Economic challenges on the horizon for Egypt's next president

By Nehal El-Sherif, dpa

16.05.2014 | picked up by China Post

Cairo (dpa) – More than three years ago, Egyptians took to the streets demanding "bread, freedom and social justice."

After two presidents were ousted and unrest spread in the Arab world's most populous country, millions of Egyptians seem willing to sacrifice freedom for the fulfilment of the two other two demands.

Neither ex-army chief Abdel-Fattah al-Sissi nor his only challenger, leftist politician Hamdeen Sabahy, has unveiled a clear plan to achieve these demands after the May 26-27 presidential elections.

Al-Sissi, whose popularity soared after he announced the overthrow of Islamist president Mohammed Morsi in July, is widely expected to win.

Economist Rashad Abdou sees a "problem" in Sabahy's election programme.

"Since he knows that his election chances are slim, he is making excessive promises to help workers, create jobs and support small- and medium-scale enterprises ... But he does not specify how he will get the money to do all of this," Abdou told dpa.

"Al-Sissi's programme also lacks a lot of things, since he was a military man and had little or no relationship with other state sectors," he added.

Since Morsi's toppling, oil-rich Gulf countries have committed some 20 billion dollars to Egypt, and many expect this support to continue if al-Sissi takes office.

While the Gulf aid has given Egypt some economic relief, it will not fix the country’s problems, according to Steven A. Cook, a senior fellow for Middle Eastern Studies at the Council on Foreign Relations.

"By financing new spending with grants from the Gulf, Egypt is merely shifting fiscal problems into the near future," he wrote in a recent paper. "Second, receiving more assistance only masks problems that are rooted in irrational and conflicting economic policies."

These policies, including unsustainable food and fuel subsidies and a tax policy that does not produce enough revenue, place significant pressure on the government's budget, according to experts.

"The (next) government will have to strike a balance between the need to stimulate growth and to achieve fiscal sustainability," said David Butter, an associate fellow of the Middle East and North Africa Programme at Chatham House.

"I would expect efforts to continue to rein in energy subsidies and the government will look to increase tax revenue, though not necessarily through measures such as hiking the corporate tax rate, as this could be counter-productive," he added.

For years, critics have said Egypt's subsidies on basic commodities do not benefit those in need and even foster corruption.

In a bid to change this, the incumbent government has announced plans to start a smart card-rationing system for two vital commodities: bread and fuel.

Earlier this month, Supplies Minister Khaled Hanafi said a smart-card system for bread distribution rolled out in the coastal city of Port Said reduced wheat consumption by 30 per cent.

There are similar plans for fuel: to end subsidies on 95-octane gasoline and set quotas for other subsidized fuel.

In the 2011-2012 budget, energy comprised 72 per cent of the whole subsidy allocation, while food subsidies accounted for 14 per cent.

A bigger challenge for the next president will be cutting subsidies for energy-intensive industries such as steel and cement that widely benefit from the subsidy of natural gas.

Abdou believes cutting subsidies is vital. However, he does not think it would eventually benefit the lower classes.

"The finance minister said the budget deficit will reach 340 billion pounds (around 48.5 billion dollars) this year," said Abdou, who heads the Cairo-based Egyptian Forum for Economic and Strategic Studies.

"Yet, the rich are actually stronger than the state. So, they will add cost difference to the price of their product, thus affecting the low-income earners."

More than 40 per cent of Egypt’s 85-million-strong population live below the poverty level of 2 dollars per day, according to unofficial figures. 

To achieve social justice and ease the economic crisis, Abdou said the government needs to start a dialogue with the business sector and impose a certain profit margin to rein in inflation, which stood at 9.1 per cent last month.

The government has recently increased prices of natural gas for factories and houses, sparking public fears about a fresh spate of price hikes.

International Monetary Fund chief Christine Lagarde has described Egypt's energy subsidy reforms as "encouraging" and called on the next president and parliament to press ahead with reforms.

"I think no matter who is in charge, economic reforms will be a must," she told CNN.

"And if that is done thoroughly, decisively, I'm sure there will be growth and investment. But the reform stage is certainly a condition to that."