Category Archives: United Arab Emirates

Why Egypt’s Pound Isn’t Strengthening

Take a look at this chart, which the Central Bank has been proudly parading this month:

[caption id="attachment_1917" align="aligncenter" width="552"]Bloomberg Bloomberg[/caption]

It shows how the pound’s official price, controlled by the central bank, has been appreciating slowly since the overthrow of Islamist president Mohammed Morsi. 

If we were to take this graph at face value, we might conclude that the pound has strengthened as the interim government (and military) took over, and billions of dollars worth of Gulf aid is helping the country’s currency stabilise.

However, traders on the black market tell a very different story, and say the Central Bank is ensuring the pound strengthens just to give the impression that the economy is stable and improving despite the turmoil.

Here, where the pound is traded illegally, the domestic currency has actually weakened to LE7.20 (from LE7.10 a few days earlier, according to Reuters) reflecting Egypt’s volatile economic and political situation.

The pound actually fell as low as around LE8 per dollar at one point earlier this year on the black market, prompting the central bank to turn to a few different measures to reduce pressure on the currency and revive the economy:

  • It put the currency up for sale a few times in December 2012 to prevent a currency crisis and let the pound lose more than 11% of its value on the official market
  • It cut interest rates for the first time since 2009 to revive economic growth
  • The government accepted $12 billion of Gulf aid from Saudi Arabia, Kuwait and Abu Dhabi. $5 billion of that has already arrived.

But none of that is working. This graph puts the currency’s performance in context, showing how the pound has rapidly fallen in value this year:

currency3

And as the pound depreciates further, the more foreign currency reserves are drained and the less the central bank can support the official rate for the currency. This is why the country is spending foreign currency at a rate of about $1.5 billion a month.

Add to that, the few foreign investors left are moving to withdrawals but currency controls are making it difficult to convert Egyptian pounds to dollars. Earlier this month, Emad Mostaque, a strategist at Noah Capital Markets in London told me around half a billion dollars worth of investment is trying to leave Egypt at the moment. 

So the picture isn’t as rosy as the interim government may want you to think.

In fact, the volatility we see on Egypt’s currency cycle will be another black mark to add to the nation’s problematic currency history, marked by the Central Bank’s repeated efforts to keep the pound’s value elevated, sometimes at the expense of the country’s precious foreign reserves.

The people at Dcode, an Egyptian business consultancy, put together a comprehensive graph detailing just how volatile the Egyptian pound has fared in the last three decades:

[caption id="attachment_1907" align="aligncenter" width="650"]Dcode Dcode[/caption]

As long as the central bank and government refuse to accept that massive political turmoil and violence on the streets alarmed investors and traders, the pound will continue to fall, foreign reserves will bleed faster and the Gulf will have even more power over Cairo as it comes to the rescue once more with billions of cash. 



What Next For Egypt’s Economy?

Egypt’s army has put the country on a path to economic destruction.

Not only will foreign investors stay away from Egypt for at least a year, but the cabinet is going to fall apart and aid will be hard to come by.

The nation, now more vulnerable than at any time since Hosni Mubarak was deposed two and a half years ago, is on its own.

Promises of aid from the EU and US may now be delayed indefinitely. No one wants to be seen as supporting an illegitimate government that has sat back quietly as hundreds of Egyptians are massacred. 

Of course, on one level, foreign aid is less important now given the $12 billion the interim government has been able to solicit from Saudi Arabia, Abu Dhabi and Kuwait. Western diplomats told Reuters that it would last less than a year, buying time for officials to iron out political issues.

But the events of the last 24 hours have destroyed any chance of political reconciliation and with another impending huge hit on tourism and foreign investment, Gulf money will run out fast.

The Gulf is not going to keep funding Egypt’s ballooning deficit, especially as the country keeps spending foreign currency at a rate of $1.5 billion a month.

Egypt’s so-called high-powered economic dream team are being weakened with every death on the street.

Not only has the resignation of Mohammed El Baradei totally undermined the government, but there are already rumours of others following in Baradei’s path, including the government’s chief economist and deputy prime minister, Ziad Bahaa ElDin.

So when Egypt inevitably runs out of cash in less than a year (if not a matter of months), there is only one place government officials will be looking to attract aid and that is from the same international donors, including the International Monetary Fund, African Development Bank and World Bank, it has ignored and asked to stay out of Egypt’s affairs.

