Egyptians feel the brunt of austerity drive

Hassan, a vegetable trader in Egypt’s economic capital Cairo can no longer get his produce at a stable price. With the recent fuel price hike increasing transportation costs, his distributors have doubled their prices. Meanwhile his customers are bartering with him to spend less on their vegetables.

“The government doesn’t even want to consider the impact of the price increase on lower income people,” he said. “So everyone is squeezing those beneath them.”

At the end of June, the Egyptian government slashed its fuel subsidies, hiking petrol and diesel prices overnight by between 43% and 55% and doubling the cost of cooking gas. Then, on 6th July, Egyptians saw their household electricity prices increase by as much as 42%.

The fuel price hike – the second since the Egyptian pound was floated last November – is part of a bruising economic reform drive, propelled by an IMF bailout. And while international lenders and investors are buoyant, middle and lower-class Egyptians are feeling the pinch.

Lack of investment

“Egypt has seen relatively little investment for the last six years since the Arab Spring,” said Sharat Dua, who manages the Magna Africa Fund at Charlemagne Capital. In the midst of unparalleled political upheaval, investors fled.

Meanwhile, spikes in political violence and terrorism paralysed Egypt’s tourism sector, which contributed $12.5bn at its peak in 2010. As a result, Egypt was forced to rely on aid from its Gulf neighbours.

In June, the Egyptian parliament approved a deal to hand two strategically located Red Sea islands to Saudi Arabia. The move was pushed through by the president despite widespread opposition – only 11% of Egyptians supported Saudi Arabia’s territorial claim according to polls.

As the deficit widened to 12% of GDP and foreign reserves plummeted in the latter half of 2016, the government’s capital controls starved businesses and industries of foreign currency. Finally, in November Egypt floated its currency – which immediately halved in value against the dollar – and secured a three-year $12bn loan from the IMF.

Other bailout conditions include the imposition of a value-added tax and the privatisation of state assets, like Banque du Caire and ENPPI, the state-owned oil company. Investors have cheered these drastic reforms.

“They needed to address these subsidies, which are a huge drain on the budget, and target them better at those who need them most,” said Dua. “It shows a serious commitment to reform and that gives you the confidence to invest.” Egyptian President Abdel Fattah el-Sisi’s ministers, too, argue that these reforms are long overdue, accusing their predecessors of cowardice.

Yet the reforms have spelt significant hardship for ordinary Egyptians, 28% of whom live below the poverty line. Inflation reached 31.5% in April, the highest level in decades, increasing prices across the board, while real incomes fell.

“It has hit the middle classes in a powerful way,” said Reem Abou-El-Fadl, lecturer at SOAS, University of London. “There is a sense of foreboding in the midst of economic crisis.”

To offset the impact of its austerity plan, the government has proposed a social care package to support poor Egyptians. It has promised to raise salaries and pensions for civil servants, and further subsidise essential items for ration card holders.

“We are hopeful that measures on fiscal support and the social safety net will protect the most vulnerable,” said Dua. But some fear the government lacks the data to appropriately target subsidies to those most in need.

Would-be investors will also be nervous about political repression, bureaucratic inefficiency, corruption and rising militant violence in Egypt. The country currently ranks 161st out of 180 countries on the World Press Freedom Index, lower than Turkey and Iraq.