Foreign Reports Bulletin
Talks between Egypt and the IMF regarding a loan package of $4.8 billion will continue through the end of this week and details are expected to be finalized before the end of the year. If the loan materializes, it should buy Cairo more time to pursue budget cuts, attract foreign investment and revive tourism. The government faces a daunting $28 billion budget deficit. A wide variety of countries and organizations, however, remain committed to assisting Egypt as it recovers from revolution.
The Egyptian Pound
President Mohammed Morsi’s government avoided an economic meltdown this summer, thanks in part to loans and aid made available by Saudi Arabia, Qatar, and Turkey. The Central Bank has spent more than $20 billion to prop up the value of the Egyptian pound since Hosni Mubarak was ousted in February 2011—an average of $1 billion per month.
In December 2010, Egypt’s Central Bank had $35 billion in net international reserves. Those reserves fell to $15 billion this summer but ticked up by $441 million last month after Egypt received $1 billion in total loans from Qatar and Turkey. The balance of about $560 million was spent on petroleum imports and loan repayments. Qatar has pledged to loan Egypt another $1 billion before the end of the year, which should tide the country over until January.
The IMF reportedly wants Egypt to let the currency gradually depreciate instead of continuing to prop it up, which would be unsustainable without regular infusions of cash. The pound has lost about 1.5% of its value against the dollar since June. It is down about 5% since January 2011.
The IMF also wants the government to whittle down the budget deficit from 11% of GDP to 10%. In order to do so, it must address energy subsidies, which account for 20% of government spending. One creative solution has already been put on hold: the government had announced that it would impose a new mandatory closing time of 10:00 PM for shops that normally stay open much later in major cities. The move was expected to cut wasteful consumption. However, the proposal was canceled just before it was to come into effect on November 4, due to popular backlash and questions about how the curfew would be enforced by a weak police force. The government says it will reconsider imposing new hours again after further consultations with businesses.
Butane Gas: A Test Case
Two weeks ago, the government announced that it had achieved partial success in ending subsidies for butane gas cylinders used for domestic cooking and hot water by three-out-of-four households which are not connected to the natural gas grid. The partial victory was achieved by selling the cylinders at subsidized prices only to people who qualified for rations or who were otherwise deemed needy. The subsidized price is 5 pounds (80 cents) for a 12.6 kg cylinder, which costs 70 pounds to produce.
The current plan is to introduce coupons with the average family qualifying for 1.75 cylinders per month. The ration card pilot project was put into effect on October 1. According to Petroleum Minister Osama Kamal, Egypt uses about 360 million cylinders per year, of which only 280 million will now be sold at subsidized prices. Egypt imports 60% of the butane used, much of it from Libya.
Energy subsidies alone cost Egypt about $1.6 billion per month. Savings from the curfew, butane and diesel subsidies might amount to some $330 million per month or $4 billion per year, although it is unclear how much the government stands to save from cutting gasoline subsidies.
• The aborted shop-closing curfew would have saved about $80 million per month, according to government estimates.
• The butane subsidy costs about $260 million per month, which the coupon system would cut by about $80 million per month if the balance of demand is sold at full cost.
• Subsidies for diesel fuel run $650 million per month. Kamal, Egypt’s Petroleum Minister, outlined a plan in late September which would cut the cost of the diesel subsidy by about $170 million per month.
• The gasoline subsidy costs about $290 million per month, but Kamal has only said that he wants a free market price for premium gasoline, while leaving the price of the regular grade at 56 cents per gallon. However, each car would be allocated 475 gallons per year at the subsidized price as long as the displacement of its engine did not exceed 1.6 liters. It is unclear how much of the country’s automotive fleet consists of these fuel economy cars.
Which Planet Is This?
Popular attitudes towards the reduction in energy subsidies are hard to gauge, although the vehement objections of the shopkeepers to earlier closing times suggests resistance is a real obstacle. Last month, the Egyptian Gazette quoted one political activist who bemoaned the lifting of subsidies.
“Consecutive governments have dealt with fuel subsidies as a forbidden territory, a red line not to be crossed. And now after Hosni Mubarak was toppled by a revolution calling for social justice and combating poverty, fuel subsidies are being lifted. Which planet is this?” wondered Mohammed Saad, a 26-year-old activist.