Except this time, the negotiations for a loan will be tougher. Stricter conditions may be enforced for Egypt to prove it has what it takes to use aid to benefit the poorest Egyptians. No government has managed to prove that since Mubarak was overthrown in 2011.

Besides, the real reason Egyptian officials have avoided intense negotiations with foreign donors is because the government does not care about working in the best interests of the people. Meeting the conditions for those loans would entail too much politically contentious work. And what politician in their right mind would implement these controversial reforms? (No leader in 60 years of Egyptian history).

So maybe this time international donors should take heed of this request and leave Egypt to fail economically (there is already pressure on the US to cut military aid to Egypt – read Marc Lynch in Foreign Policy, the FT’s editorial, and the New York Times’ editorial for why).

Egypt is completely off track where it started off two and a half years ago. Maybe taking Egypt’s politicians, and particularly the army, off life support is just the shock the country needs after decades of dependence.



Is Egypt Ready For Reforms?

As the months drag on and the prospect of a recovery for Egypt’s economy seem to slip further away, the key question on most investors’ minds is whether the government can push through reforms.

But while it is clear that successive governments have failed to ease hardship, it’s worth addressing whether Egyptians are ready for reforms.

The loudest opposition to the International Monetary Fund loan, energy subsidy reforms and higher taxes was from Egyptian citizens. That’s not surprising considering Egypt’s rocky history with the IMF and the (inaccurate) perception that reforms will make life worse for the poorest.

But perhaps its time for an attitude change. Indeed, it is the very real fear of a popular backlash to reforms that has so far stopped any government imposing anything too harsh.

But as Rebel Economy argued earlier this week, a dose of austerity with some stimulus is better than no austerity at all.

Take Latvia, which has provided “a rare boost to champions of the proposition that pain pays”, where it is perceived as shameful for people who earn any salary, no matter how small, to go on strike, New York Times reporter Andrew Higgins writes:

When a credit-fueled economic boom turned to bust in this tiny Baltic nation in 2008, Didzis Krumins, who ran a small architectural company, fired his staff one by one and then shut down the business. He watched in dismay as Latvia’s misery deepened under a harsh austerity drive that scythed wages, jobs and state financing for schools and hospitals.

Then there was light:

But instead of taking to the streets to protest the cuts, Mr. Krumins, whose newborn child, in the meantime, needed major surgery, bought a tractor and began hauling wood to heating plants that needed fuel. Then, as Latvia’s economy began to pull out of its nose-dive, he returned to architecture and today employs 15 people — five more than he had before. “We have a different mentality here,” he said.

Does Egypt need to change its mentality? Rather than protest dislikes (which is all too easy) what about focusing energy into lobbying organisations to work harder for job creation and inclusive growth?

It worked for Latvia.

The Baltic tiger’s economy grew by 50% during 2004 and 2007, but the global financial crisis of 2008-09 hit the country hard and it endured one of the worst recessions of the European Union. Deep public spending cuts introduced by the new government led to discontent and protests at home, but impressed international lenders enough to earn Latvia an IMF/European Union $10 billion bailout.

Rather than cause uproar, the cuts (including slashed wages, wide-scale sackings of public sector workers and reduced welfare) calmed fears in the international markets and rather than throw the government out of office, Prime Minister Valdis Dombrovskis, who presided over the austerity, was re-elected.

Of course it would be short-sighted to suggest that if there were no protests then life would improve for the neediest. Demonstrations have been a key tool for Egyptians to communicate their grievances. However, persistent political instability, labour strikes and violent street confrontations are only delaying a recovery.

To be sure, economists have estimated that the military’s overthrow of Islamist president Mohammed Morsi led to losses of around $3 billion to $5 billion.  That mostly reflects a sharp fall in foreign investment, declining production as factories and production facilities stopped working and a major reduction in tourism revenue as security concerns mount.

But is it naive to consider Latvia’s recovery, dubbed a “neo-liberal success story”, a model for Egypt, a country that recoils at the mere mention of “neo-liberal”?

Not necessarily. The reason why the military was so welcomed in its power-grab last month was partly because Egyptians want a return to normality. Few people want Mubarak to return but they are viewing his regime a little softer and moaning that life has gotten worse since the 2011 revolution.

At one point, Egyptians will have to recognise that there must be hardship to reach the desired result. Not everyone will get what they want, but protesting every time you don’t get it won’t make any difference either.

