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.
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.
This is PART 2 of an excellent two-part series by Isabel Esterman on government securities: treasury bonds and bills, and other debt instruments sold by a government (including Egypt) to finance its borrowings. Here is Part 1.
This time we’re looking at the impact of relying on these financial instruments to cover borrowing needs.
We all know that Egypt is in really bad shape, but if you start paying attention to bond issuances and yields, you can watch (in horror) as this vicious circle of debt continues. As long as Egypt’s debt grows much faster than its economy, things are going to be rough.
As to how to solve this, one possible route is for Egypt to get its accounts in order, by cutting spending (restructuring energy and food subsidies is the obvious place to start) and raising revenues (increasing taxes, and possibly bringing military and ministerial funds into the treasury). Unless this is done very well, though, it’s hard to avoid hurting the vulnerable or angering the powerful, and it’s difficult to see how the current administration has the political capital to do either.
In theory, Egypt could also come up with a comprehensive stimulus plan, and convince lenders (domestic and foreign), that a big enough infusion of cash will get Egypt’s economy back in gear without the need to resort to austerity measures. For this to work, it would have to be a whole lot more detailed and credible than what we’re seeing come out of either the ruling party or the opposition.
Disclaimer: In the course of the research for this graphic, it was discovered that the proportion of government spending on debt servicing (to cover the repayment of interest and principal on a debt) was actually much larger than the figure extensively used in the media. It stood at 35.7% rather than the “25%” often quoted in mainstream media.
We have consulted bankers and financial analysts to confirm this, but there is still controversy over how it the figure should be calculated. It is a matter of terminology, so for number geeks out there, we have chosen to look at entries (sources below) for “interest” and “loan repayment” as a percentage of total budget outlay, rather than “interest” as a percentage of “expenditures”, which yields the more widely-cited figure of 25%.
Last week, Egypt’s Central Bank decided to hike interest rates to slow down inflation and curb a sliding pound.
But what are the economics behind the move? What does it really mean to raise interest rates and what impact does this have?
Contributor Isabel Esterman has drawn up a genius cartoon to explain all.
She says that this is, of course, hugely over-simplified. In order to keep it at a manageable length, the cartoon glosses over things like how fractional reserve lending actually adds to the money supply, repo and discount rates (we don’t need to get that technical anyway…), as well as examples of when these theories don’t work – all topics for another day.
Still, we hope this is enough to make people feel more confident tackling something like the CBE Monetary Policy Committee’s most recent press release.
A disturbing, but unsurprising leak from an unnamed official in Egypt’s finance ministry reveals that funds allocated by the government for diesel fuel subsidies have run out for the current year, with the Cabinet scrambling to find a solution, according to Egypt Independent:
An official source within the ministry has said that meetings are being held with Ministry of Petroleum officials to solve the crisis, adding that the government’s subsidies for diesel fuel are estimated at LE50 billion.
The two ministries are considering opening an additional source of credit for diesel subsidies through a law giving the finance minister the power to approve additional credits.
Rebel Economy has repeatedly called for a swift overhaul of the energy subsidy system. Read here for a round-up of why.
But in a nutshell, and according to industry sources, in 2002, EGPC’s total debt stood at half a billion Egyptian pounds. In 2012, that debt pile has jumped to 200 billion pounds.
The organisation has also maxed out financing to fund oil and gas exploration from banks including National Bank of Egypt and Morgan Stanley.
Sources say the magnitude of Egypt’s debt is such that at BP’s global board meeting, Egypt’s debt repayment plan is brought up as a topic of discussion.
The finance ministry has already been effectively paying the oil ministry to buy its domestic energy needs either from foreign partners exploring in Egypt, or by importing it from countries including Algeria and Saudi Arabia. That was part of the reason foreign reserves fell so much.
The problem is based in the fact Egypt buys hydrocarbons at a high price, and sells at subsidised prices making it a costly system that wastes more cash than the country can afford. The energy subsidy system, which already swallows up to 20% of government spending, is also fundamentally flawed, and shortages have lead to a parallel black market.
An Egyptian radio station over the weekend revealed the cost of butane cylinders used by many Egyptians at home has now gone up to about LE70 and LE80 on the black market. A cylinder used to cost anywhere between LE8 and LE50 at the most.
Something has to give, but with further delays on implementing key subsidy reforms, it is not clear what this will be.
Funnily enough, the only official quoted in Egypt Independent’s story was Sherif Haddara, the new head of Egypt’s state-run oil company, the Egyptian General Petroleum Corporation. He quietly replaced Hani Dahi as the chairman of EGPC earlier this year, as Rebel Economy first reported this in November 2012.
Mr Haddara faces the country’s biggest challenge in managing the finances of the most indebted ministry in Egypt.
A number of you may have already read the speech from the US Ambassador to Egypt, Anne Patterson, on Egypt’s political and economic woes.
What she said was not particularly surprising or profound – much of it has already been argued by economists, analysts and journalists. But Ambassador Patterson’s speech eloquently and authoritatively wraps up Egypt’s complex issues in a neat package everyone can understand.
