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.
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.
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.
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.
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.
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.
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. Read More
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.
Egypt’s deputy finance minister, Hany Kadry Dimian, has left his post after six years in the ministry, a source at the finance ministry told Rebel Economy, delivering a blow to the country’s chances of concluding a loan agreement with the International Monetary Fund.
Mr Dimian, who has served as the deputy since 2007 and survived all of Egypt’s five finance ministers in the two years since the revolution, will leave “at the end of this week”, according to the source who did not name his successor.
While the nature of Mr Dimian’s departure is unclear, the timing sends a bad signal to international policy makers and Egyptian officials who say they are on the cusp of signing an IMF loan worth $4.8 billion.
Mr Dimian has proved to be an important component of Egypt’s finance ministry, surviving all five finance ministers since the beginning of the revolution in 2011.
As well as creating a Macro-Fiscal policy unit at the ministry of finance in 2005 (which has been a leading the writing of Egypt’s economic plan), Mr Dimian also represents the Egyptian side for the Egypt-EU economic dialogues and is coordinator for the EU-Egypt Neighborhood Policy Action.
He also serves as a board member of the Egyptian Competition Authority and the country’s National Telecommunication Regulatory Authority.
A second source, who was aware of the deputy minister’s departure, said a number of people have been nominated for the position including Maged Shawky, former head of the Cairo and Alexandria Stock Exchange, Amr El Kadi, head of risk management at private equity firm Citadel Capital, and Nidal Asr, assistant Sub-Governer at Egypt’s Central Bank.
Yesterday I had the pleasure of speaking to Robert Siegel, host of NPR’s daily show, All Things Considered about the state of Egypt’s economy.
The hot topic at the moment, of course, is how and when Egyptian officials will secure a $4.8 billion loan from the International Monetary Fund. What began as a smaller cash injection of $3.2 billion in May 2011 to buffer the economy has turned into a lifeline for the nation and one that will unlock an additional $12 billion in financial support.
I spoke about the significance of the IMF loan, it’s history with Egypt and where the government is going wrong.
Click here to listen and for a full transcript.
Circumstances beyond our control, including parents’ job title, have become more important in deciding the fate of young Egyptians in the job market, World Bank data shows.
The type of job a young person ends up with is heavily influenced by the occupations of their parents, underscoring the inequality of opportunity in the Egyptian labour market, according to a World Bank report published in late 2012.
The study shows that in the last decade, the labour market fates of young people in Egypt have become more bound up in their family origins as opportunities have become more limited.
The bottom line: it pays to have the “right” parent. Yes, this might be true for many other countries but it is especially important for Egypt, where youth unemployment is a tinder box of unrest and instability.
Among Egypt’s young labor market aspirants, more than one in two stay in the same occupations as their parents, the report shows.
Lire Ersado, a senior economist at the World Bank, who was in Cairo this week to share his findings, said the predictive power a father’s occupation on a son’s or daughter’s occupation has increased in the last ten years:
This means when you’re conceived your fate has already been decided and so being disadvantaged early on can affect your entire life. For example, there is a strong correlation that if your father was a farmer, you will also be a farmer.
It’s decided in the womb.
In 2006, 44% of young men and 75% of young women born to parents with white-collar occupations remained in the same occupational status. The data shows that young people with fathers in white-collar occupations are four times more likely to obtain a white-collar job as those with fathers in agricultural or elementary occupations.
Meanwhile, 42% of young men and 54% of young women with parents in agricultural or elementary occupations remained in the same occupational status. Young women in particular had a much greater decline in their social mobility [i.e., their job prospects] when born to father’s in agricultural or elementary occupations, widening their already sizable disadvantage.
It is not just job prospects that appear to be dampened or helped by your father’s job, but your perception of personal success.
A son or a daughter of parents in agricultural or elementary occupations has less reason in 2006 than in 1998 to believe he or she can aspire to a better job than her or his father, the data shows.
A son of a father with a blue-collar and agricultural or elementary occupations had, respectively, only a 20% and 15% chance of obtaining a white-collar job in 1998. By 2006, that had shrunk to 18% and 11% respectively.
This has also impacted the search for the right job.
While it takes as long as 12 years for a less advantaged person to find an ideal, well-paid job, it takes just 8 years for someone considered more advantaged.
While this data is a couple of years old and seems to ignore the secondary, informal, labour market, it is an important indicator that suggests ambitious and innovative young Egyptians are more likely to give up on getting a decent job if they are born into a poorer family because opportunities are limited to them.