Of course, Latvia and Egypt are hardly comparable. While Latvia was reeling from the global recession, Egypt experienced one of the fastest growth rates in the Middle East under reforms that began in 2004 to increase trade, promote growth and facilitate doing business. But as wealth accumulated, this did not trickle down to the poorest and soon stirred the discontent that ultimately led to the 2011 uprising.

Though the January 25 revolution was the harbinger of growth for Egypt, that day cannot be replicated as we have seen with Morsi’s rule and now the military’s caretaker government.

Egyptians must accept reforms and approach these with the mentality that the country won’t recover unless people are willing to try to fulfil their ambitions for a better future, rather than undermine their opponents or protect their own interests at whatever cost.

CORRECTION: This article originally linked to a story by Middle East Monitor that suggested Egypt was hit by losses of $17.1 billion after the military overthrew the former Islamist President Mohammed Morsi. The article has been corrected to reflect losses of around $3 to $5 billion, according to economists Rebel Economy consulted.



Egypt’s Ultimatum

The US sent a strong message to Egypt yesterday.

Under the Senate’s proposal, funds sent to Egypt will be kept at current levels, but military aid will be divided into four parts with conditions set on it. A key condition is that the Egyptian government holds democratic elections.

While $1.55 billion a year is very little compared to the Gulf’s $12 billion splurge earlier this month, and considering Egypt needs roughly $11 billion to $12 billion a year to keep its deficit under control, politically, the aid retains a strong tie to Egypt’s army.  It also prevents the risk of further unrest.

Washington is questioning how to handle the funds it sends since the military ousted elected Islamist President Mohamed Mursi early this month, and US law dictates that aid is cut off to a country where there has been a military coup.

So far, Egypt seems to have got away with what its military-led transition, which says a lot about what the US are willing to put with (i.e., pretty much anything as long as it keeps its hand in with Egypt).

But at what cost will this be for Egypt? 

Stricter conditions from the US are likely to come from other lenders too. The US has already in the last hour that it will delay a planned sale of four F-16 fighter jets to Egypt in light of the military overthrow.

The ultimatum is: Hold an election or else we will make you work for your money, or in the worse case scenario we will cut off aid. 

Major lenders including the World Bank and International Monetary Fund are already wary of Egypt and need reassurance that the country will not descend into more violence as shrill speeches calling for protests are given by military men.

In reality, Egyptians and financiers are looking for one thing: calm.

Calm brings clarity, clarity brings focus and that brings a plan. 

In the meantime, as the army wastes its energy rallying the masses to fight each other rather than unite the nation, there are practical conversations taking place between ministers and different economic organisations who hope to work out a plan for Egypt.

 

Ziad Bahaa El Din, for instance, the new minister for planning and international cooperation (the ministerial position which predominantly deals with international lenders) is now meeting many of these banks and resuming talks to gauge what direction Egypt will go in.

Egypt is now equipped with full bank of Gulf money. But now is the time to make moves toward reassuring donors that Egypt is serious about its transition. The fact that the National Reconciliation initiative, which is formed by interim president Adli Mansour, was launched today but only included groups that need no reconciling, and not the Brotherhood, is already a sign of the struggle for consensus, which lenders sorely need.

Unless the interim government is willing to accelerate its vague plans for economic reform, or call early elections (or both), these lenders, who can give more than just billions of cash to plug holes, will apply stricter conditions making it more difficult for Egypt to overcome its economic crisis.



Egypt’s Old Newcomers

Some familiar faces are back (trying) to run Egypt.

In fact, eleven out of 34 cabinet ministers are veterans of Mubarak’s regime.

That was good news for many businessmen considering many of the newcomers have a solid background in economics and finance and are seasoned politicians. A far cry from Morsi’s ministers, who included little-known professors of Islamic finance and loyal Brotherhood allies.

But what most analysts forget is that this is an interim government backed by the military. No matter how many “All Stars” are now in charge of the economic file of Egypt, the cabinet is physically handicapped at making reforms because it is not democratically elected. It will find it difficult to push through serious reforms or get the backing of international lenders until elections take place in February (or so we hope).

The military-led political transition has raised questions over large loans pledged by the International Monetary Fund, the World Bank and the African Development Bank. Bankers say every major institution is re-evaluating its position in Egypt.

Egypt’s new investment minister Ashraf al-Arabi may have signalled there is no need for an IMF loan now, but the reality is that the IMF may be in the driving seat and decided that until elections take place, there cannot be consensus on the $4.8 billion loan.

