Egypt Independent: Economy-Main news

Final Issue: Policies of the former regime linger, much to detriment of the economy

Alexandre Goudineau — Thu, 25 Apr 2013 09:13:00 +0000

This piece was written for Egypt Independent's final weekly print edition, which was banned from going to press. We offer you our 50th and final edition here.

On the macroeconomic level, the closure of a newspaper is a nonevent.

It is one among countless other closures of factories, shops or small businesses in a country suffering from numerous economic ailments.

If the precise total number of closures is not available, a recent survey estimated that about 4,500 factories have closed since the revolution.

While this crisis is, without any doubt, fueled by political instability, it can also be attributed to the failure of the economic model set up by the former regime of ousted President Hosni Mubarak. The perpetuation of these policies under the current regime, along with the lack of an alternative economic model, will remain an insurmountable obstacle to more egalitarian development in Egypt.

Unsustainable development

The 2000s saw a number of controversial economic policies, as well as a period of robust economic growth — at least on paper. It was often noted, however, that the benefits of growth never managed to trickle down to the people who needed it most.

Said policies mainly focused on the development of what economists call “rents”: oil and gas extraction, tourism, Suez Canal revenues and foreign direct investments.

However, experts have repeatedly underlined the risks of relying too much on these revenue sources.

“It is a risky strategy, especially for a country that relies so much on vital imports,” says Samer Atallah, economics professor at the American University in Cairo. “These rents are too sensitive to external or internal shocks to be our main sources of revenue.”

Oil and gas production has declined in the last two years for a variety of reasons: limited or less accessible reserves, delayed payment by the government, and an ill-adapted contractual frame, among others.

Tourism and foreign direct investments have also shied away from the reigning political instability, and, in turn, the rents are no longer able to cover the rising trade deficit. According to Central Bank of Egypt data, the sum of tourism and Suez Canal revenues, along with foreign direct investments, only covered 28.5 percent of imports in 2011/12 against 55 percent in 2007/08.

The overall strategy is obviously unsustainable in the long run, the current turmoil notwithstanding.

While tourism and Suez Canal revenues have reasonable growth potential, Egypt is bound to become a net oil and gas importer, putting more strain on its hefty energy subsidy bill. Its strategy of development through energy-intensive industries such as cement, steel or fertilizers would have been doomed anyway.

“The current system is unsustainable and does not have any real local added value besides the precarious and underpaid jobs that it generates,” says Amelie Canonne, co-president of IPAM, an expertise group that pursues economic and social research on common issues to north and south countries.

The economic model reflects other neoliberal experiences worldwide.

“Such policies, with local differences, have been widespread in Africa and Latin America in the last decades and have failed everywhere,” says Canonne. “They create a vicious circle of economic and social crises. The worst is that the solutions to end the crises are the very same as those which triggered them.”

Same game, same results?

While the current financial crisis calls for a bold plan, little has been done and the announced reforms toe the same neo-liberal line.

A bundle of tax rises and subsidy cuts comprise the reforms that are seen as conditions tied to the pending International Monetary Fund loan, worth an expected US$4.8 billion, though Egypt may end up asking for a larger sum. As the government tries to push these decisions though, it is faced with social conundrums and has repeatedly been forced to rescind. That’s besides being harshly criticized for following the same, tired, tried-and-tested measures that have borne little fruit.

“We believe that after the revolution, [former President Hosni] Mubarak’s economic policies should have been reviewed. If we play the same game, we will get the same results,” says Reda Issa, an independent economist.

“Even the IMF asked the government to choose the right time to reform and to spare the poor. But they did not listen,” says Issa.

Austerity measures will not spare companies either.

“The success of the energy subsidy reform is linked to a clear vision of how to help both consumers and industries get through the difficult period,” says Atallah. However, no such plan has been put forward to help these sectors and develop others to spur recovery in the overall economy.

Small- and medium-sized enterprises (SMEs), the biggest job providers in the country, are suffering, stuck between inflation, energy shortages and low demand.

“Undetailed promises were made during the [presidential] campaign, but nothing significant has happened since,” says Atallah.

“Supporting the creation of SMEs rather than handing over all the markets and public procurement to foreign companies and their local subsidiaries should be the priority,” says Canonne.