What is Mr Ersado’s antidote?
He says that economists have varied beliefs about inequality and the harm and hindrance it can have on society. Some believe inequality offers a good incentive to work hard. While many others say inequality leads to investment being funnelled to specific projects and ignores the neediest.
But Mr Ersado says, “I have not seen anyone argue against equal opportunities for children. This unites us.”
Addressing the job market problem early on (at the child level) is far more effective than tackling it at the job market level, he says, and is a good entry point for dialogue with the government.
Equality is not just about better job opportunities for men and women but makes economic sense. It means efficiency and productivity. Fundamentally, quality in the job market is also a critical factor for true political rights.
If you had a rewarding, successful job and could feed your family, would you feel like protesting?
The International Monetary Fund, after signalling that it does not believe Egypt’s proposed economic reform programme is strong enough, has offered Cairo a temporary loan to help the nation weather its currency and budget crisis while it negotiates a more complex $4.8 billion loan.
In Washington, the International Monetary Fund said Egypt needed bold and ambitious action to tackle its economic problems urgently and it could get temporary IMF funding while it negotiated a long-delayed full loan programme.
An IMF spokeswoman Wafa Amr said the Rapid Financing Instrument was designed to provide rapid, but limited, assistance to member countries facing urgent balance of payments needs.
Reuters, March 11
The stop-gap measure could amount to about $750 million, according to Reuters, a sum which pales in comparison to the budget deficit targeted at $28 billion this financial year, or 10.9% of annual economic output.
The Fund is quietly acknowledging that in the absence of the reforms president Mohammed Morsi has been reluctant to enforce, the country needs immediate help as it fast runs out of cash for fuel and wheat imports.
Providing immediate help at a smaller and more grass-roots scale, and ensuring this is not hinged on an IMF final accord is something other international investors should consider in Egypt, as Rebel Economy has argued before.
Especially as Gulf money, which has acted as a stop-gap in the past, is not forthcoming. (Qatari finance minister Youssef Kamal dashed any hopes that more funds were on their way soon this week. “We already announced $5 billion,” he told Reuters. Asked whether Doha expected to provide more, he replied: “Not yet.”)
But there is a problem in the IMF’s approach.
While the IMF is working hard to represent a voice of compromise at a time when the government’s credibility is being tested and the mandate to follow through on important reforms narrows, it should not help Egypt plug an unsustainable budget through these temporary measures because it artificially props up the government.
Egypt should not accept the bridging finance. Instead, what the government should do is begin a campaign to make the budget transparent and the economic situation clear. It needs to do that to get political buy-in for austerity measures.
The president and his supporters are buying time because they want to win parliamentary elections before imposing a more difficult economic reform plan. Accepting the bridging finance only furthers the government’s interests.
It’s almost like Mr Morsi is holding the country hostage with the help of the IMF.
If anything the IMF should not offer bridging finance and force the president to be clear about a reform plan.
“It is paramount, essential, urgent that the Egyptian economy get stronger, that it gets back on its feet,” the US secretary of state John Kerry told Egyptian businessmen this weekend.
The message was clear and has been reiterated many times before: instil the economic reforms needed to satisfy the conditions the International Monetary Fund has set for a $4.8 billion loan. But Egypt is stuck between a rock and a hard place.
Many international lenders say they will not step forward with help until the nation is politically stable. But the country is unlikely to gain stability without a widely accepted plan to create jobs and inclusive growth.
And is it really fair to ask for political stability when a country as big and polarized as Egypt is testing democracy for the first time in decades? The problem lies with the attachment of the IMF loan to any international loans and aid.
For foreign officials, including Secretary Kerry, to continue characterising the IMF loan as the fix-all solution for Egypt’s economic problems is wrong.
The IMF loan is a red herring that, once signed, will release macro-loans to Egypt from Europe, the World Bank and the African Development Bank. This money will be focused on monetary policy and readjusting the budget. It will largely ignore the more urgent problem of youth unemployment, a critical trigger for the revolution in 2011. Of the total unemployed in Egypt, 74% are between 15 and 29.
As the months have passed, Egypt’s economic crisis has deepened, leaving it with little cash to invest in jobs and address the country’s biggest problem of unemployment.
Ultimately, donors should consider investing in job training for youth, and in small and medium sized businesses earlier and before an IMF loan is signed.
International donors cannot keep waiting for an IMF loan agreement before helping Egypt, which has run out of cash to help itself at this point. If Europe and the US is so keen to help with the country’s most pressing problem, then soft loans and aid will be unlocked in the next month or two.