What is more, is that the optimistic sentiment that the cabinet will solve Egypt’s economy overlooks the tragedy of the situation: the former Islamist president Mohammed Morsi was unable to convince the same people to his government in the last year when they were needed the most.

Of course, that’s a failure on Morsi’s part for running such a shoddy administration, but it’s also a weakness on behalf of some our new cabinet members, who refused an important job because of their political affiliations.

Now, with these highly-rated economists and technocrats in power Egypt’s economy is perilously close to collapse. A year has gone by and Egypt’s budget deficit is costing the nation a whopping $3.2 billion a month, according to Reuters’ calculations.

Despite the Gulf support (which now amounts to more than $20 billion), there is scepticism among foreign investors, as Raza Agha, chief economist for MENA at VTB Capital points out in this important memo:

1. One, a high level of support from the GCC donors is perhaps helping facilitate the exclusion of the Muslim Brotherhood (MB). If the MB were a small group which could be ignored, this would not be such a big problem. But former president Mursi was still polling 30-40% support in the lead-up to his exit. With cash in the bank, the army-backed interim administration seems intent on pushing through the transition, with or without the MB.

2.       Secondly, while the large support helps Egypt meet its external financing needs ($19.5 billion over the next 12 months), it also means that the urgency to reform is postponed. Now if Mr Mursi came in facing high expectations, the new government that will take office around March 2014 will have even greater expectations and a fairly exhausted donor community. This implies they may have to reform deeper and quicker than what may have been the case otherwise. Deeper fiscal reforms could well have social consequences, given that inequality, poverty and unemployment have underpinned some of the reasons behind the pro-democracy movement.

The signs so far show that interim cabinet is fully aware of the political consequences of pushing through contentious reforms and is backing away.

After all, what interim government, which has a shelf-life of around 6 months, would make any unpalatable decisions that could lead to a nationwide backlash?

If anything, the cabinet is playing the populist hand (a favourite tactic of Mubarak which ultimately led to his demise) by spending more on areas that really need targeted cuts.

This example speaks volumes: Egypt’s new minister of supplies has pledged to ensure that supplies of a strategic good like wheat do not reach the critically low levels they did during Morsi’s year in office. Mohamed Abu Shadi told Reuters he aims to increase total stocks to between 5 million and 6.5 million tonnes by the end of Egypt’s current fiscal year next June.

Well that’s very gracious of Mr Abu Shadi, but he didn’t mention that Egypt is in the grip of nationwide fuel and bread shortages that are rooted in a mismanaged subsidy system. What about steps to reform to limit wastage, corruption at bakeries and queues outside bread kiosks? Isn’t the subsidy system, which is notorious for being abused, itself a problem?

“Criminals,” he said. That is who is to blame…

The new cabinet may be mentally equipped for reforms, but they are politically very weak and will struggle to do anything meaningful.

The best hope for Egypt is that the new elected president decides to keep some of these interim cabinet members so they can actually make a difference and have the political clout and the votes to re-write laws and communicate deeper reforms to Egyptians. 



Arab Economies Ignored

Ignore the economy at your peril. That is the lesson Arab leaders of transitional countries should learn from the Egyptian military’s removal of Mohammed Morsi from power, but one that continues to fall on deaf ears.

Rather than embrace the economic demands of protesters from across the “Arab Spring” countries in 2011, the new governments of Egypt, Tunisia and Libya have failed to address the key economic problems that brought people out to the streets in the first place.

Instead, they’ve done something much more uninspiring, which is to plaster over the status quo, and present it as a new package. 

The result is angrier, more frustrated citizens and Arab economies that are just as unsustainable as those in 2010.

In Tunisia, the country’s chronically high unemployment, high prices and slow economic growth has triggered a touch of nostalgia among some for the reign of Ben Ali. Meanwhile in Libya, despite impressive economic growth numbers, the country continues to face a fragmented political landscape and tribal power struggles, which the IMF says “complicate efforts to reestablish security and the rule of law”, and make for a vulnerable oil price.

Egypt is the most worrying of all.

The huge numbers of people appear to have embraced the military, believing the generals are acting in the national interest. Nothing could be further from the truth.

Successive governments have repeatedly crafted messages intended to tug on the patriotic heartstrings of the people, ignoring the real economic challenges for as long as they can and until someone else takes over.

