s citizens, including attacks to the city’s architecture and the prospect that city’s free-zone status would end.

But a deadly brawl last February changed the image of the city forever. 

A riot at a Port Said football game between rival groups of hard-core football fans from Cairo and Port Said ended with 74 people dead and 1,000 wounded.

It was the worst soccer riot in Egyptian history and among the worst in the world. At the time there were conspiracy theories about former members of Hosni Mubarak’s regime hiring thugs to disrupt the country’s transition to democracy.  But then the people of Port Said became blamed for the incident.

As if bowing to these rumours, an Egyptian court sentenced 21 people to death on charges related to the violent clashes between rival football fans last year.  At least 30 more people were killed and 250 injured in Port Said over the weekend in riots sparked by the death sentences.

Most had expected an acquittal.

Today Port Said is an isolated city-state that has broken from the rest of the country, as David Kirkpatrick writes in the New York Times:

 Egypt’s new government lost control of a major city, Port Said, on Saturday as rampaging soccer fans attacked the main jail, drove police officers from the streets and cut off all access to the city.

The streets are lawless, and residents feel more isolated than ever believing that the country has turned against them.

Port Said, a relatively well-to-do city that registers one of the highest gross domestic product per capitas among Egypt’s cities, is an example that even financial stability cannot bring comfort if a society feels targeted by the government.

Egypt’s administration, by sentencing to death 21 Port Said football fans, has driven a wedge between the residents and the capital of Cairo, which is still seen as the base of a centralised government that dictates the fate of 83 million people across Egypt.

Not only will the livelihood of Port Said’s residents suffer if that division continues, but the whole of Egypt, which relies on Port Said for important exports, imports and foreign currency from the Suez Canal.

If the state is interested in any kind of economic revival, it will have to include and involve cities like Port Said that have a rare combination of economic, historic and architectural attributes which the government would be hard-pressed to find elsewhere.



The IMF Dam

Billions of dollars of financing earmarked for Egypt is mounting up behind an IMF dam.

Until Egypt agrees a final deal with the International Monetary Fund for a $4.8 billion loan package, none of the estimated $14.5 billion in additional financial support and aid will be released.

The effect of the delay on signing the loan are far-reaching, and are now affecting Egypt’s ability to finance a faltering energy subsidy system.

US banking giants, JP Morgan and Morgan Stanley, are holding off on as much as $1.7 billion to $2 billion of financing for Egypt’s state-run oil company the Egyptian General Petroleum Authority until the IMF loan is set in stone, Egypt’s Al Mal newspaper has reported (Arabic).

The financing, which was first announced in December, was partly to help EGPC cover dues to foreign oil partners and sustain imports of petroleum products.  EGPC is in billions of dollars of debt partly because it has kept up an inefficient subsidy system that imports fuel at international prices but distributes to the public at very discounted prices. 

Other loans that are contingent on the IMF loan include: $6.3 billion in EU aid, $500 million from the African Development Bank, $1 billion from the US. The remainder is coming from the World Bank and other smaller lenders.

The reality is that without the IMF loan, investors and financiers will have little confidence in Egypt.

With the nation’s credit rating also now on par with Greece, investors are unlikely to make bold moves into Egypt without some reassurance that the country is recovering.



Egypt’s Muslim Brothers And The Right Debt

At a press conference yesterday, Egypt’s bewildered minister of finance, El Morsi El Sayed Hegazy, struggled to compose himself in front of reporters.

The newcomer forgot his predecessor’s name and called the former finance minister Mumtaz Al Sagh instead of Mumtaz Al Saeed.

He also looked worriedly at his Freedom and Justice Party colleagues for reassurance and had to be handed documents detailing the few basic figures on Qatar’s loans to Egypt before he spoke.

The outcome of Hegazy’s confused and anaemic performance was a claim that the new law for Islamic bonds, or Sukuk, is expected to generate $10 billion for the Egyptian government.

A significant sum considering the law for regulating sukuk issuance in Egypt has been talked about for at least two years.

The move to implement one now has gathered momentum after the strong emergence of the Muslim Brotherhood following Egypt’s uprising in 2011, but progress has been slow.

Just last week,  Egypt’s cabinet finally approved a draft law to allow sovereign Islamic bonds as the government searches for new ways to finance an unsustainable budget deficit.

However, for the Muslim Brothers to push for debt, Islamic or not, is a concern for the country’s main religious authority, Al-Azhar.