Fuel subsidies represent a chronic problem for many governments in the Middle East and North Africa. Just this week, Jordan was rocked by protests, after the government lifted subsidies and the price of fuel jumped significantly. With one-fifth of Egypt’s budget going to fuel subsidies, the arrangement is unsustainable. But it remains to be seen whether or not President Morsi and his economic team can roll back subsidies with popular support or in spite of it.
The IMF does not expect Egypt to take drastic actions on energy subsidies. Instead, it wants Cairo to address the problem over time and to make sure the most desperate Egyptians are protected from cuts. “Our experience with subsidy reform in many countries is that such reforms are best done when they are well prepared and phased in rather than implemented overnight,” the IMF’s Director for the Middle East and North Africa, Masood Ahmed, told Reuters on October 30. “I don’t think it will be sensible to try to implement hasty changes in a way that aren’t fully thought through or risk backlash.”
Speaking in August after meeting with IMF chief Christine Lagarde, Prime Minister Hesham Qandil told reporters that the loan would likely be for five years, with a grace period of 39 months and an interest rate of 1.1%.
Good intentions and agreeable terms have not insulated the IMF loan from criticism, however. On November 12, nearly twenty groups based in Cairo declared their opposition to the loan in a letter sent to the IMF and Prime Minister’s office. Signatories included religious and political groups. Complaints persist regarding the lack of an elected parliament, which would—under normal circumstances—approve any deal. Instead, President Morsi maintains expanded authority while parliament is absent. He is expected to approve the IMF loan package in the coming weeks. So far the government has released very few details about its economic plan, which would naturally be informed by discussions with the IMF.
The other side of the ledger for the Egyptian economy includes revenues from tourism, which were bringing in a bit more than $1 billion on average per month in 2010—but only $730 million per month in 2011 as both the number of tourists and the amount they spent fell by 30%. So far this year, tourism revenues are expected to be 20% below 2010’s pre-revolutionary levels. In October, Tourism Minister Hisham Zaazou predicted that tourism would not recover to 2010 levels until the end of 2013, depending on the security situation.
Egypt’s main stock market index, the EGX 30, is down compared to last month. But it remains well above the lower levels seen before Morsi took office. Other notes of cautious optimism can be seen in the latest quarterly Cairo property report from Jones Lang LaSalle, a commercial real estate firm. Last month’s report concludes that the Cairo real estate market is poised for recovery as investor confidence returns due to a more stable political environment after Morsi’s election and the appointment of a new government.
Among other developments, two of the UAE’s largest developers, Al-Futtaim Group and Emaar Properties, have announced plans to join forces to develop Cairo Gate, an $830 million retail and entertainment complex on a 16-acre site on the desert highway connecting Cairo and Alexandria. Egypt also awarded its first oil licenses since the revolution on November 8. Production is not expected until 2014 but the interest expressed by international oil companies is encouraging both for the industry specifically but also the economy as a whole. Egypt, which produces a significant amount of natural gas, much of which is consumed domestically, also imports oil. Recent estimates suggest Egypt owes roughly $3 billion for oil imported since the revolution.
Egyptian media outlets suggest that the government is planning to raise the sales tax by one percent; leisure items, like alcohol and tobacco, could be taxed considerably more. Cars and telephone use may also be taxed at higher rates, although officials have not confirmed reports, most of which rely on anonymous sources.
Many Countries Focused on Egypt’s Recovery
Before Mubarak’s overthrow, the IMF called Egypt an “emerging success story” after a liberalization program enacted in 2005 led to impressive growth rates. Twenty-one months later, the country is beginning to emerge from the economic wreckage which followed the revolution. Most importantly, foreign nations and organizations seem intent on preventing Egypt from becoming a failed state. Aid from Turkey, Qatar, and Saudi Arabia proved essential this year. The IMF loan will most likely be finalized in the coming weeks. And the European Union announced on November 14 that member states, the European Investment Bank (EIB) and the European Bank for Reconstruction and Development (EBRD), will soon extend a $6.4 billion aid package to Cairo.
Foreign Reports is a Washington, D.C.-based consulting firm that writes and distributes timely intelligence reports on political developments in the Middle East relevant to oil markets. Oil companies, governments, and financial institutions rely on Foreign Reports for their insight and analysis on key issues affecting the world generally and the Middle East specifically. The firm was founded in 1956 and the current President is Nathaniel Kern.