Islamist president Mohammed Morsi presided over almost two sets of ministers after just one year in power, as political tensions alienated large sections of Egypt and led to mass resignations. And his plans for an “economic Renaissance” were exposed for what they were: a mirage. He did not have any control over the economy and instead, wasted his presidency trying to please his Islamist base.

But in the aftermath of his downfall, egos have quashed rational thinking and a naive optimism that Egypt is now saved by the army has blinded some of the best Egyptian economic thinkers.

PIMCO’s Mohammed El Erian, writing in the Financial Times, talks of the main factors that will drive “Egypt’s eventual recovery” (Rebel Economy’s own comments in square brackets):

First, Egypt has several economic growth, income and employment engines that can be easily restarted once calm is restored. [Egypt isn’t going to be “calm” for a long time, and do not convince yourself tourists will think any different]

Second, the country’s internal finances, while messy, are not beyond repair. [He partly means subsidy reform, which no one has been able to touch for 60 years…]

Third, Egypt can alleviate immediate foreign reserve and currency pressures through emergency financing on highly attractive terms. [How convenient! Enter the sugar daddies, Saudi Arabia, the United Arab Emirates and Kuwait. Because pumping billions of dollars into Egypt’s coffers really helped last year too.]

Aside from coming across as grossly misinformed about the ability of Egypt’s new interim leaders to tackle problems that would be difficult to implement even without the backdrop of a military-led coup, this type of thinking comes down to plain, old gloating.

And nobody likes someone who dwells on another’s misfortune with smugness.  

For example, Egyptian billionaire Naguib Sawiris, whose family is the richest in Egypt, says he will invest in Egypt “like never before”. But this says more about the blurred lines between Egypt’s biggest business empires and the ruling government, than an endorsement for a popular new leader.

The last years of the Mubarak era were marked by increased public resentment against the perceived growing influence of businessmen on government, and not something the new interim administration should repeat.

[caption id="attachment_1834" align="aligncenter" width="536"]Hazem El Beblawi considered part of high-powered economic team Hazem El Beblawi considered part of high-powered economic team[/caption]

And take this highly-politicised investor note from Pharos Holding, a Cairo-based brokerage firm, which describes the new prime minister [Hazem el Beblawi], his advisor [Ziad Bahaa El Din], the finance minister [Ahmed Galal] and the planning minister [Ashraf al-Arabi] as the “fantastic four”:

It is day 17 and the light at the end of tunnel is getting brighter, despite sporadic incidences of violence. Egyptians are no longer willing to see their lives put on hold. It has already been put on hold for almost two years and a half.

Now that the final structure of the interim government is almost complete, we view the economic team as significantly more coherent and competent than all the teams appointed post the Jan 2011 revolution.

The fact that they are well-qualified doesn’t overshadow the very real polarisation in Egypt.

How can these economists enact their ideas if the streets are awash with blood and Muslim Brotherhood leaders are locked up without charges? Morsi’s failure was not being able to bring disparate groups together to focus on rebuilding Egypt. What sign is there that a new government will do any better, considering the dramatic exclusion of the Brotherhood and their allies?

In fact, the planning minister, Mr Al Arabi, has already made it clear there is no need for an International Monetary Fund loan now.

That may seem like a very good move, considering Egypt has just received $12 billion in loans, deposits and oil from the Gulf, but that money is sure to run out in a few months, and then Egypt will be asking for more money from its sugar daddies.

Adlyaid

Let’s be clear about Mr Al Arabi’s motives.  He is playing a political game, and not working in the best interest of the country.

The IMF loan is highly unpopular but one of the few chances Egypt will get to rightside its budget and seriously sort out its deficit by implementing energy subsidy reform, correcting the tax collection system and raising taxes for the middle class and wealthy.

The effect of IMF-mandated reforms is not to make Egyptians poorer, but give the government room to spend its revenues in the right place. Healthcare and education are being neglected so that Egyptians, rich and poor, can have cheap fuel. Cutting that subsidy will hurt but it will also make life better for Egyptian children who face the very real prospect of no jobs when they graduate from substandard universities and high schools.

Some economists argue that Egypt may need to negotiate a larger loan now given its fiscal needs.

It’s also politically advantageous for the interim government to hold off on any contentious talks until elections in February. Why would the temporary government do anything to push through reforms if they have the option of passing the buck?

And what happens when people rise up against another government that fails to improve daily life? Will they call for the military to rid Egypt of the same government they ushered in?

