Saturday, July 1, 2017

Egypt .. Poverty Management vs Resources Development !

Ehab El Sheemy
Today, no one in Egypt can deny that most of the private conversations between family members in Egyptian homes, between friends at cafes, between workers during breaks in their factories, and even among those who just share the same means of transportation are all about the increasing prices of commodities and services. Prices that seem to be in an outrageous race to climb a top of a mountain where no one in Egypt can reach or find the enough money to pay someone to get them !

I will not be telling a secret to say that these conversations are no longer limited to the poor, working, and lower middle classes, but they are even further extended to take a significant part in the daily conversations of other higher social classes. The upper middle class and the elites are now worried about the lifestyle that they have been working hard for years to provide to their families and children. A lifestyle that secures the best available quality of education, medical services and even food and leisure.

I will not also go into the tiny details of the psychological and financial suffering of each of these individuals. The details are not important as long as the broad outlines, their effects and their consequences are affecting every one of them, including the writer of these lines. 

But what concerns me the most here is the very common and identical detail in all of these conversations, which is the exploitation of this frustration and suffering by the groups and the lobbies that aim to tear down the stability and the social safety of Egypt. Groups that are not limited to the Muslim Brotherhood and their sponsors in Qatar and Turkey, but also include Jihadists, Pro-Mubarak regime business and industrial lobbyists, and all those who opposed the Egyptian People protests in June 2013 demanding President Mursi's resignation due to his increasing authoritarianism and his pushing through an Islamist agenda disregarding the predominantly secular opposition or the rule of law and Egyptian constitution!

The signs of this exploitation could be easily identified through several typical slogans and catchwords repeated by the followers and members of these groups, such as:

“ Al Sisi’s reforms did nothing but pushing people into skipping meals because they can't afford food ”
“The army brought down Mursi, and Egypt too !”
“You didn’t like Morsi’s 6 Pounds US Dollar, enjoy Al Sisi 18 Pounds one !”

Having written so many articles in my career, I know that many of those who belong to these groups, or feel sympathetic towards them for a reason or another, have now refrained from completing this article. However, and in case you’ve decided to go on, I will be content to share my thoughts about the real reasons for Egypt‘s suffering with you alone.

Despite the fact that several Egyptian Governments have rolled out policies aimed at improving affordability and helping people to get on the ladder, the cost of living and prices growth has far outpaced any increase in wages. I believe that the following reasons explain What’s really gone wrong:

1.      The lack of governmental political will to control the greed of the market key players, a circle that includes manufacturers, distributors, sellers, brokers and merchants.
2.      Gradual reduction of fuel and energy subsidies.
3.      The devaluation of the Egyptian pound and the decline in foreign exchange reserves
Being crystal clear for all of us in Egypt, I will not go into the details of the first point. Everyone knows the key players personally, and all of us have been listening for decades to the everlasting speeches of the Egyptian Prime Ministers and their cabinet members on how they have rolled out policies and made decisions to tighten control and censorship over market prices, and how new sanctions and penalties are introduced in coordination with the various chambers of commerce and industry to kill the increasing prices beasts. Unfortunately, those policies have been very well kept in their safes and expensive fine wood desk drawers.

I will focus here on the other two points, and will start with the historical impact of the different governmental subsidies on the market prices and the cost of living.

 Nothing is ever what it seems!

If you are a young Egyptian over the age of 30, you can easily recall the annual ironic scene of Hosni Mubarak in the Labor Day celebration where one of those paid people in the back seats suddenly, or consider it so, interrupts Mubarak’s speech to ask for the president’s generosity to grant the people a considerable salary raise!

In a continuation to that theatrical performance, and to show the sympathy of Mubarak with his poor subjects, the man plays the role of a European Medieval king, looks at his Prime Minister and then sarcastically requests him to look down with mercy upon the people and increase the food ration for the year to come!

Despite the fact that this particular scene was designed and well written to show how Mubarak expressed support and sincere care towards the hard-working and low-income classes, the truth was nothing but the painful opposite.

