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In a bid to ease pressure on Egyptians whose purchasing power was further burdened with a second round of a bold economic reform program, which led the pound to halve in value, President Abdel Fattah al-Sisi announced a set of measures aimed at boosting social safety networks. The measures include an increase of 140% in monthly food subsidies, to be more than doubled, from LE 21 to LE 50 per person, as the authorities are determined to make timely progress in the reform agenda.
On the eve of the June 30 fourth anniversary, the Cabinet introduced new increases to fuel prices and electricity tariffs by up to 50% and 30%, respectively, raising concerns about more inflationary pressures in the coming months.
The inflation rate will edge up by 3 and 4.5 percentage points following the recent fuel price hike, Deputy Finance Minister Ahmed Kojak told Reuters.
“The cuts in fuel subsidies . . . will cause a temporary lift in inflation levels by 1.5%, which may be boosted if the government pushes ahead with plans to raise electricity tariffs,” said Jason Tuvey, Middle East economist at the London-based think tank Capital Economics.
Meanwhile, inflation is predicted to ease over the next 12 to 18 months, according to Tuvey.
Inflation has accelerated in Egypt—where half of the population is living near or below the poverty line—to the highest level in decades since November on the back of the pound’s flotation, VAT introduction and subsidy cuts. All these measures were necessary for Cairo to clinch a $12 billion, three-year loan agreement with the International Monetary Fund (IMF).
7 decisions to alleviate economic hardships
President Sisi, whose term expires next June, is under pressure to balance between pushing ahead with the economic reforms and mitigating public anger.
Admitting the cost has been “harsh,” President Sisi hopes the measures would alleviate the post-reform hardships, yet they are seen as painkillers for the low-income and middle-class citizens shocked by further hikes.
“The government is seeking to mitigate these risks by emphasizing that it is bolstering social safety nets (including cash transfer schemes) and that the reforms will deliver better economic performance and employment,” said Fitch Ratings.
As part of the reform program, the price of 80-octane gasoline soared from LE 1.60 ($0.08) to LE 3.65 ($0.20) per liter, while 92-octane increased from LE 3.50 ($0.19) to LE 5.00 ($0.28) per litre.
The prices of natural gas for homes and butane gas cylinders were also raised by 50% and 100%, respectively.
A full implementation of the VAT (increasing the rate from 13% to 14%) and raising the cost of several public services came into effect starting this month (July) as part of the reforms aimed at reviving the economy and curbing the state budget deficit and public debt.
The government aims to slash the public debt to 95% in the state budget for FY2017/18 (which started July 1), while the budget deficit is targeted not to breach above 9.1% of GDP, down from approximately 12 predicted in FY2016/17.
Fuel subsidies will stand at LE 110 billion in FY2017/2018, said Minister of Petroleum Tarek El-Molla, adding that new decisions will save around LE 35-40 billion.
“The recent fuel price hikes in Egypt will help the government make progress in reducing their budget deficit,” says Tuvey.
“Ration card-holders will be able to purchase staple goods worth LE 50, up from LE 21 per month,” said President Sisi. This action will raise the food subsidy bill by LE 23 billion to LE 42 billion in the state budget of the fiscal year 2017/18 (to start July 1).
Pensions will increase by 15% with a minimum of LE 150 for 10 million pensioners, and the value of cash subsidy Takaful and Karama programs by LE 100 monthly for 1.7 million beneficiaries. The president has also announced periodic bonuses and exceptional premiums for state employees and non-respondents to the Civil Service Law.
Sisi also approved the income tax exemption level and tax deduction for low-income groups with an approximate total value of LE 7 billion to LE 8 billion. Further, a tax on agricultural land will be suspended for three years to ease the tax burden on the sector.
“The president’s decision is a clear bias for the low-income individuals, and will help the poor suffering from the soaring prices,” said Parliament’s Economic Committee member Mahmoud El Seidy.
Enough support or just a painkiller?
Economists had different points of view regarding the impact of Sisi’s social package on the most vulnerable; some hailed the decisions as a means to compensate those who have been ailing from the tough austerity, while others see a limited impact as the inflation remains at skyrocketing levels with further price hikes looming. Economists urged the authorities to boost production as the only way to create jobs and increase these individuals’ income.
“The measures come in line with the IMF-backed reform program, and will help contain the public discontent over the price spikes,” Head of Research Department at Pharos Holding Radwa El Sweify said.
Welcoming the new measures, Sweify noted that this focus on the social safety net reflects the authorities’ awareness that the inflation is not likely to ease soon. “Per our estimates, the annual inflation will keep its current high levels, and will ease gradually to range between 18-20% by the end of FY2017/18,” she added.
Fitch Ratings forecasts that the inflation will remain above 20% for the remainder of 2017, and will fall back to an average of 13.5% in 2018. The projected inflation rate of 15.2% is likely to prove too low. “FY2017/18 inflation may be closer to 20%,” the rating agency said.
Although it is hard to guage whether the measures are enough, the government’s efforts indicate that the government cares about them, Sweify stated.
Despite the pains resulting from the bold, long-awaited reforms, “they were inevitable and any more delay would drive the country into a dark tunnel,” she affirms.
In this context, Fitch urged the authorities to boost some expenditure items to mitigate the risk of greater social tensions. This could lead to a larger-than-projected budget deficit.
On the other hand, economist and finance professor Dr. Medhat Nafei said the measures are not enough to compensate the most vulnerable who are struggling to secure their basic needs since the pound float.
“These measures are not more than painkillers as the government braces for further price hikes and VAT full implementation starting July; this will not curb the inflation, and nothing but boosting production will put it under control,” Nafei said.
Costs of social support
While this package costs the government a total of LE 75 billion ($4.1 billion), to be included in FY2017/2018 state budget, according to Minister of Finance Amr El Garhy, some experts argued that the measures are not enough to offset the country’s neediest burdened with the soaring inflation. Further, a new inflationary wave is also expected due to the recent price hikes.
On the burden of the social package on the budget deficit, Sweify said the dip of global oil prices, from an average of $57 per barrel to $47, would offset the increases of social safety allocations.
“Despite all these burdens,” the minister vowed the ministry will work to maintain the projected budget deficit at 9.1% of GDP for FY 2017/2018.
Despite electricity and fuel price reforms, subsidy spending continued to rise strongly, by around 30% year-on-year, as the weakening of the pound pushed import costs up, Fitch Ratings said.
To tame this rampant inflation, the CBE unexpectedly decided to raise overnight deposit and lending rates by 500 basis points since November to 16.75% and 17.75%, respectively.
The IMF has affirmed full support to the government’s decision to bolster social safety with budgetary savings that come from other measures. “The IMF is working to help the government and the Central Bank bring inflation under control and supports the steps the Egyptian authorities are taking to protect its poorest and most vulnerable citizens,” IMF’s Managing Director Christine Lagarde confirmed.
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