The outright refusal of an IMF loan sets a worrying precedent for economic recovery in Egypt. Mubarak, too, was not keen on the IMF loan, and instead appeased the masses by pouring money into the public sector and systemic reforms.

It’s becoming increasingly clear that  Mubarak-style economic policies are likely to return, minus the big businessmen of the past like Ahmed Ezz.  That might be good for the Sawiris’ of Egypt, but it won’t be for the ordinary Egyptian. Mubarak’s neo-liberal policies helped increase gross domestic product to $145 billion but only widened the gap between rich and poor.

Some are relying on the idea that the trained economists appointed to a technocratic government will have a methodological approach to the economy, without politics playing a role. But this is very hard to believe.

As Avi Asher-Schapiro writes in the Jacobin blog:

Technocrats, of course, are not above or outside of ideology and they do not operate apart from politics. They preside over a system that distributes resources and divides political power. By their very nature technocrats are antithetical to revolutionary politics; they grease the gears of the machines that revolutionaries seek to dismantle.

The developments of the last fortnight are emblematic of Egypt’s struggle to impose any alternative economic plan.

With the budget deficit expected to hit 12% and economic growth still stagnant, jobs are hard to come by and the country is turning to the Gulf for a “quick-fix” to its energy and hard currency shortages.

Instead of just accepting whoever is made minister, prime minister and president, Egyptians (including high-profile members of the business community) should hold the interim government to account.

Mr Beblawi and his team should be grilled for answers and a plan, not adorned with praise.  



Is Egypt’s Fuel Crisis Over?

No.

That’s the short answer. Here’s the long one:

I’m afraid Egypt still has a long way to go before we never experience a power cut or experience gas shortages again.

The country’s fuel shortages seemed to have miraculously disappeared, just as Islamist president, Mohammed Morsi was overthrown. There were no gas lines and suddenly no electricity cuts:

“We went to sleep one night, woke up the next day, and the crisis was gone,” Ahmed Nabawi, a gas station manager told the New York Times.

Supporters of the interim government predictably seized on this saying the “improvements in recent days were a reflection of Mr. Morsi’s incompetence, not a conspiracy,” according to the NYT story.  While the former president is guilty of a lackadaisical approach to the economy, there is little truth in this.  It looks more like severe wishful thinking shared by Morsi’s opponents after his ouster. 

First of all, there have in fact been power cuts and long queues for gas since Morsi’s ouster. I experienced a power cut myself yesterday and I’m lucky enough to live in the quite pleasant island of Zamalek.  Journalists who travelled to the Upper Egypt city of Beni Seuf in recent days also witnessed extended queues for gas at petrol stations there.

The second point, a technical but very important one, is that much of the gas used in cars is actually refined locally. It is not imported from other countries, so any explanation that has attributed the queues to fill up gas tanks to the wider economic downturn is inaccurate. Egypt imports gas and other types of energy products for factories, businesses and power stations, not for cars.

Thirdly, for those conspiracy theorists out there, it is very likely that the Gulf money to Egypt was part of quite a substantial reward arrangement.  Therefore, the removal of Morsi would have seen the $12 billion (which includes a hefty supply of badly needed oil products) from Saudi Arabia, the United Arab Emirates and Kuwait funnelled through a few days earlier than it had been announced, lessening pressure on demand for energy locally.

Fourthly, the simplest answer is usually the right one.

Did anyone consider the fact that as millions of Egyptians took to the streets, very few people were actually at home or at work using electricity or filling up their cars? It is rational to expect that with business pretty much at a standstill on the anniversary of Mohammed Morsi’s presidency, the demand on domestic energy was actually quite low, meaning we were in a comfortable position for the days leading up and after his ouster.  Electricity-generating power stations are by and large run with natural gas, and with demand much lower for that week, it’s likely the capacity would not have been overcome as it has in the past.

There are other “theories” out there that suggest the Army used its own funds to pay for fuel, and “Saved Egypt”.  Groups blamed each other.

Some liberals suggested that the Muslim Brotherhood was behind the fuel shortage as an attempt to demobilise the masses and prevent large demonstrations from forming. But others who served under Morsi said there was a conspiracy to create a crisis from the opposition:

“This was preparing for the coup,” said Naser el-Farash, who served as the spokesman for the Ministry of Supply and Internal Trade under Mr. Morsi. “Different circles in the state, from the storage facilities to the cars that transport petrol products to the gas stations, all participated in creating the crisis.”

