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Subsidy cuts darken Egypt economic reform

Curbing massive subsidies is essential to landing an IMF rescue, but more loans might not be what Egypt needs.
Last modified: 4 Apr 2013 15:05

One Egyptian put the situation in stark terms: “If we can no longer afford crucial goods, we'll resort to crime.”

The man who spoke was standing outside a distribution center for gas cylinders at 7am. Arriving at such an early hour is now what it takes to secure a key commodity in putting food on the table.

The government has just doubled the price of cooking gas for the first time in 20 years. Officials say they had no choice: curbing Egypt's massive subsidies is at the heart of landing an essential loan from the International Monetary Fund.

There was no chaos outside the distribution center, however, only desperation.

Hanem Saeed, a jobless widow who lives on a pension of $30 a month, said people have no choice but to accept the increase in butane gas prices.
“It’s not like we can eat rocks. This is how we cook,” she said as she tried to drag two gas tanks.

The price of a cylinder of gas sold for home use has gone from $0.60 to a $1.20, still far below the $12 it actually costs the government.

This fiscal year alone, Egypt is coughing up more than $20bn for subsidies. While market economy proponents frown upon that, nearly half of the country's population is poor and subsidies are just about the only thing that keeps them alive.

The government has been trying to balance the burden. Last year, it lifted subsidies off of high-octane fuel.

Even so, the long lines of vehicles waiting for diesel shows that even non-luxury fuel is being affected.

Up to 70 percent of Egypt's diesel is imported. This type of fuel is used mostly by commercial vehicles, such as buses and trucks and in plants, and is subsidized by some $1.5bn a month. As the value of Egypt's currency drops, and its dollar reserves dwindle, it seems there have been fewer diesel orders.

At times, diesel lines extend for kilometers, the wait lasting for hours.

Outside a gas station in central Cairo, a driver said he came all the day from a city in the Delta, more than 80km away, because there was no diesel in any of the stations on the entire highway.

Bus drivers complain that they are losing business. Traffic jams are only getting worse. The wait is aggravating people and has resulted in deadly violence.

The question on many people's minds is “Where did the government go wrong?”

Is this truly about a collection of economic challenges amid what is increasingly viewed as an unfinished revolution? Or is it about something more sinister?

Whatever economic measures the government takes, it is facing resistance and criticism mainly due to the poor political performance of President Mohammed Morsi.
His next steps aren’t exactly a walk in the park, either, given that he risks alienating more people ahead of elections that are expected to take place sometime this year

The government has often partially blamed the economic crisis on insecurity and incessant protests. Yet all three of those factors keep feeding into each other, leaving many puzzled about the way out.

An IMF delegation is in town for more than a week during which it will visit the Central Bank and other economic institutions.

The proposed $4.8bn loan will not save Egypt whose current budget deficit stands at more than $20bn. In fact, it is only hoped to encourage other international lenders or friendly states still willing to take a chance on the Arab world's most populous nation.

Many observers argue that more loans, or handouts, are not what Egypt needs. Restructuring the country's entire economic system is what is at stake here, and that's not going to be achieved in days or even months.