Nervous Egypt prepares to scrap subsidies

By Simon Allison 25 September 2012

For decades, Hosni Mubarak bribed Egyptians with cheap bread and cheap petrol. Now Egypt’s new government must take those luxuries away if they are to stave off bankruptcy. How will the people respond? According to SIMON ALLISON, the first cut really is the deepest.

Before the Arab Spring, before Tahrir Square, the Egyptian state was bound together by what political scientists like to call a social contract. In return for suffering though Hosni Mubarak’s corrupt autocracy and meekly accepting the lack of personal freedoms, citizens expected to be fed with cheap bread and supplied with cheap power. No matter how bad the political repression became, relatively few people went hungry or homeless. In effect, Mubarak’s Egypt bought its much-vaunted “stability” by subsidizing things like flour, cooking oil and petrol.

It was no coincidence that Mubarak’s stability evaporated as the price of bread in Egypt increased. This wasn’t all Mubarak’s fault – as the world’s largest importer of wheat, Egypt is always at the mercy of the market, no matter how much extra the government puts in. It didn’t matter, however; once the government failed to uphold its side of the social contract, ordinary Egyptians felt entitled to demand a new one.

This was a lesson Egypt had learned once before. In 1977, Mubarak’s predecessor Anwar Sadat tried to scrap the bread subsidy completely and only just managed to cling onto power after widespread rioting. “By the time they were over, hundreds of buildings were burned, 160 people were dead and Egyptian President Anwar Sadat had learned an essential lesson for the modern Arab dictator: let them eat bread. Lots of cheap bread,” wrote Annia Ciezadlo in Foreign Policy.

But Mubarak’s gone, and Egyptians have a new leader and the makings of a new government. President Mohamed Morsi has already shown that he plans on doing things a little differently. Within months of taking office he fired army chief Mohamed Hussein Tantawi, forced a global geopolitical re-think by making friends with Iran and frightened Israel by insisting that the terms of the Egypt-Israel peace treaty will be revised – soon.

Morsi’s biggest headache is none of these things, as much as they may grab international headlines. Instead, his primary concern is what to do about all those subsidies, which continue to keep the price of staple goods artificially low – ridiculously low in some cases. Butane gas canisters (used for cooking), for example , are officially sold for 2.75 Egyptian pounds (R3.50), when they should cost closer to 80 Egyptian pounds (R100).

The issue is not whether or not to scrap the subsidies, but how and how fast to do so. Simply put, the Egyptian government is perilously near bankruptcy and subsidies account for a full one-third of its expenditure; failing to address the subsidies problem will push the government into insolvency.

Fortunately, the government seems to realise this. “We will no longer support (the country) through subsidies because too much support is like a cancer,” former Finance Minister Hazem El Beblawi said in October. “People must get used to the idea that subsidies are an exception.”

Nearly a year later, news is emerging that Egypt is finally getting ready to make the necessary cuts. Independent newspaper Al-Masry Al-Youm reported that a draft plan to reduce energy subsidies by $4.2 billion has been handed to Morsi. This is would slash energy subsidies by over half, with a consequent impact on the cost of living. Morsi has apparently accepted the figure and is just deliberating on whether to implement the plan next month of after as-yet-unscheduled parliamentary elections.

It’s unlikely that Egyptians will be quite as accepting. Revolution or no revolution, the country is accustomed to gorging itself on cheap power. Taking this away will feel like a backward step, especially for the many, many people who weren’t all that interested in revolution in the first place. “Things were cheaper in Mubarak’s day,” they will say, and they’ll be right, regardless of the macro-economic subtleties.

For a taste of what impact this might have, Egypt needs only to look at Nigeria and Sudan, two other African countries where scrapping long-standing fuel subsidies has caused massive social unrest. In Nigeria, riots forced the government into a humiliating U-turn as it re-instated a partial subsidy to get people off the streets. In Sudan, anti-government demonstrations provided Khartoum with the most serious threat to its authority in years.

Given Egypt’s current propensity towards demonstrations and riots, it is highly likely the subsidy reform program will inspire something similar. This, perhaps, is why Morsi is considering ignoring the pressing economic need to cut subsidies earlier in favour of waiting until parliament is elected; he knows that it’s unlikely to endear his Freedom and Justice Party to voters.

Before he goes ahead with the subsidy reform, there are two things that Morsi can do to mitigate the damaging political effects of this economic decision. The first is to communicate properly. “The experience in other countries has shown that effective communication is a make-or-break aspect of any energy subsidy reform program,” wrote the African Development Bank. This would involve a campaign to sensitise the public to the idea of cuts while explaining the economic imperative behind them; a difficult but not impossible sell.

The second is to learn from countries that have managed the transition without causing mass social unrest – specifically Iran. “Iran’s successful reform of its petroleum subsidies in 2010 points the way for Egypt,” argued the Council for Foreign Relations. “A wide-reaching public awareness campaign announced the increase in fuel prices months in advance, and the reforms were paired with direct cash transfers to more than 80 percent of the population. Families had to apply to receive a cash transfer, but the IMF noted that the application process was well run and more than 98 percent of applicants were approved. Cash transfers were delivered in advance to the bank accounts of participating families, where the money was frozen but visible until energy prices increased.”

Done properly, subsidy reform could be the beginning of a serious overhaul of Egypt’s bloated and cumbersome budget, which could in turn unlock international funding and keep the country afloat. Done poorly, it will hamstring the new government and bring the spectre of bankruptcy ever closer. Either way, life is about to get much more expensive for ordinary Egyptians. DM

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Photo: A beggar sits at the entrance of a pedestrian tunnel in Old Cairo July 30, 2012. REUTERS/Asmaa Waguih


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