Mubarak’s regime has fooled everybody by keeping prices at almost constant levels for more than 20 years, or let me be more specific to say at levels that would avoid public anger and frustration. The man has simply relied on the continuous and constant increase in wages, offering thousands of new governmental jobs that were not actually needed, and finally on the allocation of massive budget provisions to subsidize fuel, energy, and major food supplies. To give a you taste of that, you just have to know that the price of the cooking gas cylinder was 2.5 Egyptian Pounds in 1991, and was sold for the very same price twenty years later in 2011 !

What made things even worse, was that the cost of these subsidies was not directed to its targeted beneficiaries! Instead, the hundreds of billions of pounds of subsidies benefited the steel, cement and ceramic industrial giants who managed to acquire their quota of fuel and energy at the subsidized price while selling their products at international market prices, achieving more profits and increasing their power inside the regime’s lobbies of influence.

Now you can easily see the painful and plain truth, and find the answer to that particular and most puzzling question:

How on earth did Mubarak manage to run this country?

The man actually did nothing but directing most of the mandatory spending items in the national budget to safeguard the ultimate deception scenario, a scenario where he could avoid people’s frustration, eliminate real opposition, and constantly feed the hunger for power and wealth of his close circle of trusted men, and the larger circle of the loyal business and industrial lobbyists.

In order to imagine the extent of that economic disaster, you just have to know that the total spending in the Egyptian Governmental Budget of 2016-2017 is 975 billion Egyptian Pounds, of which 230 billion pounds are directed to the wages and benefits of more than 7 million governmental jobs created by Mubarak regime, 210 billion pounds are dedicated to commodity, fuel and energy subsidies, while 290 billion pounds are dedicated to the payment of the interest on debt !

Running a simple calculation, you can figure out that 730 billion Egyptian Pounds are currently dedicated to pay for the repercussions of what Mubarak did to ensure the survival of his own regime! A cost that you will never consider as catastrophic until you know that the revenues of the very same governmental budget are estimated at a total value of 670 billion Egyptian Pounds only !
To picture the full tragedy, you must remember that these figure were calculated in 2016 before the devaluation of the Egyptian Pound, meaning that the 500 billion Egyptian Pounds dedicated to the subsidies and interest on debt will rise to almost One Trillion Egyptian Pounds in the new 2017-2018 budget leading to an immediate and imminent collapse of the Egyptian economy.

Sadly, in a different world, and under a different regime, these wasted hundreds of billions should have created a different version of Egypt, a version with a huge infrastructure network, large energy and power grids, and advanced roads and transportation networks. A version where new horizons are open for investment, millions of real jobs are created for all Egyptians, key and major foreign investors are attracted from each corner of the world, and where foreign exchange reserves are constantly growing.

As a result of all that corruption, the chaotic management of the country's resources and economy, and the absence of a real infrastructure that supports the establishment of an industrial base that allows Egypt to export and to maintain an acceptable and fair value of its national currency, Egypt has remained hostage to two main sources of foreign currency: tourism and the Suez Canal ! A fact that reduced Egypt’s economic competitive ability and increased the country’s exposure to threats of hurting its fragile economy through a series of well-planned and heavily funded terrorist attacks.

To get things closer to your mind, the value, strength and stability of the national currency depends mainly on the demand for this currency, in other words on the products and services provided by the country dealing with this currency to the world markets. It’s exactly like selling your national currency in the world markets in the form of a specific good or a product, if it is able to maintain its relative value against other commodities, its value will go up, if not, expect nothing but your local currency to depreciate.

 The Virtual Safe !

To simplify how the foreign exchange reserves affect the national currency value, let us assume that the foreign exchange reserves are kept in a safe that is split into two main parts. The first part is untouchable and is fully dedicated to the payment of interest on debt, while the other part is dedicated to cater for the demand for foreign currency as required by both governmental and Non-Governmental entities, a demand that fulfills the investors and importers needs in the form of guarantees or overseas transfers that enable them to conclude their commercial and industrial transactions. A small portion is  even dedicated to respond to the individual needs required for online purchases, expenses related to traveling for work, leisure, or even to perform their religious rites.

