HUMAN WRONGS WATCH

In January 1977, a series of riots broke out across Egypt in response to the decision of then president Anwar Sadat to abolish government subsidies for bread and other basic foodstuffs.

The riots lasted just two days, but during that time nearly 80 people were killed and hundreds injured in clashes with police and security forces.

In this instance, Sadat, already a committed economic liberaliser, was acting under pressure from the World Bank and International Monetary Fund (IMF), from whom Egypt had recently received substantial loans to help deal with its deepening debt crisis.

Today, 36 years later, the conditions for a similar confrontation seem to be brewing in Egypt again.

Economy Systematically Worsened under Mubarak

Since the overthrow of Sadat’s successor, Hosni Mubarak, in 2011, the state of Egypt’s economy has steadily worsened.

The official unemployment rate now stands at 13%, inflation is running at 8.3% and, in the last four years, the number of Egyptian households living below the poverty line has increased from 21.6% to 25.2%.

Egypt’s public finances are similarly weak. Foreign currency reserves have fallen from a relatively secure pre-revolutionary level of $36 billion to a dangerously low level of $13.6 billion, the national deficit has reached 8% of GDP, and the trade deficit amounts to more than $2.5 billion.

Negotiating Recovery

Egypt’s new government, led by the Muslim Brotherhood’s Mohammed Morsi, has been forced to enter into bailout negotiations with the IMF. In March, an IMF delegation travelled to Cairo and offered an initial loan instalment of $4.8 billion.

Further talks were held in Cairo this month but concluded yesterday without an agreement. The next round of discussions will be held in Washington DC, US.

The IMF Demands

Should the government eventually accept the money, it will have to agree to a number of IMF demands, including tax rises, the privatisation of public assets, a reduction of waste and corruption in the public sector and, crucially, the removal of food and fuel subsidies which some estimate account for one fifth of all state expenditure.

This latter demand is particularly contentious given that food prices have soared in recent months as a result of a prolonged fuel shortage, itself a consequence of the burgeoning currency reserve crisis (substantial currency reserve holdings are needed to import oil and gas).

The lack of readily available fuel has increased transport costs and forced Egypt’s agricultural industry to reduce its production of wheat, making it increasingly difficult for ordinary Egyptians to access necessary resources.

These difficulties were compounded last month when the government raised the price of subsidised cooking gas – for the first time in 20 years – as a way, presumably, of signalling its willingness to cooperate with the incoming IMF delegation.

Egypt’s Catch-22

Egypt’s government has a difficult political balancing act to perform. One the one hand, it is under growing pressure to rescue the economy from a prolonged slump. At a minimum, this will require a targeted programme of capital expenditure, something an IMF loan might be able to facilitate.

On the other, as parliamentary elections loom and party political divisions intensify, Morsi and his team will be reluctant to strip back the subsidies which act as an invaluable source of financial support for millions of voters. Any attempts to do so will be met with aggressive and well-organised opposition at the street level.

Opposition exists within Morsi’s own movement as well. While Morsi himself is said to be sympathetic to structural economic reform, including reducing or abolishing subsidies, the political wing of the Muslim Brotherhood, the Freedom and Justice Party, is much more reticent, preferring instead to delay reforms until after the current election season has ended or beyond.

The split reflects an ongoing debate in Egypt’s post-revolutionary politics over whether or not to pursue the Mubarak-era policy of economic liberalisation.

Qatar, Libya…

For the moment, Egypt may be able to avoid capitulating to IMF demands.

In addition to a $2 billion interest-free loan from Libya, the ultra-wealthy Gulf emirate of Qatar has offered to purchase $3 billion worth of Egyptian bonds  – and this is on top of an earlier transfer of nearly $5 billion of Qatari aid to Cairo.

But neighbouring Arab states cannot be expected to prop-up the Egyptian treasury indefinitely – and most, including Libya, cannot afford to – even if a withdrawal of funds provokes renewed regional instability. Sooner or later, Egypt’s government will decide whether to reform the subsidy system and face the potentially explosive political consequences or to reject the IMF bail-out cash and risk national bankruptcy.

Neither option promises to be anything other than extremely painful.

*James Maxwell‘s article was published on Think Africa Press. Go to Original. 

Read also:

Whither Egypt (II) – Economic Bankruptcy

Whither Egypt (I) – Did You Say Dictatorship?

What Happened to Egypt’s Dream of Religious Freedom?

US-backed Egyptian Regime Inflames Sectarian Violence

2013 Human Wrongs Watch