Real issues ignored

The current financial situation has heightened the need for reforms that will increase state revenues and rationalize costs. But little has been done by the government and forthcoming changes indicate that there will be no straying from the way of the old regime.

On the revenue side, the government has resorted to indirect taxes rather than income tax to increase its revenues. The decision to raise the tax exemption level is mainly cosmetic, as most Egyptians evade income tax.

“The philosophy of the government is not to place an additional burden on the rich by making the income tax more progressive,” says Atallah.

Revoking a planned capital gains tax, on profits from dividends as well as mergers and acquisitions, is further proof.

According to Issa’s calculations, in the last six years, 60 percent of tax revenues came from citizens, 28 percent from the Egyptian General Petroleum Corporation (EGPC) and Suez Canal, and only 16 percent from other companies.

“The government resorts to indirect taxes to increase its revenues, like during the old regime,” Atallah says. “It is time to re-evaluate.”

This while the more pressing issue of tax efficiency has gone by the wayside and the massive informal sector remains well out of the tax authority’s reach.

On the spending side, administration wages, subsidies and debt servicing account for 74 percent of spending, according to Finance Ministry data. They alone surpass official government revenues.

However, as Canonne asks, “Are we sure those costs benefit the population?

“They did not review any of the old policies. They kept the unfair tax system, they did not touch the special funds, which represent 20 to 25 percent of the budget,” Issa adds.

It leaves little room to spend on basic public services such as education and health. According to Issa, debt servicing alone exceeds education, health and food subsidy expenditures.

Education spending in the budget has shrunk in the last decade, while the number of students has swelled. According to the Central Agency for Public Mobilization and Statistics, the share of education in the budget has gone down from 17 percent in 2001/02 to 10.6 percent in 2011/12.

The share of university spending has been halved in the same time span.

Though health spending has remained steady in the last decade, Egypt ranked 161 out of 187 worldwide when it comes to the health spending share in gross domestic product, according to the World Health Organization.

Now what?

While the government openly chose the path of spending cuts, some experts criticize this decision.

“Austerity policies have a much higher cost in times of economic and social crisis. Investing in public services, social policies, education, health [and] housing is costly, but it yields,” says Canonne.

However, such opinions are rare in the country. More generally, few alternative economic models have been suggested since the revolution.

The presidential elections highlighted the lack of depth of the economic programs of the different candidates.

Co-organizer of the World Social Forum in Tunis, Canonne has regretted the lack of a “strong alternative development vision” from Arab civil society during the event.

“A political solution has to come first,” says Issa. “No economic solution will come without security and unity.”

Egyptian experts also argue the lack of political transparency and available data impedes them from coming up with an all-encompassing development plan.

“In Egypt, we work in an obscure room,” says Atallah.

Final Issue: Problem of unemployment likely to worsen in Egypt

Noha Moustafa — Thu, 25 Apr 2013 08:55:00 +0000

This piece was written for Egypt Independent's final weekly print edition, which was banned from going to press. We offer you our 50th and final edition here.

Whether the economy is growing or slowing, unemployment has been one of Egypt’s most persistent ailments for decades.

Compounding this is the vague relationship between workers and employers that puts little responsibility on the latter, while placing the former in a highly vulnerable position due to poor labor laws.

In today’s beleaguered economy, crushed by a convergence of declining revenues, a ballooning deficit, a devaluating currency and stymied capital inflows, unemployment has risen, exposing with it an array of deficiencies that plague the labor market.

Over the past two years, the battered economy has seen growth rates drop, a shortage in basic food and fuel supplies, and a funding crisis that’s led the government to turn to local banks to finance its deficit. In the process, the government has crowded the private sector out of the debt market, choking expansion and investment plans as well as limiting access to finance by troubled companies. In turn, some have closed while others have downsized.

According to the Global Competitiveness Report 2012/13 recently released by the World Economic Forum, concerning the labor market efficiency index, Egypt ranked 128 out of 144 countries with regard to cooperation between labor and employer. The relationship was defined as confrontational.

Salah Gouda, economic expert and head of the Economics Studies Center, attributes this confrontational relationship to the absence of a clear-cut and binding framework creating a healthy relationship for both sides.