Forget these hypotheses that are not proved and will probably remain that way.

What is clear is that the country’s addiction to subsidies is still very much a problem, and that this eclipses every single theory on how shortages may or may not have started or ended. Of course, Mohammed Morsi made many mistakes, as detailed here.

But Egypt, has for a long time, bought energy products at international prices, and sold these locally at a severely subsidised price, costing the nation billions of dollars (in fact energy subsidies swallow up to a quarter, and increasingly more, of the budget – more than what is spent on health and education combined).

Not only is this an expensive way of distributing subsidies, but the system is not targeted so effectively everyone gets cheap fuel – and the rich naturally consume more of it, leaving the poor still in need.  Add to that, Egypt has actually begun consuming more energy than it is producing, exacerbating the problem. This problem may have been inherited by Morsi, but it is not his fault.

The painful truth is that when a new government convenes, it will be up against the same debilitating problems that Morsi’s administration was having difficulties with. Nasser created subsidies, but neither Sadat nor Mubarak or Morsi would touch them.

Who will dare to be the fact that is associated with these reforms? 

Instead of focusing our energy on these pointless theories that are fabricated by those who are greedy for power, the interim government should focus on how to relieve pressure building up as a result of  this system soon, before Egypt experiences another bout of shortages which will no doubt be blamed on one unsuspecting group.



Patriotic Egyptians Donate to National Fund

For Egypt’s Central Bank, financial donors are always welcome.

Whether it’s Qatar, Saudi Arabia or even controversial international lenders like the International Monetary Fund, if the donation looks and feels like US dollars, Egypt is happy to receive it. Especially at a time when the country is desperate to fund dollar-denominated fuel and wheat imports, but limited foreign currency reserves make it too expensive.

So last night on Egypt’s CBC channel, when TV host Khairy Ramadan called on all Egyptians – the business community, celebrities, Egyptian expatriates and ordinary citizens – to donate to a national fund to help Egypt out of its economic malaise, many Egyptians were happy to take part.

Anyone can deposit money into the “Egypt Fund” using bank account number 306306 (all Egyptian banks are accepting donations).

Within minutes, hundreds of Egyptians were calling to donate money to the cause.  Even children donated pocket money.

But one person in particular stole the show.  Mohammed Hawas, chief executive of Sahara Group, an engineering company declared that he would donate a whopping $5 billion.  (By the way, he was a presidential candidate in 2005, so undoubtedly, a political element is at play here…).

The national fund, trending on Twitter with the hashtag #EgyptFund, has already stirred debate.

For some, it highlighted the patriotic duty of Egyptians at a time of instability.  Some said if the donations continue at the same pace, Egypt would have no need to sign a loan from any other country or organisation, including the IMF. Some even went as far to say that Egypt could eventually lend money to the US and not the other way round.

Other viewers were more sceptical.  “I’ll believe it when I see the money with my own eyes,” said one unconvinced Tweep.  “So I should give up my money for the economy even if it doesn’t work?” asked another.

For all the discussion for and against the account, Egyptians should be reminded that this is a tried and tested method. Even under Mohammed Morsi, a “Renaissance Account” was opened encouraging the same donations, for the same cause.

It didn’t work that time (or we would have heard about it) and it is unlikely to work this time.

The account might be a crowd-pleaser rallying positive momentum for Egypt’s economy, but if the country is really serious about improving the economic situation, the interim government needs to move quickly on the formation of a cabinet so that the government can function properly and real reforms can be pushed through.



The Honeymoon Is Over

“Let us savour the moment now, and we’ll worry about the future later,” some Egyptians said yesterday hours after Egypt’s military had ousted the country’s president Mohammed Morsi.

Led by General Abdul-Fattah el-Sisi, the army – backed by the heads of Al Azhar, the Coptic Church and Mohamed ElBaradei – moved swiftly and confidently to suspend the country’s Constitution and create an interim government. Crowds erupted in cheers and screams.

Some say the military was working on behalf of the people of Egypt and that the country’s first democratically elected president had to go. Others say the army’s decision was carefully orchestrated, and cannot be described as anything but a military coup.

But as the jubilant atmosphere of Tahrir Square begins to fade, there is one certainty: Egypt’s economy must be made an absolute priority, or risk repeating this scenario in another 12 months. 

