Egypt: The losers of liberalisation

Egypt: The losers of liberalisation
Comment: Domestic debt has increased by 35% since the IMF's 'reform' programme was introduced, writes Maye Kabil.
12 min read
21 Nov, 2018
Hunger and poverty rates in Egypt have risen sharply over the past three years [Getty]

While public expenditures are shrinking in those very areas which directly affect the lives of ordinary citizens, Egypt's government is spending more on infrastructure and construction projects.

Many of these have not been the object of any broad consultation and it remains unclear why they should have been given such a priority. Nor do these expenditures contribute to improve key basic indicators - the ostensible object of the reform programme - first and foremost the external balances and the public debt, not to mention the reduction of the deficit which implies reducing costs and increasing revenues.

Making short shrift of the citizens' legitimate right to know about decisions that have decisive effects on their lives even as they experience the negative consequences of the policies forced on them, and as their taxes are used for these mega-projects, the government did not even deign to make public the details of this structural adjustment programme before it was implemented.

Thus the reform plan was not published until it was well underway. And it was the IMF which was the first to disclose it in detail, the government having obtained parliamentary approval only five months after the most important parts of the programme had been launched.

The procedure was the same for adopting the gigantic projects which are absorbing the lion's share of the country's financial resources, even while their scarcity is stressed in the programme of economic reform itself. There was not the slightest consultation or communication regarding their economic benefits, their possible contribution to increasing the national revenue, their added value potential.

Nor were they shown to be tied in with the repayment of the debt or the progress of human development - all criteria which would make it possible to evaluate the wholesomeness of the government's projects.

Lack of foreign currency

Egypt began putting into practice the structural adjustment programme as agreed with the IMF in November 2016. It extends over a period of three years and is supported with a loan of $12 billion, payable in six instalments depending on the progress made in its implementation. Egypt has come two-thirds of the way, with only one year remaining before the agreement comes to an end.

The IMF's successive reports show the Fund's degree of satisfaction with the performance of the Egyptian economy. The government itself considers it has fulfilled its mission by achieving many of the programme's goals, in particular an increased growth rate, which was 4.3 percent before the programme began and had reached 5.3 percent by the end of the last fiscal year in June 2018.

The IMF expects the same rate for the current year with the "recovery of the tourist trade, an increase of natural gas production and continued market confidence thanks to the implementation of the adjustment program" to quote the Fund's report on world economic prospects published in October.

This policy has enabled the government to solve the problem posed by its currency shortage thanks to international loans on the one hand, and currency devaluation and the deregulation of its exchange rate on the other. Thus the Central Bank was able to amass unprecedented levels of hard currency reserves (in two years they rose from $17.5 to $44 billion).

However the external debt rose by 58 percent and now stands at $88 billion, according to the latest data available from the Central Bank.

As for the other expected sources of foreign currency, they have not developed as spectacularly as the government and other enthusiasts of flexible exchange rates for the Egyptian pound had promised, especially in terms of exports. These had, of course, improved, but the expected boom has not been seen.

Direct investments have risen by 11 percent with the increased production of oil and gas. The tourist trade, in the first year of the programme, had also not reacted to the devaluation as favourably as had been predicted, but last year it really did pick up again.

However, the big success achieved with the deregulation of the exchange rate, and which is regarded as one of the basic pillars of the "reform" was the massive arrival of investors in the Egyptian debt securities market: foreign investments in treasury bills and bonds amounted to $23 billion last March, ie: $500 million more than before deregulation.

Although they have provided the country with hard currency and allowed the government to obtain the equivalent in local currency, these capital flows represent a burden for the state budget since the value of those debt securities will only be added after a time. Meanwhile, the interest on the debt will have to be borne by the public purse, in addition to the current debts and their servicing.

According to the latest figures available last March, the Egyptian internal debt amounts to 3.5 trillion Egyptian pounds, representing an increase of 35 percent since the "reform" was launched.

The servicing of the debt swallows up 40 percent of the state's public expenditures, which is more than the total civil service payroll, subsidies and investments added together.