As Maggie Hyde, at Egypt Independent wrote:

Adopting the Islamic banking law in Egypt has drawn significant scrutiny from civil society and religious figures — an indication of the struggle over Sharia-based laws in the future.  One of the main concerns is that putting the Islamic label on this sort of financing is merely cosmetic, a way to lure investors into a less than attractive market.

Members of Al-Azhar’s Islamic Research Academy rejected the Finance Ministry-backed bill, saying it “violates Islamic Sharia and endangers the state’s sovereignty”: 

The bill would allow foreigners to own sukuk, as well as shares in local factories and businesses, Al Azhar academy member and former Grand Mufti Nasr Farid Wasel told Al-Masry Al-Youm.
“It is like we are selling our properties to foreigners,” he said.

It is a further test of how Egypt’s Islamist government will reconcile religious beliefs with a modern economic framework. The Morsi administration has already faced this dilemma with the IMF loan, as they sought to convince conservatives that the contentious loan was Sharia-compliant.  The IMF distanced itself from this notion, saying instead that the interest rate on the loan is very favourable compared to other forms of financing.

But amid all the confusion during this messy political transition, a push toward tapping Islamic bonds for financing signals that the Brotherhood are promoting the very element of finance that Islamists usually reject – debt.

For the Islamists, this is the right kind of debt. However, they are mistaken on how much it will cost them.

In fact, in Egypt’s case, it will be cheaper to opt for conventional financing rather than sukuk.  To give one example, Egypt will borrow from the International Monetary Fund at about half the rate Qatar paid for sukuk in July.

Perhaps the nervous new finance minister should concentrate on practicing his public speaking before proposing Islamic finance as a credible way out of Egypt’s economic crisis.



Egypt’s Real Reserve Level – Behind The Headline Numbers

The monthly announcement of Egypt’s net international reserves figure has become more of a spectacle of the country’s economic woes than a reflection of recovery.

Egypt’s foreign reserves have tumbled more than 60% from $36 billion before the uprising that toppled Hosni Mubarak in early 2011 and as the country’s key sources of hard currency – investors and tourists – have dried up.

Reserves rose slightly to $15.5 billion helped by a deposit by Qatar to support the economy, Egypt’s minister of finance said yesterday, but they remain at a dangerous level after being run down to defend Egypt’s currency.

Though sporadic official announcements convey seemingly unwavering optimism that reserves will be back to normal levels, behind these headline numbers is a more worrying figure.

In reality, liquid reserves, or convertible foreign currencies including securities, cash and deposits that can be used to defend the Egyptian pound, are at $11.8 billion, according to Egypt financial consultancy Dcode, which used data from the Egyptian Central Bank.

According to Dcode:

Liquid Net International Reserves (net of Gold reserves) declined from $21.3 billion in September 2011 to $11.8 billion in November 2012, covering only 2.2 months of commodity imports.  This figure includes past debt repayments, including a $1.6 billion debt repayment in July, but does not include any other repayments post-November 2012.

That suggests the Central Bank’s monthly announcement is extremely misleading and in fact Egypt is well below the three months of cover for imports that the IMF recommends its members retain.

But not only have economists suggested liquid reserves are falling at a faster rate than net international reserves, but that the $11.8 billon could be even lower in reality.

In a November 2012 note, Capital Economics economist William Jackson suggested liquid reserves are under $10 billion:

Capital Economics
Capital Economics

Jackson writes:

The CBE has intervened aggressively in the foreign exchange market to defend the pound against the backdrop of capital flight. As a result, FX reserves have fallen from a peak of $36.2bn to just $15.5bn at present (and liquid reserves have fallen even further). (See Chart 1.) The good news is that the CBE’s reserves have stabilised in recent months, mainly thanks to the drip feed of aid from the Gulf. And so long as the IMF deal is ratified by the Fund’s board next month, the Bank’s reserves should receive a more sizeable boost in the coming months.

As liquid reserves run dry, the Central Bank’s ability to defend an already overvalued pound has become untenable.

With no sign of a final agreement on the IMF loan, the Bank’s decision to launch dollar auctions (which many regarded as a late reaction) to effectively depreciate the pound makes a lot of sense.

Even more intriguing is the IMF’s own breakdown of Egypt’s reserve level.

