Less than a year separates us from the fortieth anniversary of the January 1977 demonstrations. After two decades of socialism, economic transition towards capitalism and liberating markets began.
President Anwar El-Sadat, who was then at the zenith of his popularity after the 1973 Arab-Israeli war, took a crucial decision to lift government subsidies for different commodities.
President Sadat was confident that his popularity and his historical achievement would convince the people to wait for the yield of the Open Door policy to trickle down to them. However, in an unexpected move, people took to the streets protesting over the increase in prices.
Chaos was rampant and President Sadat considered what happened to be a “thieves’ uprising”, but he was obliged to back down from his decisions and subsidies returned once again.
The 1977 demonstrations were a watershed, for it has been widely understood since that day that lifting subsidies from the poor is a red line which no sane person should attempt.
Even President Hosni Mubarak did not agree to lift subsidies during the three decades of his rule, despite global institutions’ recommendations to do so.
But that harsh lesson has not discouraged the government during the past two years from taking stern economic measures, to even speak of which was previously considered a kind of fantasy.
Such measures did have a major influence on rising prices. Here, we can shed some light on the four main aspects of those measures.
First: Lifting subsidies
With the launch of economic reform programme, focus was drawn to reducing the budget deficit through lifting subsidies gradually on fuels. The first wave started in summer 2014.
Last summer was supposed to witness another wave, but the drop in oil prices relieved the government from taking such a measure. However, with the recent rise in oil prices, the government will resume the programme to lift subsidies, including gasoline, diesel and electricity.
Price increases will not be restricted to a single wave in the next few months, but rather will be followed by other waves in the future. Although the programme promises not to affect low-income earners, previous experiences show that lifting subsidies is reflected on the rise in prices of different goods and services in the economy.
Second: Devaluating the pound
The years following the 2011 revolution witnessed a deficit between the incoming and outgoing foreign currency to the economy, leading to a mounting pressure on the pound. The central bank has fought tooth and claw in its defence of the pound by using foreign currency reserves.
With the erosion of the reserves, the central bank has relied on Gulf support; but due to the oil prices drop this support has receded. Thus, the pressure on the pound rose and led to the parallel market going wild.
Despite reassurances that floating the pound or devaluating it to a great extent is not on the horizon, the central bank resorted at last to devaluating the pound by about 14 percent.
Some think that this will not lead to a rise in prices because obtaining hard currency for importing was done from the parallel market anyway. But this devaluation will certainly lead to a rise in prices for goods which were imported according to the unofficial rate of the pound, which were the non-essential goods.
As for the essential goods, obtaining foreign currency for importing them was done through banks according to the official rate. Moreover, the customs on all products are accounted for on the official rate of the pound against the dollar.
Third: Import restrictions
In an attempt to reduce the pressure on the pound, the central bank imposed, in cooperation with the government, restrictions on importing, aiming at limiting importing non-essential products. This led to a shortage in the availability of several essential products, including medicines, and this in a country that imports three times what it exports, and even those goods it exports or produces locally often require imported raw materials enter to manufacture.
With a shortage in supply, the demand on those products has increased and consequently their prices rose in anticipation of more shortages in supply in the future.
Fourth: Printing currency
With the budget deficit worsening in the last few years, the government resorted to financing the deficit locally by borrowing from banks, until the total of what the banks lend to the government became bigger than what it lends to individuals and companies.
Since this did not cover the financing gap, the central bank was driven to expand in printing currency and using it in buying government bonds to finance the budget deficit. This resulted in doubling the central bank’s investment in the government bonds during last year.
This trend is continuing, thus increasing the supply of printed money and leading to a rise in the prices of different goods and services.
It is undeniable that all four aspects have a direct effect on a rise in prices. But what’s new is that accumulative effect of the four aspects combined will lead to a steady increase in prices in the coming period.
However, the incomes of individuals and families are not increasing at the same rate due to the economic slowdown, which leads to an accelerated decrease in purchasing power to great extent.
This will affect the middle classes’ expenditure on luxuries, while it will make the poor classes unable to meet their basic needs and will lead to the descent of a larger segment of society below the poverty line.
The government has adopted some social programmes to alleviate the negative effect on low income earners, whether through direct monetary handouts or through increasing the number of consumer complexes and diversifying foods available through them at low prices.
Those are commendable actions, but they are unable to face the inflationary effect of the four aspects combined. This inflationary wave may drive different segments of society to take to the streets, not asking for a political change but in demand for a decent living.
The 1977 demonstrations came as a reaction to a severe and sudden wave in increasing prices. The present rise in prices is happening now gradually, but the final effect of this graduality is bigger than that of the 1977 wave, due to the synchronisation of the combined different four aspects of price rises.
The government is moving forward with applying the economic reform programme to reduce the budget deficit and improve the investment environment adopting, in coordination with the central bank, stern economic approaches to save the ramshackle economy.
However, the government expansion in those crucial measures and their synchronisation will have great social repercussions that may develop into a political reaction from different social classes, like those which took place in the January 1977 demonstrations.
But it seems that what happened forty years ago has been forgotten. Despite El-Sadat's popularity and the 1973 victory, people still took to the streets when their life became unbearable.
Thus, it is necessary to review the adopted economic reforms and the pace of applying them, and to expand the social security network to a greater extent.
The writer is managing director of Multiples Investment Group.