In a country where almost half of the people live below the poverty line according to World Bank statics, a new slew of austerity measures introduced by the government have started to take its toll on the citizens of the most populous Arab country.
Starting July, the government raised fuel prices by around 50%, for the second time since November when it also floated the currency in an IMF-backed reform programme, which fuelled inflation.
Days later, the government introduced another hike in electricity prices by 40%.
The World Bank has set the poverty line in Egypt at EGP 482 ($54) a month.
Inflation has also hit a three-decade high in the past month, with electricity bills set to jump in August and with estimates of up to a 30% mark up.
For Ramzy El Kady, a 32-year-old worker in an Egyptian factory, life is getting harder.
“My salary is 800 pounds. How could I survive with this amount of money alone, not to mention that I have two kids and a wife?” El Kady told Daily News Egypt.
“After they (the government) decided to increase our social insurance programme last month, they took any increase on the beginning of July,” he added.
Late June, the government has announced a raft of measures to protect low-income Egyptians, saying it boosted social spending to EGP 75bn ($4.1bn).
The allocation of these funds aims to reduce the inflationary effects of the economic reform programme on the Egyptians, according to official statements.
But El Kady also show signs of support to the government’s austerity measures.
“With all we have to wait and see the results of these reforms. We have to support our president,” he explained.
Analysts believe the fuel and electricity price rises will further put pressure on inflation, though it was announced to have decreased in May to an annual rate of 30.9%, from 32.9% the previous month.
Price up is not a surprise
When Mona El Said, a 25-year-old house wife, was asked about her opinion in the recent prices hikes, she told Daily News Egypt that she wasn’t surprised.
“We all knew from the very first moment that the government will continue to carry out reforms to what has been spoiled in the last 30 years. All we have to do is be more patient,” she said.
The government first announced a subsidy reform programme in FY 2014/2015.
The reform includes price changes to petroleum products, improving financial efficiency of the Egyptian General Petroleum Corporation (EGPC), and reallocating subsidy spending in favour of food and pension programmes, the report explained.
Radwa El Sweify, an analyst with Pharos Holding for Financial Investments, believes that inflation will spike.
“Inflation over the next two months may rise to 34-36%, but the rate of inflation in the last two months of this year will be less than the same period last year when the pound was floated,” she said.
The pound has depreciated sharply from 8.8 per dollar to 18 following its flotation, which came after the International Monetary Fund (IMF) agreed a $12 billion loan disbursed over three years.
But the pound has strengthened over the last week for the first time in 3 months against the dollar.
“The government doubled social spending, but prices have tripled,” she said.
Egypt’s inflation rate is expected to rise by an approximate 3-4.5 percentage points following last week’s fuel price hike, Deputy Finance Minister Ahmed Kojak said.
Global Search House expected prices to resume their rally again after the Egyptian government enacted a second round of economic reforms at the beginning of FY 2017/2018.
HSBC said in a research note that the downward trajectory could reverse in the near term, particularly if the government delivers on the next round of subsidy cuts and VAT increases in July.
Social Unrest is unexpected
For Mohammed Aly, a worker in an Egyptian cafe, said that another social unrest like what happened in 2011 is very unexpected.
“We have to endure this time, because the result of any unrest could lead to worse,” Aly told Daily News Egypt.
“The subsidies weigh them (the government) down. We have to wait for the result of these reforms,” he added.
Prime Minister Sherif Ismail said fuel subsidies were straining government financing.
The projection for next year “is 150 billion pounds. This is a big number that neither the oil sector nor the budget can handle,” he said at a press conference.
“The programme was a response to a ballooning budget deficit in view of a surge in fuel subsidies post 2011 triggered by high demand and higher global oil prices.”
As a start, the government slashed spending on fuel subsidies by around 41% from EGP 126bn in FY 2013/14 to EGP 74bn in FY 2014/15. However, spending on subsidies of petroleum products were then swollen due to the pound’s flotation.
The aforementioned subsidies’ allocations in FY 2016/17 budget were projected to be around EGP 35bn. Yet, the estimated actual for the year is expected to hit EGP 101bn.
“This reflects both the flotation effect and the rebound in global oil prices from the budgeted $40 per barrel compared to an actual average of around $51 for the year,” the research firm explained, noting that “both factors surpassed the effect of November subsidy cuts.”
The government has projected a budget deficit of EGP 370bn, 9% of the country’s GDP, and this figure was, somehow, based on assumptions that no longer hold, as some expenses, mainly interest payments, will be exceeded.
“With the recent 2% hike in interest rate, we estimate interest payments in the upcoming FY to reach EGP 407bn versus the budgeted EGP 381bn,” MubasherTrade Research said in a research note.
Besides, subsidies to the General Authority for Supply Commodities (GASC) were later increased to EGP 85bn instead of the initial EGP 63bn, as savings from fuel subsidy cuts are expected to be more than offset by interest payments and social package.
MubasherTrade expects the overall deficit to hit EGP 418bn, higher at 10.2% of GDP in FY 2017/18.
Because the overall deficit is expected to exceed interest payments, the research firm also expects the budget to run a primary deficit, albeit somewhat minimal, of about EGP 11bn, 0.27% of GDP.
“We believe fuel subsidy cuts will have an overall favourable effect on the budget deficit. However, we believe this will take a longer time compared to the government’s timeline as interest payments still take accrued savings,” Mubasher added.
“We expect the budget deficit to maintain almost the same level in FY 2017/18, at 10.2% of GDP, compared to an estimated 10.5% of GDP in FY16/17. However, we believe the budget deficit will decline to a single-digit number over the following years. However, we stress that such improvements will be sensitive to a growing interest payments figure,” it said.
“A global tightening monetary policy, especially in the US, can place upward pressure on Egypt’s cost of credit, therefore delaying the positive effect of any subsidy savings,” the report further explained.
The report also explained that fuel subsidy cuts affect inflation through both direct and indirect channels, adding that an increased value-added tax (VAT) from 13% to 14% effective 1 July 2017 will add further to the inflationary pressure.
“However, the second quarter of FY 2017/18 could witness an easing pace of inflation due to the favourable base effect,” the report noted.
The Central Bank of Egypt (CBE) has recently hiked interest rate 2% to tame high inflation.
“The MPC highlighted that the move to raise rates was a response to concerns over the inflation outlook. More than anything, it seems that recent subsidy cuts prompted policymakers to take action,” Capital Economics said in a research note.
“The statement emphasised that the rate hike was aimed at tackling second-round inflation effects related to these subsidy cuts. Perhaps most importantly, though, the MPC also signalled that this latest rate hike is likely to be the last in the tightening cycle.”
The report added, “it envisages a (measured easing of the monetary stance) once underlying inflation starts to moderate.” Subsidy cuts mean that inflation is likely to rise in the very-near-term—by our estimates, they will directly add 1.5%-pts to the headline rate.’
However, over the next six to nine months this is likely to be more than offset by the unwinding of last year’s sharp drop in the pound.
“For our part, we think the headline rate will drop sharply towards the end of this year, close to the CBE’s end-2018 target of 13(+/-3%). This is likely to prompt the central bank to start cutting rates and we envisage a prolonged easing cycle over the next couple of years. We are sticking to our forecast for the overnight deposit rate to fall to 12.75% by the end of 2018,” the report concluded.