“There is no clear set of rights or responsibilities for the employer/employee. The current labor law does not protect employees from employers’ abuse, nor does it defend business owners from workers’ protests,” Gouda explains.

The labor and social insurance laws date back to the socialist era, and have not changed much since Egypt embraced more open market policies.

In the flexibility of wage determination, Egypt ranked very high — 55 out of 144. Though this may be viewed as positive, it is not, in fact, as wage determination is basically left to individual companies regardless of competencies or any sense of social justice.

Gouda says implementing a minimum and maximum wage is a must to address such flagrant market deficiencies.

For hiring and firing, the country ranked 116 out of 144, meaning this is arbitrary to employers rather than enforced by regulations.

“In the private sector, employers can easily hire workers with Form No. 2 and make them sign the dismissal Form No. 6 at the same time, so an employer can easily dismiss an employee without much hassle,” Gouda says. “In other countries, civil society organizations, labor unions and business associations are strong, and no such thing can happen.”

According to the report, the index of wages in relation to productivity ranks Egypt number 112 out of 144, only proving that production and efficiency are not related to compensation or pay.

Sometimes, especially in the public sector, it isn’t necessary to even work and be productive in order to receive bonuses, incentives and even profits. Also, the Corporations Law 159/1981 stipulates that privately owned companies distribute 5 percent of profits among employees — but that doesn’t happen, says Gouda.

Egypt scored worst when it came to the brain drain, ranking 132 out of 144 as a country that fails to retain or attract talented people. For numerous political, economic and scientific reasons, the best and the brightest normally leave the country to pursue better opportunities elsewhere.

“We have a climate that repels efficient and competent people — for example, Mostafa al-Sayed, Mohamed al-Erian, Ahmed Zewail, Magdy Yacoub, Farouk al-Baz and many others,” Gouda adds.

Unemployment rising

The unemployment rate rose by 0.5 percent in the fourth quarter of 2012 to 13 percent — this being the official figure, while the actual rate is predicted to be higher — up from 9 percent in 2010.

About 242,000 people joined the ranks of the unemployed last year as the total jobless figure reached 3.4 million, out of a total labor force of 27 million. About 1 million Egyptians lost their jobs in 2011 as economic growth slowed, and more than 162,000 Egyptians lost their jobs in the last quarter of 2012 alone.

Youth unemployment rates are predicted to be much higher in the Arab world, and Egypt is no different, with about 77 percent of the unemployed between the ages of 15 and 29.

A deep divide exists, as on the one side more and more young people are searching for jobs, while, at the same time, the private sector continues to encounter difficulty recruiting skilled employees.

According to reports by the Arab Labor Organization, higher unemployment among the educated is a trend now being seen in the Arab world. More than 80 percent of those unemployed have at least a high school diploma, and a third have a university degree.

Urban unemployment is notably higher than in rural areas, at 16.3 percent and 9.9 percent, respectively.

These figures include only registered workers, in turn excluding the massive informal economy that exists outside of a formalized framework.

Six months ago, the Cabinet planned to team up with the private sector to put together a national program for employment and training, with the goal of reducing joblessness to 6 percent by 2022, the State Information Service said.

Planning and International Cooperation Minister Ashraf al-Araby was quoted as saying that Egypt plans to reduce its unemployment rate to 9.5 percent by 2017 and 6 percent by 2022.

Gouda, however, dismisses this as mere talk. “It is all just ink on paper,” he says. “There are no real trainings being provided and there is little investment coming into the country to create the needed jobs,” he adds.

Over the years, faced with a growing deficit and less growth than needed to create enough jobs, Egypt has come to rely on foreign direct investment to fund the kind of projects that keep the labor wheel moving. As this has all but completely dried up, unemployment has suffered further.

“It is a mess,” Gouda says.

Causes and effect

One of the main factors contributing to higher unemployment rates is a labor force that has grown faster than the demand for it, a trend that is likely to continue in the coming years.

In 1960, total unemployment in Egypt was less than 200,000. By 1976, that rose to 850,000, and by 1986, the figure stood at more than 2 million.

Job opportunities, meanwhile, have barely expanded as the population swelled. Graduates have to wait for more than five years on average to find a job, which is why the rate is highest among young graduates in Egypt.

