Egyptians feel the pain in Sisi’s push to seal $12bn IMF loan

Posted on October 18, 2016

In messages splashed across billboards lining Cairo’s streets, the government is trying to convince long-suffering Egyptians of the virtues of economic reform — and prepare them for looming price shocks.

“Bold reforms shorten the route,” says one slogan. The billboards began appearing last month as the government pushes through reforms to seal a $12bn International Monetary Fund loan. Egyptians, who have already endured a recent rise in value added tax, are now bracing themselves for yet another increase in prices as analysts predict that a devaluation of the Egyptian pound is imminent and that fuel subsidies will be cut.

Christine Lagarde, the IMF’s head, recently disclosed that both measures have to be implemented before the fund’s bailout deal, provisionally agreed in August, can be concluded. But in a country with widespread poverty they could feed into a groundswell of resentment against President Abdel Fattah al-Sisi’s government.

It is a risk the authorities have been trying to avert by postponing politically sensitive reform. But now the government has little room to manoeuvre as it desperately needs to tackle a severe dollar shortage strangling the lacklustre economy and restore weak investor confidence.

A video that went viral this week showing the driver of a tuk-tuk lambasting the administration over shortages of basic goods is being interpreted as a sign of mounting discontent over people’s conditions.

“Before the president was elected, we had enough sugar, coffee and rice. What happened?” asked the driver.

Mohamed Abu Basha, an economist at EFG-Hermes, a regional investment bank, said the new measures would make life harder for the poor, who account for half of Egypt’s 90m population. But he added that the country could no longer afford to postpone devaluation and had no choice but to seek the IMF’s help.

“On the currency side, reserves are not enough to form a buffer,” he says.” So without the IMF, a devaluation would come at a higher cost and it would take longer for investors to jump in without the confidence that a deal with the fund would impart.”

Fearful of stoking popular unrest and mindful of widespread bread riots in 1977, successive governments have been wary of price increases. Two attempts in the past five years to borrow from the IMF foundered just as deals were being concluded because officials balked at the required austerity measures. When Mr Sisi, who came to power after toppling his Islamist predecessor, was still at the height of his popularity in 2014, he slashed fuel subsidies. But another promised round of cuts did not materialise as the economy struggled and rising prices squeezed the poor and the middle class.

Analysts argue the pound would have to be devalued sharply to address the dollar shortage. On the black market, the currency has tumbled to 15 against the dollar in recent months — a premium of 70 per cent over the official price of 8.8 to the greenback. But a devaluation, coupled with fuel subsidy cuts, is expected to drive inflation to 17 or 18 per cent, up from 14 per cent in September, the IMF says.

Egyptians are already feeling the pinch. Outside a low-price supermarket, Noha Shokry, a human resources manager, says she has been forced to change her shopping habits.

“I no longer buy imported juices or cereals,” she says. “I have given up almost anything we can do without, other than sugar, rice and ghee.”

Ghada Mohamed, a cook, says she cannot afford to stock-up her fridge.

“Prices are terrible. I buy less than I used to, just enough for the day,” she says. “People won’t be able to bear it.”


President Abdel Fattah al-Sisi: his government has little room to manoeuvre as it seeks to tackle a dollar shortage and restore investor confidence © AFP

Mr Sisi has promised that basic food prices will be preserved no matter what happens to the currency. The government has already put out tenders for six-months stocks of basic supplies — some believe in order to lock in lower prices before the expected devaluation. The military is also getting ever more involved in the economy, selling imported baby milk and cheap food from the farms it runs.

Officials and analysts say the challenge will be ensuring the IMF bailout and devaluation succeed in easing the economic crisis. Portfolio flows will be needed to address the liquidity crunch, but they will only come if there is a functioning foreign exchange market. The government will also be hoping for a recovery in the moribund tourism sector and the development of new gasfields, both important sources of foreign exchange.

But many Egyptians are already taking drastic measures. Hossam Gamal, a hairdresser at an upmarket salon, plans to sell his car because he could no longer meet his family’s needs.

“I used to consider that I earn well, and I used to be able to save, but it is now impossible,” he says. “I have been drawing down my savings for two years.”

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