It is difficult to find another example of this from an official outside Egypt, including from Patterson herself.
This time, she clearly spelled out what has gone wrong within the Morsi administration and what must change. Unsurprisingly, that mostly involves addressing economic problems:
The most catastrophic path is for the government and the political leadership of the country – whether in power or in opposition – to avoid decisions, to show no leadership, to ignore the economic situation of the country.
When management of the economy is treated as a by-product of political disputes instead of a core function of political leadership, the business community is left trying to protect itself instead of investing and growing.
So what path should Egypt take? Here are her top three priorities:
As I said, it’s not something we haven’t heard before. However, if we heard this speech from Mohammed Morsi or his prime minister Hisham Qandil, it would be a complete breakthrough.
Quite simply, Ambassador Patterson showed Egypt how to deliver difficult news with the hope for change and reform.
The Morsi administration’s track record for communicating these issues with the public is abysmal. Either the Muslim Brotherhood enrol themselves in some public speech lessons quickly, or they can be more inclusive and relax their tight circle to allow experts with experience to help lead the way to recovery.
Over the weekend, Egypt released another “energy subsidy reform” announcement to add to the growing pile of releases that seem to disappear within days, with little follow-up.
Egypt is “working on a programme to cut the country’s energy subsidy bill by 50% over the coming five years and to compensate by raising Egyptian wages,” Ahram Online reported, citing the the state-run MENA news agency.
And with the government expecting the full year bill on energy subsidies to amount to $16.3 billion, a substantial proportion of the state budget, it’s no surprise that Egypt wants to make cuts. Especially as the system, as it stands, benefits the richest the most, rather than the country’s poorest who depend on cheaper fuel for their livelihood.
However, there is a big problem with this announcement. Egypt is effectively scaling back its energy subsidy reform plan.
Egypt had aimed, for a substantial part of 2012, to cut its energy subsidies by up to a third over the coming year as part of an ambitious plan to reform the economy.
More specifically, as Heba Saleh from the Financial Times wrote in October:
The reduction by E£40bn, or $6.5bn, in the current fiscal year, ending June 2012, is equivalent to roughly a third of the $17.2bn the government is estimated to have spent in the last fiscal year on fuel and electricity subsidies for industrial and domestic consumers.
Even almost a year ago, on New Year’s Day, 2012, Egypt came out with it’s New Years Resolution, as Reuters’ journalists wrote back then:
Egypt’s government will increase natural gas and electricity prices paid by heavy industries by 33 percent this month to narrow its growing budget deficit.
Economists say cutting energy subsidies, which represent about 20 of total spending, is one of the few practical options the country has to cut the deficit.
At the time, the higher rates were part of a plan to shave 20 billion Egyptian pounds ($3.3 billion) off the deficit.
But, unfortunately for Egypt’s already confused public, yet more mixed messages were to come. In September, Egypt’s government said it drafted a plan to reduce energy subsidies by 25.5 billion pounds ($4.2 billion). Here, again the cuts were suggested as within a year.
At this point, determining which cuts the government will actually make, and how much it will shave off the energy subsidy bill have become obsolete.
But what is clear is that the government last year had pencilled in a quite substantial and quick reform and that is now changing.
For example, if the government cuts the energy subsidy bill by $4.2 billion (according to the September announcement) that is equivalent to a 25% reduction of a $16.3 billion energy bill.
Cutting $6.5 billion from the total bill (according to the October estimate and based on a total annual energy bill of $16.3 billion), is equivalent to a near 40% cut of the total bill in a year.
So, if the government is suggesting cutting 50% of the bill but over 5 years, that’s a substantial markdown from earlier announcements, and should signal to readers that:
a) the government is realising the task of reducing subsidies quickly is much more difficult and contentious and is responding with softer plans, but more importantly,
b) while there is something to be said for a slow reform programme, Egypt is unlikely to recover quickly from its financial woes as long as energy subsidies exist in their current form, because they are such a huge weight on the budget.
So far, little real reform has happened. In November 2012, the Cabinet approved cutting subsidies from the high-end 95-octane gasoline, used mostly by the middle and upper class for luxury vehicles. But the more important coupon or smart card system that would see a nationwide impact on subsidy use is yet to be enforced.
Finally, we must consider the bigger picture in reforming energy subsidies. Right now, Egypt spends more on energy subsidies than on health and education combined. What if the government made real reforms quickly that meant Egypt’s poorest didn’t have to rely on the black market for their fuel needs, but also benefited from billions of dollars redirected into health and education – two vital pillars of a successful welfare programme?
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.
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.
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.
Egyptian private equity outfit, Citadel Capital, has appointed petroleum industry veteran, Mohamed Shoeb, as Managing Director of its energy division.
It is the latest sign of how Citadel is quietly moving toward filling a gap in the energy market which is likely to be left after a reform of the country’s energy subsidies.