The IMF figures suggest that the bulk of Egypt’s liquid reserves, excluding gold and other non-convertible assets, stand at about $7.1 billion.  That’s in stark contrast to the Central Bank, which says foreign currency reserves are $10 billionThat $7.1 billion figure may not represent the only liquid reserves but economists say they are unsure of what this level could be at the moment.

The Central Bank’s late decision to allow the pound to fall has cost the country and the Morsi administration.

Now Egypt has little choice but to rely on immediate, easy aid from the Gulf, and a long-term (and very contentious) loan from the IMF before it can recover to its original reserves level.



Guest Post: Is Islam the solution?

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

“If religion makes you more honest, why is it that the most corrupt countries are also the most religious?” asks a writer at Epiphenom, a blog about the science of religion and non-belief.

A few weeks ago, Rebel Economy posted a map illustrating how countries around the world fared in Transparency International’s annual Corruption Perceptions Index.

Corruption Perceptions Index 2012
Corruption Perceptions Index 2012

The graphic becomes even more interesting when paired with a world map that shows how religious different countries are:

Gallup, 2006

What is clear is that when looking at the two maps side by side, countries with the most pious citizens are not the least corrupt; in fact, when you remove communist or formerly communist countries, which have their own complex histories of corruption and state intervention in religion, it’s very nearly the opposite.

More religious countries appear to be more corrupt. (More rigorous examinations also bear out this conclusion, as do studies that look at legislation of religion as well as just personal practice –Heather Marquette at the University of Birmingham gives a good summary of the field.)

This does not mean that religiosity causes corruption – many studies have tried to establish a causal link, with frustratingly ambiguous and contradictory conclusions.

However, it does mean that religious movements or political parties that claim the evils of corruption can be eradicated by making society more religious are engaging in wishful thinking or outright deception.

To put it more bluntly, Islam is not the solution.

(Nor, for that matter, is any other religion. Check out the corruption scores of devoutly Catholic nations.)

Claims that a government ruled by people who fear god and pray every day will automatically be more honest than one run by secularists or atheists fly in the face of empirical evidence.

Australia, whose prime minister is an atheist, is consistently among Transparency International’s highest scorers, as are profoundly non-religious Scandinavian countries; highly religious societies, like Afghanistan and Somalia are at the bottom.

It’s not random chance that societies like Australia or the Scandinavian countries, which combine with low religiosity and low levels of corruption, also have some of the world’s highest standards of living.

Both corruption and religiosity are strongly related to low scores on measures of wellbeing like per capita income and the Human Development Index. Again, proving causation is nearly impossible. But it’s safe to say that countries that are wealthy, have little public corruption, and provide their citizens with high-quality social services like healthcare and education are unlikely to be highly religious.

This presents an interesting conundrum for politicians like the Freedom and Justice Party, who promise voters both good governance and more religion in public and private life. There’s scant evidence that the two goals are compatible.

Realistically speaking, the most likely explanation for the Muslim Brotherhood’s dismal economic record lies in a combination of inexperience and incompetence on the part of the new regime, the deeply entrenched corrupt and corporatist legacy of the old regime, and global economic malaise.  Secular governments can of course be corrupt, as those who lived under Mubarak or Putin are well aware.

Nonetheless, the relationship between religiosity and corruption does suggest a fun conspiracy theory to explain why the government seems to consistently make the worst possible choices for the economy: Perhaps the Ikhwan and their Salafist fellow travelers are well aware that a society that is poor, corrupt, uneducated, and unhealthy is also more likely to embrace religious fundamentalism, and this is all part of a phenomenally complex and masterfully subtle master plan.



Egypt’s Weak Water Fight

It is well known that any limitations to Egypt’s water supply, a vital resource and sometimes a matter of national security, has been aggressively opposed by officials keen to protect the Nile’s badly needed fresh water.

But in the aftermath of the January 25 revolution in 2011, it is becoming increasingly clear that Egypt is not only squandering its  water supplies to the detriment of other African countries who get a much smaller share of the river’s water, but that Egypt’s growing population is demanding more water to cover its unsustainable farming practices. 

Ten countries are involved in a decades-long conflict over Nile Water rights and billions of cubic metres of water. On one side, seven East African countries want more water from the Nile, and on the other stands Egypt and Sudan, who get 90% of the river’s water under colonial-era accords and strongly oppose the move.

It is no surprise then that Egypt has repeatedly said it will reject any deals that do not preserve its historic, and dominant, water rights.

