‘Time for implementation’

Niveen Wahish , Thursday 6 Jun 2024

Improving the economic outlook tops the new cabinet’s list of priorities.

Al-Sisi and Madbouli

 

This week President Al-Sisi asked Prime Minister Mustafa Madbouli to form a new government. While details of the new cabinet had not been made public by the time Al-Ahram Weekly went to press, the new government’s mandate is clear. It will prioritise economic reforms, seek to attract investments, reduce inflation and improve overall economic performance.

To succeed in these make or break tasks “we need a change of philosophy, not just a change of faces,” says Khaled El-Sayed managing director of Synerjies Centre for International and Strategic Studies.

“The government cannot solve the problems Egypt is facing alone. We are facing the problems as a nation, and as a nation we must all play a role in overcoming the obstacles we face,” to which end El-Sayed stressed the need for greater private sector and civil society involvement in the decision-making process.

A series of consecutive economic shocks, beginning with the COVID-19 pandemic and including wars in Ukraine and Gaza, created destabilising economic headwinds that resulted in a hard currency crunch and several devaluations. The breakthrough came four months ago, thanks to a major deal involving $35 billion of UAE investments in prime real estate on the north coast.

While the deal offered a degree of economic respite, last week Prime Minister Madbouli spoke candidly about how Egypt’s hard currency resources remain insufficient to cover expenses and had strongly hinted that government subsidies on bread and fuel would be reduced. Two days later the government moved to raise subsidised bread prices by 400 per cent. Despite the 15-piastre increase, each loaf of bread remains around 80 per cent subsidised.

Energy subsidy cuts are also on the cards. Madbouli said fuel price hikes will probably be imposed gradually, allowing the balance between production costs and retail price to be restored by the end of 2025. In the meantime, electricity is expected to increase by up to 40 per cent on 1 July.  

While reducing bread subsidies may not constitute a major problem it is symptomatic of a lack of planning, economist Mohamed Fouad told the Weekly. The decision to cut subsidies appears to have been a knee jerk reaction to the fiscal disturbances caused by the floatation of the pound in March, and to the fact that debt related payments have limited any room for manoeuvre, he explained.

The only space to make cuts may have been in the subsidy bill but in real terms subsidies do not constitute a fiscal load, said Fouad. He pointed out that spending on subsidies has been dropping in recent years: in the 2017-18 budget, subsidies amounted to LE332 billion, the equivalent $21 billion at the time, representing 22.3 per cent of the total government spend, and while LE636 billion has been earmarked for subsidies in the 2024-25 budget, it is now equivalent to just $14 billion. Meanwhile, debt and debt service payments now account for 62 per cent of the total spend compared to 25 per cent six years ago.

Lamenting that the government appeared willing to abandon its social responsibilities when faced with a fiscal load, Fouad expressed support for the prospects of conditional cash transfers which the prime minister said last week will be discussed by the National Dialogue.

“Conditional cash transfer is a much better way of administering subsidies than in-kind, but there is a lot of work that needs to be done,” said Fouad. Conditions must be in place to ensure the programme is effective in reducing long-term poverty and any system will need rigorous monitoring and evaluation. While programmes such as Takaful and Karama that apply a form of cash transfer to female-led households and the elderly are already in place, they are not necessarily scalable.

Fouad called on the government to implement greater fiscal discipline, rationalise government spending, limit borrowing, ensure revenues match or exceed expenditure and formulate a clear plan for debt sustainability.

They are issues of which the government is well aware and which it is committed to resolving. In its letter of intent to the International Monetary Fund (IMF) the government said it was bolstering efforts to bring down debt and reduce financing costs. “We are also taking important steps to strengthen our monitoring and control of extra-budgetary public investment as well as managing fiscal risks,” the government said.

Last week’s decision to reduce subsidies coincided with the arrival of an IMF mission to conduct the third review of Egypt’s Extended Fund Facility signed in December 2022 for $3 billion and augmented in March 2024 to $8 billion. The IMF had nothing to do with the decision to reduce bread subsidies, a source who preferred to remain anonymous said. The source stressed, however, that the IMF is a strong proponent of cutting energy subsidies.

While the decisions taken by the government are bold and will be good for the economy in the long-term, in the short-term they will increase the burden placed on citizens, says Khaled El-Sayed of Synerjies, with the middle classes particularly effected.

Fouad agrees, noting that while inflation numbers may stabilise or even decrease because of the base year effect, people will still feel pain in their pockets.

To help smooth the fallout from reforms El-Sayed called for a bigger role for the private sector. By supporting the private sector, the government will enable it to create jobs and increase wages, he explained.

The government has repeatedly promised to level the playing field and allow greater private sector participation, targeting a 65 per cent private sector share of total economic activity within three years. In its letter of intent, the government said to increase private sector-led growth it is pushing ahead with reducing the state’s footprint in the economy and implementing structural reforms that strengthen the business environment. “Supporting the rollout of the state-ownership policy, we are advancing our divestment programme, which will be an important source of foreign exchange inflows and help our debt reduction efforts. Reforms aimed at strengthening procurement practices, enhancing competition, and improving the ease of doing business will help lay the groundwork for increased private-sector participation in the Egyptian economy.”

Government intentions to encourage the private sector were reiterated in a virtual meeting held earlier this week between Madbouli and around 200 investors. During the meeting the prime minister underscored that overcoming the obstacles facing investors tops the list of the government’s priorities. He repeated the government’s commitment to its announced programme to sell stakes in state-owned companies to increase private sector participation in the economy and trailed a list of “attractive investments” that will be announced to Arab and foreign investors during the EU-Egypt Investment Conference, scheduled for 29 June.

To attract investment, the government must first resolve issues facing local investors, stressed El-Sayed. It must speed up the decision-making process and drop policies that prove inefficient. “The reforms needed are known to everyone. Now it is time to execute them,” stressed Fouad.

 


* A version of this article appears in print in the 6 June, 2024 edition of Al-Ahram Weekly

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