High inflation takes its toll on Egypt's shrinking middle class

Salma Shukrallah , Sunday 23 Oct 2016

Large numbers of middle-income Egyptians who once lived securely above poverty levels can no longer be sure of the future as economic reforms, falling pound and out of control inflation changes life as we knew it

Middle class
Shoppers lined up Monday at a market on Cairo’s outskirts (Photo:AP)

In the upper-middle class Rehab suburb of New Cairo, Ahmed Disouki, the owner of two local foul and falafel restaurants, complains that besides managing his restaurants, he now has to juggle another part-time job to survive.

“People like me who deal with the end product sold to consumers feel inflation the most,” says Disouki.

“I cannot increase prices much because I do not want to lose customers, but the costs keep rising and people buy less.”

Disouki, in his early forties and a father of one child, says he had to take up another job as a financial manager at a private company after his restaurants stopped making profit.

“I have around 100 workers, all of whom would lose their livelihood if I shut down, but as soon as I start seeing losses I will have to,” said Disouki.

Inflation, and more inflation

The inflation rate has hit its highest level in years, with core inflation reaching 13.94 percent in September. Egypt’s middle class, not only its poor, seem to feel its impact.  

Economists say inflation rates will continue to increase, with devaluation of the pound and another round of subsidy cuts in the pipeline, both core elements in the government’s planned reforms.

The Central Bank of Egypt depreciated the value of the Egyptian pound last March by 14 percent and is expected to devalue it by an additional 30-40 percent as Egypt tries to finalise a loan deal with the IMF worth $12 billion. The government argues this will bolster international confidence in Egypt's ailing economy.

According to Disouki, a skilled worker at his restaurant who used to get paid around EGP 1,000 per month will now not accept less than EGP 3,000.

“Most people working in such labour intensive jobs, standing for hours in front of a fire, are heavy smokers and a pack of Cleopatra [a local cigarette brand] now costs EGP10... in addition to his transportation, a worker would need EGP1,000 just to cover his own expenses at work .”

The cost of the restaurant’s electricity bills alone has gone up from EGP 7,000-8,000 per month last year to EGP 15,000-18,000. Basic cooking ingredients such as oil, beans, sugar and flour have all become more expensive, Disouki explains.

Disouki also says that traders, in anticipation of an increase in prices, no longer provide his restaurants with products in large quantities and frequently do not have needed products in stock due to a shortage in imports.

Price of economic reform

In a country that imports $60 billion in products and exports only $20 billion, a dollar shortage will mean a shortage in supply, says managing director at Multiples Group Omar El-Shenety, adding that inflation is not caused by devaluation alone.

According to El-Shenety, inflation is likely to reach 20 percent in the third quarter and will continue to be high for a while.

While devaluation is a main reason for the increasing inflation rates, the scarcity of products due to the dollar shortage also contributes to the rise in prices. The removal of subsidies and the price increase of public services is another main cause.

The new Value Added Tax (VAT) will have a “spill over” effect, El-Shenety says, to be reflected in the prices of many products.

The fact that Egypt’s central bank has been printing money to cover the deficit for a couple of years will have a “lagging effect” that will continue to reflect on inflation rates for another year or two, the Cairo-based economist expects.

The government will continue to gradually devalue the pound, and El-Shenety predicts that this will be done over three stages, with each tranche of the expected IMF loan.

“It is hard to be sure of the central bank strategy, but it will probably be a managed floating of the Egyptian pound and not a free float, until the gap between the official market and the black market is minimised.”

“A free float is not advisable at the current stage because Egypt suffers from low reserves and demand for the dollar is inelastic... the rise in the price of the dollar would be too high.”

A government campaign encouraging people to endure the likely harsh impact of its economic reform plan has billboards hanging on Cairo’s October Bridge and around its main streets reading “Courageous reforms will make the road shorter,” and “We can ration consumption, reduce our imports.”

The government and the army have launched campaigns offering products at discount prices and providing commodities that are in shortage. However, El-Shenety believes that “the middle class is not likely to benefit from or take advantage of such campaigns.”

While social safety networks created by the government might help with the situation, says El-Shenety, they will not help mitigate the impact of inflation on a vulnerable middle class.

Shrinking middle class

Estimating the size and borders of the Egyptian middle class has always posed a challenge for experts. While the country’s official statistics agency has offered concrete official estimates for the size of the poor population and the range of their income, similar estimates for the middle class are lacking.

In 2015, the Global Wealth Report of Credit Suisse Research Institute estimated the size of the Egyptian middle class at 5 percent, indicating that it had dropped by 48.2 percent between 2000 and 2015.

A similar study by the World Bank published in 2016 similarly estimates that the middle class in Egypt had shrunk by 14.3 percent in the first half of the 2000s, falling to 9.8 percent in 2010.