Just this week, Egyptian minister of irrigation and water resources Mohamed Bahaa Eddin said the country refused to sign the Entebbe Framework Agreement, which would redistribute Nile water shares among Ethiopia, Rwanda, Uganda, Kenya and Tanzania.

Even though Egypt get’s the lion’s share of water, which stands at 51 billion cubic meters annually, the quota still does not satisfy its needs.

In fact, the country indicated this week it needs another 7 billion cubic meters to meet domestic demand.

Rebel Economy spoke to Karim Assir of the Signet Institute, a Cairo-based think tank, on why Egypt’s demands to not only keep its dominant share of water but also fight for more underlines deeper problems for the country. [Text within square brackets are additions by Rebel Economy]:

How does Egypt use water inefficiently? 

Karim Assir (KA):

The choice of using flood irrigation [a dated method of irrigation where gallons of water are literally pumped over crops], as well as the choice of cultivating water inefficient crops, and the agricultural sector puts the biggest strain on this country’s resources.

I think anyone who lives in Cairo also sees the way water is used improperly each morning, when shop owners and bawabs [the Arabic word for "doormen"] hose down cars and sidewalks, and while this may be just an anecdotal example it highlights a major issue which is that water is not viewed as a scarce resource here.

In addition, the wealthier Egyptian households become, the more water they will likely consume water directly – i.e. through heavier use of household appliances, landscaping etc, or indirectly, i.e., through consuming more food, products which have heavy water footprints.

What is the biggest strain on water resources?

KA: Wheat crops require lots of water.  As does rice and other staples of the Egyptian diet, but demand for these crops is also very high. It is not be a good use of the country’s resources to become self sufficient in these crops. [That is despite calls from the government to move toward self sufficiency and boosting domestic production to lessen the burden on imports].

The natural water resources that Egypt has (Nile and groundwater resources) available are put under stress by a growing population, and given that this dynamic won’t change in the future, the problem threatens to become more severe.  The majority of Egypt’s population is settled inland, along the Nile, which makes supplementary sources of water like desalination a less viable option for the Egyptian government, since water would have to be pumped from the coast and would add significantly to its cost.

The tariffs on water do not help.  As with everything here, water is subsidised. Egyptians pay about 20% of the actual cost entailed in producing and delivering water to households.

How can the state alleviate these pressures and inefficiencies? 

KA: The government’s approach to water scarcity has been inaction, as with many other issues, and their options are limited. However, one proven way to begin limiting demand for water is to increase its price, so that’s one place they could start.  Encouraging the cultivation of water efficient crops and landscaping would help. Also, Egyptians need to be made aware that water is scarce, otherwise they really have no incentive to use it more efficiently.

All these factors combined make it difficult for Egypt to argue that it should maintain its share of the Nile water, let alone ask for more, since other Nile Basin countries face similar structural problems and high demand for water.

Even though water is subsidised and cheap for all to use, like Egypt’s other subsidised goods (oil, gas and food), the richest reap the benefits. Water inequalities have become more stark following the revolution and slums across the country are suffering from lack of resources.

If Egypt wants to viably argue for a better deal with its African neighbours, the best place to start is at home. Increasing the price of water would instantly mean a reevaluation of farming methods. Flood irrigation would be limited and therefore the types of crops grown would change. Part of the problem is mismanaged food subsidies and an agricultural sector that has to import wheat to meet demand.  If this system was overhauled, it would alleviate pressure on farmers providing subsidised bread.

Of course, this must happen in unison with a framework of policies that will provide new crops in place of the old, and deep education for Egyptians to highlight that water is a non-renewable resource that does not flow endlessly.



Breakfast Wrap: Egypt’s New Market Policy, Dangerous Yield Game

Could Egypt’s new central bank governor Hisham Ramez, who replaces Farouk Al Okdah, signal a shift in policy from tightly controlling the exchange rate of the pound – as it has done for nearly a decade – to introducing a more balanced currency market driven by supply and demand?

Yes, the business community tells Al Arabiya’s Carina Kamel.

“The priority now is to have an orderly currency market,” said Osama Mourad, a financial analyst. “We have been able to get rid of the responsibility of the exchange rate which was seen clearly from the new governor’s statement.”

Over the weekend, Ramez sent a strong message to Egypt and the financial world, who are closely watching developments in Cairo, that “the bank’s number one priority was overseeing a ‘balanced’ currency market and that the central bank ‘has all the tools needed to intervene’”, according to the Al Arabiya report.