Let’s imagine that the first part of the safe is not provided with any compensation against the regularly withdrawn amounts, and that the other part’s size is rapidly shrinking due to the lack of tourism income, the absence of a real inviting investment environment due to the failure of the successive governments over the past 30 years to establish the proper basis of such an environment, the drop of exports revenues, and the decline of the global economic growth over the past couple of years that directly affected the intensity of the traffic in the Suez Canal.

And here exactly where you can infer why the US Dollar exchange rate difference exceeded 50% between the official Central Bank of Egypt’s announced rates, and the parallel market rates before the floatation took place in November 2016!

Looking at the scenario of the virtual safe, the Central Bank of Egypt (CBE) had to refill the first part of the safe using the amounts available in the second part, as a result of that, and saving the last segment of reserves to buy the strategic and essential commodities and supplies, the CBE was no longer able to provide the foreign currency amounts required to fulfill the governmental and non-governmental needs. A situation that was extremely exploited by the parallel market dealers to impose unreasonable rates with huge profit margins.

Going through the same scenario, you can expect that eventually the safe will be out of cash, Egypt will no longer be able to fulfill its international obligations or to pay the interest on debt,  buy the essential and strategic commodities and supplies, or even import the materials and equipment required to run the existing  investment and production facilities. The failure to pay back the interest on debt will force all lenders to stop lending Egypt, and that would force the government to drastically cut back on expenses, leading to domestic riots and going back to square one. Moreover, foreign investors would quit the stock markets and eventually even direct investments would vanish, and which would ransack the stock markets and destroy domestic companies leading to more unemployment and more unrest. Finally, the currency would fall like a rock but over everyone’s head this time!

This exactly why the Egyptian Government and President Al Sisi had no option but to stop that catastrophic decline in foreign exchange reserves. Unfortunately, the solution was nothing but to return to borrowing from the International Monetary Fund (IMF) and the regional financial institutions such as the African Bank, and of course to issue international bonds for the first time since 2012.
The Plan !

I will not claim being an economic analyst who discerns potential outcomes of economic or financial decisions made by the Egyptian Government, but I will summarize the actions and measures that most of those experts and analysts advised the Egyptian Government to follow and to apply to confirm its credibility and ensure the ability to fulfill its commitments towards repaying the IMF loan:

• Reduce the wage bill of governmental staff to 7.5% of GDP through the proper application of the civil service law
• Increase the contribution of corporate tax and sales to 6.7% of GDP by 2018, through the application of the VAT.
• Reduce energy subsidies from 6.6% to 3.3%
• Reduce Suez Canal transit dues and tariffs to attract more navigation lines.
• Maximize the gold resources of the central bank to respond to the instability of the dollar

The Guarantees !

What really matters here, is that all of these economic measures will only be a new burden on the current generation, unless the government, the president, and the elected parliament are willing to impose administrative and legislative reform measures and guarantees targeting governmental corruption along with the hard and painful measures of the subsidies restructure and reform. This should include:

• Establishing an institutional framework to prevent monopoly.
• Political leadership should play a crucial role in fighting corruption and ensure appropriate action is taken when needed.
• Promote transparency and adopt the international standards of taxation and financial transparency.
• Strengthening the rule of law and effective legal prosecution, and appointing specialized anti-corruption institutions with an effective anti-money laundering framework.
• Regulate and simplify the competencies of public officials and reduce their discretionary powers to reduce their ability to bypass the law, request bribes and disrupt the flow of investments.
• Develop adequate incentives for outstanding performance, and ensure effective wages structure and compensation procedures.
My belief is that as long as the government, the president and the parliament are committed to respect all aspects of economic, legislative and executive reform, and not only devoted to imposing more taxes and reducing subsidies, I have no choice but to support them all.
Until they do, they must accept being criticized and even attacked by those who are most affected by the painful reforms.

As for people like me, who are convinced of the importance and inevitability of the economic and social reform, they have to bear the burden of communicating these facts with all Egyptians to show how the pain and suffering are always for a better tomorrow!

God save Egypt.