When Hani Qadry Demian, the new Egyptian Minister of Finance, took office less than a month ago, he clarified at once that national economic conditions were even worse than one could ever imagine. The budget gap, according to Demian’s assessment, is three times higher than the figure reported by his predecessor, Ahmed Galal.
Despite cash flows coming from the allied Gulf countries, national currency stabilization and the overcome of the energy supply crisis, public finances are still in the red. Reuters recently evaluated the state of play of the Egyptian economy: within five years, according to the analysis, the ratio of public debt to gross domestic product (GDP) may rise above 100%, considered the “point of no return” for the Egyptian funds. Demian said that GDP growth rate would be equal to 2.3% this year, too little to avoid a financial slump. “Egypt is spending more than it can borrow while domestic production stagnates”, warned Moustafa Bassiouny, an economist of Cairo Signet Institut interviewed by Reuters. Therefore, the lending policy, applied also by Mohammed Morsi’s government, is burdening the national debt rate instead of shrinking it. Out of 103 billion dollars invested by Egypt last year, 25.4% are earmarked for interest payments on the debt.
In summer 2013, talks between the Egyptian government and the International Monetary Fund ground to a halt after a three-year long negotiation. During their periodical meetings with local authorities, the representatives of Christine Lagarde imposed strict conditions in exchange for a 5 billion dollars loan: cuts of subsidies and privatizations. Being aware that a reduction in handouts would only increase social instability and the risk of turmoil, both the former President Morsi and his successor, Hazem al-Beblawy, turned down the offer.
A rationalization of State subsidies for primary goods still remains wishful thinking. Even Morsi attempted to downsize subsidies before being ousted out by the coup occurred on June 30, 2013. The putsch followed a wave of strikes and complaints, the dear price paid by the then President as a consequence of his attempts to reduce state spending. He attempted indeed to focus state subsidies on the purchase of loaves instead of flour, which was sold to bakeries at market prices.
The military-appointed government has now implemented a plan resembling Morsi’s one. A pilot project started in Port Said, close to the Suez Canal. This involves the distribution of smart-cards, similar to vouchers, that allow citizens to buy basic goods by an amount equivalent to a fixed number of credits calculated on the basis of each family’s size. Until now, the plan has been limited to bread purchases only, the goal being to eradicate the black market of bread, largely diffused in the country. The innovation lies in the possibility to monitor consumption avoiding abuses, in lowering state expenditures and in increasing the range of products that can be purchased by consumers (bread, fruit, vegetables, etc).
A new paper by researchers at the Food Policy Research Institute (IFPRI) mentioned by The Economist suggests how developing countries can take advantage from the use of vouchers. A tool which is considered more efficient than extra-money donation to the poor (experimented in Malaysia) as well as than unlimited subsidies for single goods (like in Iran).
According to officials of the Egyptian Supply Ministry, this attempt at rationalizing food subsidies, tried in Port Said, should lead to lower the cost of supplying wheat, which is of the primary importance when considering that Egypt is the first importer of wheat in the world with 10 millions of tons purchased from foreign countries. A practice that rapidly depletes the small reserves of foreign currency owned the country, which is already spending about 5 billion dollars per year to ensure food subsidies.
The next months will show whether such a plan will be a successful measure, suitable to be implemented in the rest of the country, or a mere populist move of a government with an eye on the upcoming presidential elections. Port Said, the place where the pilot project started, has always been a stronghold of the army, where the military holds huge economic interests. It is a kind of city-state that has always took advantage of fiscal benefits and in which the armed forces have invested a great deal of money for decades, mainly in activities related to the Suez Canal.
When Hani Qadry Demian, the new Egyptian Minister of Finance, took office less than a month ago, he clarified at once that national economic conditions were even worse than one could ever imagine. The budget gap, according to Demian’s assessment, is three times higher than the figure reported by his predecessor, Ahmed Galal.
