Middle East economists and analysts have tried and often failed to answer Egypt’s million dollar question: Will the country’s economy collapse and, if so, when?
Finally, someone has crunched the numbers to give us an answer.
London-based economist Ziad Daoud pored over Central Bank data and reckons the scare-mongering (of which the media is to blame of course…) of Egypt’s imminent economic collapse is largely unwarranted.
Egypt needs to raise $11.7 billion in the next 12 months, according to International Monetary Fund estimates.
[caption id="" align="alignleft" width="220"] via Wikipedia[/caption]
Egypt’s days of wrath began in Alexandria, where workers streamed off the docks, clashed with Egyptian police and sacked the home of Vice President Husni Mubarak. Within hours, the violence spread across the Nile Delta, into the industrial complex at Helwan and all the way to Aswan, 600 miles south of Cairo. There, as President Anwar Sadat awaited a visit to his winter home by Yugoslav President Tito, rioters burned down the triumphal arches built to honor the visitor. In Cairo itself, disorder ruled the streets. Near Opera Square, where bloody riots in 1952 gave birth to Gamal Abdel Nasser’s revolt against King Farouk, fighting raged between demonstrators and police. And in nearly Liberation Square, hard by the Hilton hotel, angry mobs tore a 10-foot poster of Sadat to shreds. “Down with Sadat!” they screamed. “Nasser! Nasser! Nasser!”
Thus began a story in Newsweek on January 31, 1977, just a week after huge protests erupted across Egypt when Anwar Sadat unleashed huge cuts to the subsidy system that so many people rely on for cheap food and fuel. His government had raised the price of rice, sugar and cooking gas – staple products of millions of Egyptians.
But within days, Sadat restored the subsidies and life returned to normal. Hosni Mubarak never forgot that incident and stayed clear away from subsidy reform over the entirety of his regime. Here is a Google Doc with some articles from that time.
Thirty-five years later, Egypt’s budget has the vital signs of a terminally ill patient who can only survive with massively invasive surgery. See Rebel Economy’s past posts on subsidies here (Egypt Subsidy Withdrawal, with graph) and here (Shish tawouk? Thank Nasser). More money is spent on Egypt’s fuel subsidies than healthcare and education combined. It’s the single-largest problem in the quest to meet some of the demands of the January 25th uprising for greater distribution of wealth and government services, where in the early days “Bread! Justice! Freedom!” was the slogan.
The Ministry of Finance has said it would begin a gradual phase-out of subsidies for some sectors and income classes, as part of its economic plan presented to the IMF. But it still remains to be seen how Morsi will comprehensively handle one of the most delicate tasks of his term – or if he will delay decisions for the next president like his predecessors.
The 1977 experience haunts the offices of government ministers across Egypt. With Egypt already on shaky ground and a significant segment of the population suspicious of the Muslim Brotherhood’s consolidating power, any misstep could plunge the country into protests and bread riots.
All that being said, subsidy reform has been successfully implemented in developing countries across the world. Malaysia began a gradual cut-back in 2010. Iran is in the midst of its own programme to cut back subsidies, which is even more vital because of international sanctions.
Even in countries that are not in bad shape, subsidies are holding back innovation in their economies. Here is a recent link to an IMF paper on energy subsidies in the Middle East. This problem is a perfect chance for politicians and economists to work together; it will be impossible without public awareness campaigns, subsidy targeting so that the poorest are not left in the cold, and a full-scale implementation by Egypt’s creaking bureaucracy.
Guest post from Bradley Hope, The National‘s Cairo correspondent.