This is really a mirage.  The immediate gratification gained at getting rid of Morsi is at the expense of solving the basic bread and butter problems that helped push Egyptians onto the streets in the first place.

For example, resolving Egypt’s ever-increasing budget deficit, finally getting over a costly addiction to energy subsidies and actively creating jobs for the 1.2 million Egyptians who lost a job under Morsi (and the millions more who have been seeking formal employment).

Whoever takes over the helm inherits these problems and will likely meet a public backlash to any reforms.  The economic challenges have not gone away just because a Muslim Brotherhood leader was booted out.

In fact there are many more questions now lingering:

What of the $4.8 billion loan from the International Monetary Fund? Egypt still desperately needs this but the last time the army was in power (in June 2011), the loan was refused because it was considered too much of a public debt burden. Fast forward two years and you have an intractable crisis made worse by the fact international lenders won’t touch Egypt until this loan is signed.

Also, Egypt currently has no constitution: is it even possible for the IMF to sign a deal with a country with no governing charter?

What of the the billions from vehement Muslim Brotherhood ally Qatar? Will the Gulf state pull out now that the Brothers are gone? As Emad Mostaque, strategist at Noah Capital Markets says:

[There are] big question marks over $8 billion of existing Qatari cash being rolled over in a couple of years [and] $19 billion of pledged foreign direct investment in next 4 years (more than everyone else put together over last five [years])

Egyptians may be celebrating now, but hardship is yet to come for the poorest Egyptians who need immediate reforms, and the price we have paid for accepting the military’s aggressive move will no doubt set the tone for the next few months.



Why The Oil Market Is Wrong On Egypt

This guest post is by Robin Mills, energy strategist and economist. He is the author of “The Myth of the Oil Crisis” and “Capturing Carbon”. 

An unlikely pairing has made it to the headlines this week: international oil markets and Egypt.

The price of US light crude oil has risen above $100 a barrel for the first time since September 2012 while Brent crude oil, the European benchmark, has risen to about $105, apparently on concerns over political turmoil in Egypt.

Energy analysts left, right and centre say there’s risk the unrest in Egypt could spread to other parts of the Middle East impacting oil supply.

But there is no truth in this.  Oil markets are usually jumpy over perceived geopolitical risk, even when there is no logical connection to any realistic supply disruption. 

Most importantly, Egypt is not a major oil exporter – in fact, it is a net importer of about 90,000 barrels per day (bpd). Fears that Egyptian turmoil will spread to neighbouring countries could only be rooted in an ignorance of the region and a lack of awareness of the past two and a half years.

Some of the increase in oil prices may be driven by fears for the Suez Canal.  But this is actually not such a vital waterway for oil – nothing like the celebrated Strait of Hormuz, which carries some 17 million bpd of crude oil.

In contrast, the Suez Canal transited a measly net of about 100,000 bpd (see the table below for details) in the first three months of this year.

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What’s more, the Suez Canal is even less significant for oil transport than Egypt’s Sumed pipeline, which runs from Ain Soukhna on the Red Sea, crosses the Nile south of Cairo and terminates at Sidi Kerir near Alexandria on the Mediterranean.

It carries crude oil from south to north, and transported 1.7 million bpd of oil in 2011, up from 1.1 Mpbd in 2010.

If anything, liquefied natural gas (LNG) transit through Suez is more significant on a net basis, mostly running south-north (probably largely representing Qatari supplies to Europe).

A disruption in Suez, which seems unlikely, would have much more significant implications for world trade generally, than for oil specifically.

The bottom line is that more worrying for oil markets should be the disruption of Libyan production, now below 1 million bpd due to strikes and protests, and the continuing crisis in Iraq, a major oil producer. Yesterday, in continuing insecurity, two cars bombs exploded in the southern oil city of Basra, which had been relatively secure.

Iraqi oil exports in June were at a 15-month low due to pipeline sabotage, technical problems and bad weather at southern loading ports.

The real reason there has been a relative gain of US oil prices over European prices is clearly not because of Middle Eastern events, but due to other domestic developments including new pipelines that will open up once landlocked crude supplies in Oklahoma.

On the other hand, negative factors seem to be overlooked – the reduced probability of conflict with Iran after the election of pragmatist president Hassan Rouhani, and weak Chinese economic data.

As often happens, with a collection of data pointing in opposite directions, the oil market has chosen the most dramatic, if the least relevant, to respond to.