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.
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.
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.