He sought to reassure  jittery investors (and simultaneously enter himself into the club of Egyptian officials unruffled about the state of the economy) by saying “there is no reason to worry” about price movements on the Egyptian pound which has lost nearly 6% of its dollar value in the past two weeks. “The situation is not out of control.”

Yet, control is the last word that comes to mind when describing Egypt’s economy.

With demand for dollars still high, almost daily dollar auctions have continued to drive the pound lower.

The scale of dollarisation was also highlighted when Egypt signalled that the $2 billion loan from Qatar arrived in December, implying that the money had already been eaten up defending the currency.

What is more worrying, however, is how the transaction exposes the fragility of Egypt’s economy:

“Without Qatari aid, Egypt was on course for a full-blown financial crisis and, perhaps, a forced deal with the IMF by February,” Said Hirsh of Maplecroft said, according to Reuters.

Once again, Egypt has been bailed-out by its big brothers, giving the government little incentive to make much-needed reforms, including in the costly energy subsidy system.

◊◊◊

Another indication of how Egypt is living hand-to-mouth is the constant rollover of debt.

Egypt’s Finance Ministry said on Thursday it would offer $1 billion of one-year treasury bills for auction on January 14. This would effectively roll over maturing US dollar-denominated bills from last year.

Though it alleviates pressure on Egypt’s creaking budget, the country will now have to refinance around $2.5 billion in 2013.  Dependance on local banks to buy into these securities is highly unsustainable. 

Economists have said that the rate of spending on interest payments on bonds and bills is now exceeding the rate at which the government spends on energy subsidies. Egypt is spending about 15% or 16% of its budget on these payments now. A considerable amount.

The upside is that Egypt’s treasury yields are attractive to foreign investors who look at emerging and frontier markets. Egypt has among the most attractive yields of the frontier markets, according to Silk Invest, the London-based investment banking boutique:

egyptyields

Silk Invest CEO Zin Bekkali says in a note to investors:

“Interest rates in developed markets have reached unsustainable levels in both the government and the corporate sectors. Frontier markets currently offer one of the worlds’ most interesting fixed income opportunities with the potential for double digit returns in hard currency, local currency as well as for corporate bonds.”



Two Former Central Bank Governors on Egypt Currency Woes

Yesterday, the Egyptian pound slid to a new record low of around LE6.51 to the dollar, as demand for dollars remained strong.

It was despite Qatar providing the nation with an economic lifeline by sending $2.5 billion in aid to help it tackle a currency crisis.

The central bank has allowed the pound to slide by about 0.5% a day against the dollar since it introduced a new currency regime on December 30, according to data from Reuters.

Until the new regime was imposed, the currency had lost just 6% in the two years since Egypt’s revolution that overthrew president Hosni Mubarak. But in last past 11 days the fall has accelerated, with the pound losing 5% on the interbank market.

But what does this mean in the long-term?

Using interviews I did with two former Egypt Central Bank governors (part of this appeared in a story I published today in the International Herald Tribune), Rebel Economy looks at two different perspectives on the new currency regime:

1. Mahmoud Abul Eyun, Central Bank governor until 2003, and oversaw Egypt’s historic flotation of the pound and eradication of the black market: 

He criticized the timing of the new measures, saying they should have been adopted at least a year ago and that the late reaction will hit vulnerable people the hardest.

“We have been waiting for this for a long time, at least two years. The bank has unfortunately lost a lot of foreign currency, and this is the price that has been paid for the late decision.”

“This is going to add a lot to the fiscal burden if the government continues to have subsidies,” Mr. Abul Eyoun said.

Abul Eyoun predicts a 20 percent jump in the price of staple goods if the government cannot finance its deficit and if the pound continues to slide.

“It is a dilemma, and I feel that this government and central bank will have to go through hard times,” he said.

Ismail Hassan, Central Bank governor in the 1990s and now heads Misr Iran Development Bank in Egypt: 

He welcomed the Central Bank’s move and said it heralds a new era of currency management.

“I don’t think there is room for the word devaluation. Devaluation was used in the past when we had a fixed price, and now the alternative is the central bank not interfering heavily in the market,” Hassan said.

The new regime means devaluation, a product of central bank measures, would be replaced by market forces of natural depreciation where the real value of the pound would be discovered.