Between 1988 and 1998, the labor force grew at an annual average of 523,000 workers, while employment increased at an annual average of 435,000. Between 2001 and 2010, labor supply grew at 2.6 percent, and new job seekers will increase to an annual average of 638,000.

Within this context, the problem of unemployment is expected to get uglier in the coming years.

Unemployment has also been a result of underperformance in labor markets, which is also the reason for a decline in income. Unemployment among people who are literate in Egypt is much higher than that among people who are illiterate.

Causes of unemployment are varied and may be due to a combination of the following factors: rapid changes in technology, global recessions, attitudes toward employers, and discriminatory behavior in the workplace, which may include discrimination on the basis of age, class, ethnicity, color or race.

“What we need now is a new and fair law that takes into account the correlation between employers and employees,” Gouda says. “A generation of employment opportunities and equality in income distribution are key to dealing with the dual problem of unemployment and poverty.”

Final Issue: How one Egyptian family struggles to make ends meet amid harsh conditions

Dalia Rabie ,Mohamad Adam — Thu, 25 Apr 2013 08:51:00 +0000

This piece was written for Egypt Independent's final weekly print edition, which was banned from going to press. We offer you our 50th and final edition here.

Mohamed Abdel Barr starts his day at 4 am, when he wakes up for the dawn prayer. He tends to his farm, feeds his cattle and then heads to school, where he works as a janitor.

He returns home at about 2 pm to have lunch with his family, after which he continues work on his farm, with his son Islam, until sunset.

Abdel Barr’s modest one-story house is a five-minute drive off the main highway of his village Wardan, nestled in a green landscape, where he lives with his wife and three sons.

With the deteriorating economic situation and constant increases in prices, Abdel Barr’s family makes do with their own resources, depending on the cattle and crops growing in their farm to cover the needs his paycheck can’t.

Wardan is located 50 kilometers from Cairo, and, in its serenity, stands in stark contrast to the city. The village, tucked on the border between Cairo and Monufiya, is also far removed from the capital’s turbulent political climate, leaving its residents focused mainly on their day-to-day well-being.

This alone proves to be a struggle as the village faces a scarcity in government and health services, as well as household utilities.

Abdel Barr’s family plans the finances of each month in advance, he explains, with both he and his wife calculating how much is needed to feed the family.

With a meager salary that is barely keeping up with price hikes, Abdel Barr and his family rely on their cattle and crops for most of their supplies.

The most common crops the family grows include corn, trefoil, beans and wheat. Abdel Barr’s wife, Om Ayman, explains that sometimes the family will grow a new crop at the expense of another, depending on their needs at the time.

They also rely on their cattle for milk, from which they make their own dairy products, such as cheese and ghee.

This leaves few products that Om Ayman needs to buy at the market.

She also shows off the bread she bakes in their homemade oven, which saves them the use of gas.

If their budget runs out one month, the family resorts to selling some of their produce in the market.

In an average month, Abdel Barr spends about LE100 on subsidized food, LE200 on meat, and another LE100 on other food items, leaving LE100–200 for emergencies “in case something happens to one of my children.”

“I get paid on the 26th of every month and God helps us get by,” he says.

With both Abdel Barr and his wife suffering from diabetes, their medication is provided through health insurance on a monthly basis.

He explains that every month, a Muslim Brotherhood medical convoy offers help for the underprivileged. While Abdel Barr has been paying for the medication for the past five years, he says he relied on the convoy last month who provided him with medication prescribed to him and his wife.

The family says the increasing cost of living really started to take its toll on them after the revolution, and especially over the past two or three months.

Egypt’s economic malaise is adding the heaviest burden on the already struggling poorer segments of society. Planned economic reforms, including tax rises and subsidy cuts, are looming threats of further difficulty to making ends meet. Many experts expect these policies to hit the poorest the hardest.

In a frenzied scramble to cut a hefty subsidy bill, Egypt unceremoniously raised the price of cooking gas earlier this month, for the first time in two decades. The price of cooking gas cylinders sold for domestic use was raised by 60 percent to LE8, and doubled to LE16 for commercial use from the price of LE8.