Aside from the burden on the budget which they represent, those foreign investments in debt securities are by nature highly sensitive to fluctuations on the world markets and in the opinion of many economists constitute a real danger: they are a form of investment which arrives easily enough but may be withdrawn just as suddenly.

This is what happened in the past few months with the rise in US interest rates and the extreme commercial and political volatility across the world, which brought about the flight of those capital flows from emergent countries.

In Egypt, $6 million in securities portfolios fled the country between last April and July, the equivalent of almost one quarter of all the investments in securities.

The fact that the government counted on those investments places it in a critical situation. It finds itself obliged to assign even higher rates of interest to those securities in order to attract once again the investors who are withdrawing from emergent countries. It is important to realise that for an increase of just one percent in the rate of interest on a given security, the service to the corresponding debt increases by 4 to 5 billion Egyptian pounds.

The burden of public debt

The chief objective of these economic reforms, in the case of Egypt and most of the other experiments conducted by the IMF, remains the reduction of the budget deficit. The usual way to achieve this is through a drastic reduction of public expenditures while at the same time ways are sought to increase receipts.

Egypt committed itself to implementing a number of decisions designed to reduce expenditure and hence the budgetary deficit. Over the past two years the social subsidies have dwindled: fuel, electricity and water - but also public transport such as the Cairo underground.

Despite the brutal impact of the shrinking of these subsidies on the cost of living for ordinary citizens, the goal remains difficult to achieve. Every few months the government has to revise, in conjunction with the IMF, the ideal level of the budget deficit in relation to the GDP, either because the price of oil, on which Egypt is so dependent, has risen, or because of the increasing burden of the debt and its interests.

Thus ordinary citizens are fated to put up with these ever-rising prices, the end of public subsidies and the state's incapacity to increase their income. The idea is to ensure a balance between the economic indicators but it is hard to see how this could be achieved without profound modifications in the economic structure - which the "reform" programme never mentions.

Economists and human rights advocates who criticise this method challenge the ability of this so-called reform to get the economy out of its morass. To what extent, they wonder, is it capable of inducing changes in the structure and management of the economy likely to bring about any sustainable development or guarantee a fair apportioning of the advantages and disadvantages - instead of obliging the majority of the population to support the full weight of the reform with no rewards while a few players avoid the costs and make a pile for themselves?

Consumers began to realise they were the losers in September 2016, with the introduction of VAT, replacing the previous sales tax. VAT raised the percentage levied on consumer goods at the same time as it extended the range of excisable goods and services.

Another measure followed that November: the deregulation of the exchange rate of the Egyptian pound, which divided its value in half and thus halved the purchasing power of the average Egyptian. This decision was a condition of the final agreement on the IMF loan: the first instalment was paid the week following the currency deregulation. That very evening, the government raised the price of fuel, in proportions that varied from 30 percent to 80 percent.

In the wake of these decisions, a terrible wave of price increases swept the country, with prices peaking at a record high, 30.7 percent up on the 2017 average, the year that followed the currency deregulation. This year the rate of inflation has fallen by 11.5 percent compared with last year, but is again tending to rise with the June hike in the price of fuel and electricity. In its report on prospects for the world economy, the IMF expects the rate for this year to be around 21 percent.

However, the drop in the rate of inflation has brought no improvement in living standards, since prices continued to climb, albeit more slowly, and wages remained unchanged.

Some employers even cut wages to reduce their expenses when the price rises occurred, affecting all goods and services, and consequently their production costs.

At the expense of citizens

Thus it is the ordinary citizen and not the state or the investors bearing the brunt of most of these costs and these policies, whether they are aimed at cutting expenditures or increasing receipts. The IMF has insisted on the need to widen the fiscal base to include the highest income bracket, and deplored, in documents monitoring the economic programme, the steady decline of corporate tax revenues over the past decade.

Yet the fact remains that in the end it was the IMF that allowed the government to give up its plans to tax the highest revenues and official transactions which it had begun to apply. On the other hand, the Fund stepped up its pressure to eliminate delays in VAT collection, when this purely restitutive tax is paid by consumers who make no profit.

