Analysis & Opinions

Sisi's back to the wall

| Nov. 08, 2016

Egypt's economic dam was breached on 3 November when the government devalued and floated the Pound.

It raised interest rates by 300 basis points, and announced substantial energy price increases, including for products consumed by the poor and lower middle class, such as diesel fuel, 80 octane petrol and butagaz cylinders, which went up by as much as 50 percent. 

The government is presumably hoping that the ensuing torrent will deluge the country with foreign currency, not political protests.

These decisions were necessitated by a foreign currency crisis that had brought the economy to a standstill. The black market rate for the Pound had soared to 19 to the Dollar, virtually shutting down imports. 

Last week the head of the Importers Division of the Chamber of Commerce had called for a two-week suspension of dollar purchases and for a halt to imports of all "non-essential goods".

As supplies of basic commodities dwindled and prices escalated, the government was moved to desperate measures, such as seizing privately owned supplies of rice and sugar, including a 10kg bag from a man on a Cairo street.

Sisi is not too old to remember the "sugar riots" that swept through the Sudan in response to shortages and a price rise that shook the government of Jaafar al Numairy in 1982. Presumably fear of an Egyptian replay of those riots caused the government to announce on 4 November it was abolishing the 20 percent import duty it had slapped on sugar back in February.

Lurking behind the crisis was a game of chicken between the IMF and Sisi's government. The long and fractious history of that relationship has caused the former to be extremely wary of the promises of the latter. So the IMF was holding out for action, not just words.

It had been anticipated that it would in its October board meeting, approve the $12 billion loan agreed months earlier at the staff level, but it did not. Last week the IMF Director of Communications re-iterated the organisation's view that the exchange rate be liberalised, implying it was a precondition for the loan.

Agreement with the IMF assumed even greater significance in the wake of suspension in October of the 700,000 tons per month of refined oil products promised by Saudi Arabia, thereby adding $1 billion to Egypt's monthly import bill.

Simultaneous with the currency flotation announced on 3 November, Sisi reached out to Saudi Arabia, leaking the news that Egypt was requesting of Bahrain and the UAE that they mediate its dispute with Riyadh. 

Presumably this signals a readiness for Sisi to pay more respect to, if not toe the Saudi line on various issues, a political cost he is forced to pay.

The key question is whether in his game of chicken with the IMF Sisi's apparent surrender signals his embrace of its conditions, or his desire to evade them behind a screen provided by "IMF riots," such as those that met similar steps under Sadat in February, 1977. 

He might be calculating that the IMF and governments behind it, especially that of the US, supporting the agreed loan will deem Egypt too big to fail. With the first puff of gun smoke in Cairo, according to this calculation, they will agree to rescind the loan's conditionalities, as they did in 1977. Sisi could then roll back at least some of the stringency measures.

A breakdown of order in Egypt would, among other things, result in yet another surge of migration to Europe. Possibly it is not coincidence that in mid-October the government passed new anti-human trafficking legislation, signaling thereby its vital role in containing this threat.

It appears that even Tarek Amer, head of the Central Bank, might harbour suspicions about his President's motives. The New York Times interpreted his statement that "it is going to take us around one and a half years to see changes," as meaning that he fears Sisi may want to torpedo the float and revert to a managed currency peg, just as Mubarak did a few months after the 2003 flotation.

Whatever the gamesmanship, there is no doubt that the November 3 measures will stimulate inflation. A World Bank study of the relation between devaluation of the Pound and inflation revealed that in the immediate wake of the 2003 flotation/devaluation, inflation more than doubled, from 5.5 percent to 12.7 percent in less than a year. 

The inflation in turn caused a 7.4 percent decline in consumption by Egyptian families and an increase in the proportion of poor ones from 16.7 percent to 21.8 percent.

Economic conditions now are much worse. Underlying inflation rates and poverty levels are far higher than in 2003. The new devaluation of 50 percent, with more surely to come, compares to a devaluation of the Pound in 2003 from 4.51 to the dollar to 5.86, or about half the magnitude of the present devaluation.

Inflation in August was 15.5 percent, the highest in seven years. The rate now is undoubtedly higher. Food price inflation has outpaced the general index, by August having risen steadily for five months, reaching 19.3 percent. 

High and escalating food prices, as for sugar specifically, are potential political dynamite. And as with the case of sugar, on November 4 the government announced it was increasing the budgetary allocation for food subsidies accessed through smart cards, over which the military assumed direct authority in August, as if it were fighting a war on this front, which in some regards it is.

The squeeze on consumers had already begun before the 3 November devaluation and accompanying measures. The new VAT had taken effect a month earlier and although does not apply to most foodstuffs, drove up the cost of many goods and services, including mobile phone calls and cigarettes.

Housing and utilities inflation increased by almost 400 percent over the year ending in August as a result of a reduction in subsidies for electricity and water.

Family budgets were already under stress as incomes have been stagnating, even falling. The civil service "reform" law passed by parliament last month ostensibly raises salaries, but in reality reduces take home pay by cutting bonuses, which typically constitute a high proportion of gross pay. 

Since there are 7 million civil servants and average household size is 4.2, that suggests almost 30 million people will be negatively impacted by this "reform," about one third of the entire population.

Remittances and private sector employment and wages are not picking up the slack. Official remittances are down by about $4 billion over the year, more than a 20 percent fall. 

Although by official figures total unemployment rates have not changed dramatically over the past several years, the labor force participation rate has dropped.

Youth unemployment has increased and is now about 32 percent. The definition of "employed" is to have worked for at least one hour a week. Official figures substantially underestimate the rate of unemployment by virtue of this definition alone, to say nothing of purposeful fudging. 

In the vital tourism sector, which has for many years accounted for at least 12 percent of GDP and a higher proportion of the labor force, there must have been a substantial decline in employment over the last year. In July 2015, 912,000 tourists arrived in Egypt, but the following July saw about a 50 percent reduction.

So both Sisi and his people have their backs to the wall. He seems to recognise this as indicated by his attempt to reach out to youth through the conference held at Sharm el Sheikh last month and by subsequent promises to review cases of imprisoned youths.

But the scorn addressed in social media to these limited measures suggests they are unlikely to curry much favor with youth, the sector of the population the regime most fears. Sisi did not help his case when at the conference he made the curious reference to his refrigerator containing only water for ten years.

He may, therefore, have to offer more concessions to his people - a step he and his security advisers clearly fear - lest they be perceived as weak.

So maybe the game plan is the desperate one of stimulating an "IMF riot" to cause the country's backers to kick in more funds to keep Sisi in place. 

Whatever the case, there is no doubt that his regime has profoundly mishandled both the economy and the polity, reducing it now to desperate measures, whatever they may be. What is certain, according to commentator Omar Al-Shenety, is "a major inflationary wave that will probably be unparalleled in Egypt's modern history".

This piece originally appeared in The New Arab.

For more information on this publication: Please contact Middle East Initiative
For Academic Citation: Springborg, Robert.“Sisi's back to the wall.” , November 8, 2016.

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