Abdel Barr talks about butane gas cylinders, which he buys for LE9 after they were sold for LE5. He explains that to be able to afford it, he has to do without some “luxury items, such as cigarettes or certain types of fruit.”

According to official statistics, the poverty rate in Egypt has increased, reaching an average of 25.5 percent for the year 2010/11. More than half of the rural areas’ population lives below the poverty line.

According to the Central Agency for Public Mobilization and Statistics, “extreme” poverty had decreased to 4.8 percent of the population in 2010–2011.

The poverty line in Egypt was at LE256 per person per month, or LE8.50 per day, while the “extreme” poverty line is calculated at LE171.50 per person per month, or LE5.70 per day.

For Abdel Barr’s family to survive, each member of the family contributes to daily chores.

Om Ayman wakes up with her husband and spends her day tending to the farm and house. She goes to the market at 7 am on Thursdays and Saturdays, to either buy or sell produce.

Their son Islam, who is still in school, manages to study and play football with his friends while still making time to help his parents around the farm, as well as making a little extra money by working as a cook catering to weddings in the village.

“Out of all my sons, he is the one I depend on the most,” boasts Abdel Barr.

With his other son, Ayman, enlisted in the military, Abdel Barr says some of his expenses have been alleviated since he manages to earn a salary working there as a cook.

When it comes to months such as Ramadan, when spending may increase, Om Ayman says the family stocks up on supplies two months in advance.

“We are aware of our financial situation and we spend accordingly,” she says.

Abdel Barr and his wife say their daily routine has swallowed any leisure time or activity. With barely any time to spend away from the farm, Abdel Barr and his wife’s only outings involve going to weddings.

They do maintain a family tradition, however, of having their two married daughters spend a day with them every week.

Abdel Barr says he is intent on “raising my children right so they don’t engage in any problems.” He laments the current turbulent political situation in Egypt, saying that while his village might be away from any violence, such scenes still affect him negatively.

He has no hopes in Egypt’s current politicians to improve the economic situation, saying, “The full don’t sympathize with the hungry.”

Egypt to issue schedule next month for gradual fuel subsidy cuts

Reuters — Wed, 24 Apr 2013 21:20:00 +0000

Egypt aims next month to issue a schedule of gradual rises in the subsidised prices various industries pay for fuel, to bring them near to world levels in four years, its trade and industry minister said.

A reduction in energy subsidies is widely seen as an important step towards allowing Egypt to secure a US$4.8 billion loan from the International Monetary Fund (IMF) to shore up its finances.

Egypt spends around a fifth of its budget on fuel subsidies, and the government is under pressure to reduce them to plug a deficit that has mushroomed since the popular uprising that ousted Hosni Mubarak in early 2011.

A growing population and a falling currency are expected to push the energy subsidy bill to more than LE120 billion in the financial year that ends in June.

Trade and Industry Minister Hatem Saleh said the government has been negotiating with industry leaders on the plan to increase prices.

"A very big dialogue is taking place with the Federation of Industries. I expect that within a week or two we will bring in the petroleum minister, and there will be a protocol so that the direction is clear for everyone," he said in an interview.

The protocol will set dates for increases in the price different industries pay for natural gas, diesel and fuel oil.

"Some industries will continue to be supported and will not reach world prices. They will be subsidised. These are labour-intensive industries and strategic industries that have an impact on poor people, such as basic food industries, basic commodities."

Reaching world levels

In February, the government raised the price of fuel oil, which is widely used in energy-intensive local industries, to LE1,500 per ton from a previous LE1,000.

It also increased prices of natural gas and diesel for some industries by 50 percent, industry sources said at the time.

"Within four years, we will approach world prices, especially energy intensive industries," Saleh told Reuters.

Egypt, which used to be a significant gas exporter, has struggled to pay for energy imports since the uprising drove away investors and tourists, two main sources of foreign currency.

It has paid for energy imports partly by drawing down foreign reserves, borrowing from foreign governments and delaying payments to oil companies operating in Egypt.

Foreign reserves dropped to a critical level of $13.4 billion in March - insufficient to cover three months of total imports.

The government has said it will start rationing state-subsidised motor fuel in the second half of 2014.

Farmers say they are concerned about a shortage of diesel to power irrigation pumps and tractors for the harvest season which may hinder this year's wheat crop.