The World Bank study described the middle class as those who are “reasonably secure from falling into poverty,” and included individuals who earned $4.9 per day in 2005. The study described Egypt as a country with stronger downward than upward mobility.

Hisham Ghanam, a 50-year-old employee at one of the state run electricity distribution companies, tells Ahram Online that although salaries have increased at his company by more than 50 percent since the 2011 revolution, his purchase powers remain the same, and that he has even been forced to do without some luxuries.

“It is as if we lost what we had gained [after the revolution],” says Ghanam.

Ghanam is his family’s sole breadwinner and a father of three girls, two enrolled in state universities and the youngest in a public school.

“Our food and drink has not been affected [by the rise in prices], but spending on private [school] lessons or doctors has become more of a financial burden... the lesson that was for EGP 30 is now for EGP 50, and the doctor that used to take EGP 100 for a checkup now takes EGP 150.”

“This has forced us to give up some luxuries, like replacing our old phones with newer ones or going on a summer holiday,” Ghanam says, describing the situation for his family as well as his co-workers.

The upper echelons of the middle class are also complaining.

Alya Mohamed, a 34-year-old working mother of two employed at a multinational manufacturing company, tells Ahram Online that despite being paid 30 percent more than at her former job, which she quit in 2014, her spending pattern seems “the same or even less than before.”

“Our manager has requested an adjustment of our salaries to meet the rising inflation, but no company can adjust quickly enough with the continuous rise in the dollar price,” Mohamed complained.

She further fears that the current economic conditions are putting her and her husband’s job security on the line, as multinationals are unable to transfer their profits to their home countries due to the dollar shortage and transfer controls, rendering Egypt a less attractive country in which to operate.

“The atmosphere [at work] is very tense, everyone feels the place might shut down and we will lose whatever salary we are getting.”

Struggling to maintain the same standard of living, Mohamed says the family’s income barely covers household needs, school fees and car maintenance.

“We could not afford international schools so I enrolled my son in a well-reputed private national school. This year I paid EGP 30,000 for his school, compared to 18,000 last year. My younger son goes to nursery school, which costs another EGP 30,000 annually.”

Mohamed also says her older son needs to attend after school programmes, which adds to the cost of education fees, in addition to the summer camp where she sends both her sons.

“We cannot save anything. We cannot upgrade our flat,” luxuries which she says were previously affordable for middle class families like her own. “We also recently minimised outings and travel.”

Similarly, 28-year-old housewife Asmaa Omar, whose husband works as an app developer, says her family’s priorities changed over the last couple of years.

“I changed basic shopping, for example. I do not buy as many detergents...I used to buy one specific type of cleaner for the kitchen another for the bathroom, now I just buy the general cleaners,” Omar says, pointing to how much they need to operate on a budget.

“I will also have to start working as soon as our son joins nursery, because otherwise it will not be affordable,” the young housewife adds. 

Coping with reform

According to economist Noaman Khalid of CI Capital Asset Management, Egypt’s economic reform programme was originally planned to be applied over five years and for the pound depreciation to start during the downtrend in oil prices, when it dropped in 2014 from $90 to $18 a gallon.

The shift in policy at the time, from the austerity plan to investing in mega projects such as the expansion of the Suez Canal, failed to minimise the negative impact of the reforms, Khalid opined. Instead, the mega projects, designed for long term returns, exhausted foreign reserves.

Attempts to mitigate the impact of inflation have been taken up by unofficial campaigns not spearheaded by the government, the most high-profile of which was launched by prominent media figure Amr Adib, who called on traders to lower costs by lowering their profit margin under the “People Command” campaign.

While these campaigns may mitigate a potential social backlash, as prices will be lowered after the initial shock of inflation passes, Khalid believes their effect will last for no longer than a few months.

The fact of the matter is that the government cannot control prices and the rise in inflation is likely to continue for at least six more months, according to the economist.

Khaled adds that the inflation will lower purchase power across classes, causing what he described as a “severe recession” until investments pour in.

El-Shenety, however, believes investments will not necessarily follow the current reforms.

“The price of the pound is not the main factor driving away investments, but also the lack of security and political stability.”

Egypt has been struggling with political unrest, security problems and militant attacks in recent years, all of which turn away investors and tourists.

Regardless of whether the current reforms will manage to attract investments to Egypt in the short term, there is a general consensus among experts that inflation will continue to be high for a while, taking a toll on Egypt’s shrinking middle class and threatening it with further downward mobility.   

With the middle class acting as the country’s main “purchase power” and its “safety net,” as El-Shenety put it, this in turn is expected to affect the economy at large.

Accordingly, the Egyptian poverty rate, estimated at 27.8 percent, is likely to widen.

*The official exchange rate for $1 = EGP 8.78

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