In July 2016 (the year this economic programme began), the Egyptian government decided to lower the rate of taxation on the highest income bracket from 25 percent to 22.5 perecent for those whose income was higher than one million Egyptian pounds ($56,000) per year. At the same time it did away with the 10 percent tax on capital gains.

Pharoah projects: Useful for whom?

At the same time as it strives to reduce public expenditures, rerouting the sums previously allotted to subsidies in order to pay off the deficit, repay accumulated debts and their interest - all of which prevents the state from developing vital public services in the areas of health and education - we hear of plans for mega-construction projects which will cost billions of pounds.

It is claimed that these will open prospects for the future, but the government never provides any clear explanations of their economic opportunity. Nor how they are going to further sustainable development, nor how they are compatible with the austerity policies imposed on the population.

Egypt signed with the IMF for a loan of $12 billion. It has managed to collect another twelve billion from friendly countries and credit agencies. It was able to place foreign currency denominated debt issues on the world markets. All of this to fill a huge gap in its finances. And lo and behold at the very same time this government plunges into preparations for building a new administrative capital at a cost which those in charge of the project evaluate at nearly $45 billion.

Aside from a few propaganda talks in the media, none of these projects have been the object of a large debate on their desirability nor on the priority granted them in an economy committed to austerity and indebtedness, an economy struggling to regain its stability after a period of great political uncertainty.

The president of the company set up by the government to build this new administrative capital has announced that the first stage of the project will cost 300 billion pounds and will be finished in three years.

If that kind of money is available for what was originally a housing project and has taken on the proportions of a city, why are those funds not used for more urgent projects which are in desperate need of financing and which could boost sectors of the real economy or generate solid profitability, contrary to these huge sunk investments?

Why not try to lighten the burden of the economic crisis on ordinary citizens and respond to the pressing needs of the education and health sectors, deteriorating day after day as the funds devoted to them are shrinking year after year?

This project is increasingly challenged in the rare spaces where free speech is still tolerated, such as on social networks. Those in charge never miss an opportunity to repeat that the administrative capital will not be financed by the state, in order to make these challenges appear irrelevant.

And yet 51 percent of the company in charge of the project is owned by the armed forces, and 49 percent by the Organisation of Urban Communities, both of which are emanations of the state.

Even though anything related to the armed forces is shrouded in secrecy and remains impenetrable, the fact is that in the final analysis we are talking about public money.

But the new administrative capital is not the only project at hand. The government is also preparing to build a residential and recreational town, the first stage of which will cost 50 billion Egyptian pounds and which will also include governmental residences and the presidential palace. It will house the government headquarters during the summer months.

The government programme presented to parliament last summer includes plans for 16 new towns. The priority given these building projects seems hard to justify. It appears to be banking on the building trade to spark the economy and provide jobs for workers, ignoring the possibility of creating better jobs in other more profitable sectors of the economy which offer real prospects of development.

To provide transport for these new towns, the government is studying plans for a high-speed railway 498km long, between Ain Sokhna and Alamein, connecting the new administrative capital to October 6 City and to Alexandria, at a cost of $1.2 billion (nearly 28.5 billion Egyptian pounds) - to be financed by a soft loan from China.

The paradox of the principles underlying these public policies is that, at the same time the government is adopting plans for this train to serve the new future towns, it refuses to take on the cost of a public service like the Cairo underground, where the price of a ticket has gone up twice in one year and is likely to go up again soon.

The pretext for this refusal is the underground's deficit, although in fact the system is quite profitable. This is merely an attempt to make the people pay for investments linked to the extension of the underground inside Cairo, which in no way corresponds to the actual needs of the population. The underground constitutes a safe, rapid and reasonably priced means of transport in an environment where everything is increasingly expensive.

But the population is being made to pay the cost of a "reform" which only benefits the corporations, the banks and local and international creditors.

Maye Kabil is the economics editor at Mada Masr. She has worked in Egyptian journalism for 10 years in different publications and electronic newspapers, including Al-Shorouk and Aswat Masriya.

This article was originally published by our friends at Orient XXI.

Opinions expressed in this article remain those of the author and do not necessarily represent those of The New Arab, its editorial board or staff.