Al-Sisi kicks off austerity drive

10 July 2014

Protests over fuel subsidy cuts mean the new president faces a difficult balancing act in shrinking Egypt’s fiscal deficit and maintaining his popularity

On 5 July, Egyptians woke up to find that fuel prices had rocketed overnight. The price of 80-octane petrol, commonly used in older cars, jumped by 78 per cent from £E0.9 ($0.1) a litre to £E1.6 a litre.

Diesel costs increased by 64 per cent to £E1.8 a litre, while natural gas prices for several industries rose by 30-70 per cent. The hikes were greeted with dismay on the streets.

Street protests

Minibus and taxi drivers staged impromptu protests, blocking roads across the capital until they were dispersed by police officers firing tear gas canisters. The independent daily newspaper Al-Masry al-Youm ran a front-page headline saying “The Hour Of Suffering Has Struck”.

President Abdul Fattah al-Sisi came to power in a firestorm of public bloodletting and has since struggled to wrestle the country onto some form of stable trajectory. An energy crisis stands in his way.

Egypt’s rapidly expanding population has led to a surge in demand for natural gas for electricity generation. This, along with other heavily subsidised fuels, has led to a ballooning of the government’s subsidy bill, putting huge pressure on the country’s already dire public finances.

To make matters worse, as gas demand has increased, output has tailed off, forcing Egypt to seek expensive imports. Annual domestic consumption increased by 10 billion cubic metres between 2008 and 2013. Over the same period, production declined by 2.9 billion cubic metres.

Importing gas is putting an extra strain on the country’s foreign reserves, which fell to $16.7bn at the end of June, just above the minimum threshold of three months of reserves to purchase critical goods.

The subsidy cuts followed the 30 June announcement by Finance Minister Hany Kadry Dimian that under the newly approved budgeted spending plan, the government would aim to reduce the deficit to 10 per cent of GDP in the 2014/15 fiscal year, or £E240bn.

The deficit was estimated at 12 per cent of GDP in 2013/14 as the subsidy bill continued to stack up and instability meant many holidaymakers stayed away, depriving Egypt of much-needed revenue from tourism. Dimian said the fuel bill would be slashed from £E144bn last year to £E100bn.

An earlier budget proposal foresaw a deficit of £E292bn. This was rejected by Al-Sisi, who called for an end to ineffective and unproductive spending and better control over government debt.

Balancing act

Falling production and an insatiable appetite for subsidised gas mean that Al-Sisi will have to perform a difficult balancing act in order to put Egypt on a stable footing and fortify his position as head of state.

To remain in power, he needs to get the country’s finances in order, and at the same time shrink the deficit without sparking civil unrest.

Several new revenue-raising measures have been introduced in the 2014/5 budget, including a capital gains tax. Under the budget, tax revenues as a whole are expected to rise by 26 per cent. Total expenditure is set at £E789bn, while revenues are expected to be £E549bn, compared with £E507bn in the past fiscal year.

There could be severe consequences if the cost of living rises and Al-Sisi knows this

Oliver Coleman, Maplecroft

Although security forces managed to easily disperse the protests that occurred in the wake of the 5 July subsidy cuts, the risk of violent demonstrations is likely to increase if Al-Sisi continues to push through with his austerity drive, says Graeme Bannerman, a former staff director at the Senate Foreign Relations Committee and a former Middle East analyst with the US State Department Policy Planning Staff.

“Al-Sisi is embarking on a very risky path,” he says. “There are good reasons why no Egyptian leader has implemented these reforms. This is just the first in a series of painful reforms and it remains to be seen whether Al-Sisi can push them through without sparking civil unrest.”

Oliver Coleman, a Middle East and North Africa specialist at UK-based risk analysis company Maplecroft, says implementing mechanisms that protect the poor from bearing the brunt of the price increases are crucial to the success of Al-Sisi’s austerity drive and maintaining popularity.

“It is an area where he’s really vulnerable,” he says. “There could be severe consequences if the cost of living rises and Al-Sisi knows this.”

The leader’s trump card is support from Gulf states, which has been keeping Egypt’s economy afloat since the ousting of former president Mohamed Mursi. Saudi Arabia, Kuwait, and the UAE pledged $12bn to Cairo in the wake of the military coup that unseated Mursi, and have since pledged a further $8bn.

The Gulf states are happy to see the back of political Islam in Egypt and the funding comes without overt conditions, but the donors will expect Egypt to get its house in order, according to Coleman.

“There is pressure [for financial reform] coming from the GCC states, especially probably the UAE,” he says. “They will take that burden for a long time if they have to.”

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