Shoeb is the former head of the state-run gas company, Egyptian Natural Gas Holding Company (EGAS), and prior to that was the vice Chairman for operations at the state oil company, Egyptian General Petroleum Corporation (EGPC).
The problems attached to both companies do not reflect kindly on Shoeb; EGAS was at the centre of a politically controversial cancellation of a gas contract to Israel, while EGPC is facing a potential bail-out from Egypt’s banks because of a mounting debt pile to foreign oil companies and banks for energy exploration.
However, the former EGAS head brings experience and knowledge of the nation’s state energy industry (and its specific challenges) that would be hard to find elsewhere. Importantly, he has deep connections in the sector that will come in very useful for Citadel at a time when its most high-profile investments are in the energy market. These include:
- a $3.7 billion financing package for the Egyptian Refining Company project
- A joint venture with Qatari investors to import liquefied natural gas into Egypt from mid-2013
UPDATE - This morning Citadel Capital sent a statement saying it had sold one of its investments, in a further sign that the private equity firm is focusing its strategy around five sectors including energy and transportation.
Its portfolio company National Petroleum Company Egypt Ltd. sold National Petroleum Company Shukheir Marine Ltd. to Sea Dragon Holding Ltd., a subsidiary of Canada’s Sea Dragon Energy.
“This transaction is the first of a number that will see us exit non-core portfolio and platform companies as part of our transformation over the coming three years into an investment company,” said Citadel Chairman Ahmed Heikal.
A spat between EGPC and Centamin’s Sukari goldmine appears to be almost resolved after customs authorities on Sunday allowed an export shipment of 1,600 kilograms of gold to the Netherlands, Egypt Independent reports.
Shipment had been halted by Egyptian customs because the petroleum and finance ministries had said Centamin owed the authorities back-dated payments for fuel. Centamin denied this and said its payments were up to date.
Josef El Raghy, chairman of Centamin, has faced labour strikes and fuel shortages that have forced the firm to halt production twice this year.
It’s a stark reminder of both a highly bureaucratic state where the lack of a signature can halt valuable exports that could shut a company down, and how fuel shortages at EGPC have the potential to trickle into important industries across Egypt.
One clear characteristic of the Morsi administration’s economic programme is its resemblance to Mubarak-era projects. The following is no exception. Egypt Independent reports:
Prime Minister Hesham Qandil has tasked the agriculture, irrigation, electricity and investment ministries to begin implementing a project the government hopes will reclaim and cultivate a million new acres of farmable land over four years
Land would be sold to private companies for a small fee under the BOT scheme, granting them use anywhere between 20 to 25 years. Products used by private companies in the production of renewable energy sources would not be subject to taxes or customs duties.
The head of Egypt’s state-run oil company, the Egyptian General Petroleum Corporation, will step down in January as the institution faces a growing debt pile and rising premiums for fuel imports, an official at EGPC has told Rebel Economy.
Hani Dahi, who was appointed chairman of EGPC in March 2011, will retire on January 3rd and will be replaced by Sherif Hadarra, who spent time as an executive at Sumed oil pipeline, said the official who did not want to be named because the announcement has not been made official yet.
An official at Midor, an Egypt-based refining company, also confirmed the move naming Mr Hadarra as the successor.
Before his position at EGPC, Dahi was chairman of EGPC’s engineering affiliate, ENPPI.
With many of Egypt’s debt and energy problems rooted with EGPC it is no surprise the current management is keen to get out. In the last decade EGPC has become Egypt’s most indebted state entity with a debt pile exceeding $30 billion.
According to industry sources, in 2002, EGPC’s total debt stood at half a billion Egyptian pounds. In 2012, that debt pile has jumped to 200 billion pounds.
The organisation has also maxed out financing to fund oil and gas exploration from banks including National Bank of Egypt and Morgan Stanley.
Sources say the magnitude of Egypt’s debt is such that at BP’s global board meeting, Egypt’s debt repayment plan is brought up as a topic of discussion.
Other scandals have also seen high-ranking officials linked with EGPC now in jail.
In May, EGPC along with the state-run gas company, the Egypt Natural Gas Company, filed a request for arbitration against East Mediterranean Gas Company (EMG) over a deal to supply natural gas to Israel, Hani Dahi said at the time.
The two state-run companies filed the request on May 3 after EMG breached the terms of the contract by delaying payments for gas, which it exports to Israel.
But energy experts and officials involved with the gas pipeline deal believe the real reason was that EGAS and EGPC were having trouble producing enough gas to meet export contracts, Bradley Hope of Abu Dhabi’s The National reported in June, further implicating management at the two state-run companies.
What does all this mean for the country’s decision-making and management going forward?
Industry players say EGPC’s track record of appointing specific people to senior positions in state-linked companies is merely a precursor for a cabinet position. Abdullah Ghorab, the last minister of petroleum before Osama Kamel, was the head of EGPC before he was bumped up to the ministry in 2011.
With oil and gas one of the most contentious issues the new government is having to deal with, Egypt’s president Morsi and his aides may be shifting key positions in the bureaucracy to best manage their biggest problem.