During last year’s presidential race, Mohamed Morsi pledged to shore up Egypt’s faltering economy. But on the first anniversary of his ascension to power this June 30, the country finds itself mired in an even deeper financial crisis, the most palpable manifestation of which has been a recurring fuel shortage, which this month grew further acute.
In a scene that has become commonplace, the past weeks have seen an incrementally increasing fuel shortage, and in the past days, some stations completely ran out of fuel while the ones that didn’t were encircled with long queues that brought traffic to a standstill on main roads in Cairo.
Local media reported fights erupting and live ammunition being used around some stations, causing further panic among already frustrated Egyptians.
While the government has, for the most part, blamed this and previous basic commodity crises on black market trade or panic-driven hoarding, the fuel plight exposes broad structural and deeply fundamental problems with the Egyptian economy. And these are problems, which the successive governments sworn in under Morsi’s rule have failed to tackle.
What is painfully evident is the Egyptian government’s growing inability to pay for imports of strategic goods, namely fuel and food, as a result of the steady depletion of foreign reserves and a drop in the value of the pound coupled with no significant increase in foreign currency revenues, economists say.
“We are currently on the edge,” says Mona Mansour, chief economist and strategist for the Middle East and North Africa at investment firm CI Capital, in reference to the country’s foreign reserves.
“We are heavily dependent on imported strategic goods like oil products and wheat. Our imports are necessity,” she adds.
Egypt, the Arab world’s most populous country of more than 80 million people, imports US$58 billion worth of goods annually, while exports are valued at US$26 billion, Mansour says. The country imports between 15 percent and 35 percent of its fuel needs and buys more than half of its wheat needs on the international market, making it highly susceptible to fluctuations in global prices.
The supply of these basic commodities is crucial to keeping a lid on social unrest in a country where a large segment of the population relies on subsidized goods — the very ones the government buys off the global market — to make up for low salaries and a near total absence of welfare services.
Fuel and bread shortages have in the past triggered civil clashes that have sometimes turned bloody. Exacerbating the situation is a confluence of political impasses that translate not only into a prolongation of these socially sensitive crises, but their swift escalation.
Used in industry and transport as well as in agricultural equipment, the lack of adequate fuel supplies, particularly diesel, has led to citizens blocking roads and, at times, clashing with security forces and each other over the scarce supply.
In 2008, scuffles in queues for the subsidized 5-piaster bread loaves outside bakeries resulted in several fatalities.
While the government has announced long term plans to expand its production of these vital commodities — by cultivating more wheat or increasing its domestic output of fuel — relying on imports is the most immediate practical solution to the recurrent and pressing shortages.
But both the companies and authorities buying these commodities on behalf of the Egyptian government have to pay for them in foreign currency, which has become increasingly difficult as foreign reserves dwindle and Egypt’s pound weakens.
The Egyptian General Petroleum Corporation, the state-run company in charge of importing the country’s diesel, gasoline and other fuels, for example, has had to approach local banks to convert the Egyptian pounds provided by the Ministry of Finance into US dollars, former Oil Minister Osama Kamal said recently at a press conference when he was in office.
“There is definitely a shortage in foreign currency and, of course, any country that has a shortage in foreign currency has a problem with its relationship to the world economy,” says Samer Atallah, assistant professor in the Department of Economics at The American University in Cairo.
“The problem is exacerbated given that we rely on imported energy and food, which are definitely very important. They are the cornerstone of any economic activity, particularly energy — the transportation factor, the electricity factor, the industrial factor — all of these rely on energy. You take that away, you halt a substantial part of economic activity,” he explains.
“This is a symptom of a more complicated issue within the Egyptian economy, which is [what] we call a deficit economy, [or one] that consumes more than it produces and has to rely on foreign injection of resources,” he says. “The problem here is that we have been chronically doing this and we have been a deficit economy for a very, very long time.”
Fuel to the fire
Amidst an already volatile political climate, shortages in commodities trigger “social unrest and political movement,” Atallah adds, which “doesn’t make things easier for Morsi.”
“The longer it takes to reverse these policies, the longer and the harsher these policies are going to be on Egyptians,” he says.
Since Egypt’s uprising in 2011, and in the year since Morsi took power, monthly economic indicators have been characterized by consistent and sharp drops in foreign reserves, at first mainly as a means of propping up the pound, and later as a reflection of faltering economic conditions.
Not only does the government use this to pay for imports, it also uses foreign currency to pay its dues to foreign companies operating in its territory, chief among these being international oil companies.
Despite rising to US$16.04 billion at the end of May from US$14.4 billion at the end of April, reserves are still down more than half compared to their December 2010 level, according to data from the Central Bank of Egypt. This latest uptick, however, is due largely to one-off regional aid, coming mainly from Qatar and amounting to US$8 billion in total, according to Mansour.
Qatar has played a key role in maintaining reserves above a critical level through a number of direct deposits with the Central Bank. Some critics suggest this is unsustainable, while still others point to the political strings that must be attached.
“Our key foreign currency earners are weak,” says Mansour.
Suez Canal revenue dropped around 4 percent to US$4.6 billion in the period between July and May 2013, compared with the same period last year. The oil sector has recently stopped being a provider of foreign currency as it’s become a net importer, while the increase in tourism revenue was “incremental,” Atallah says.
Remittances from Egyptians living abroad was the “only positive thing in the balance of payments,” he adds. However, some may argue that the very fact that Egyptian expatriates need to send more money home is itself a negative reflection of the state of the economy.
Revenues from tourism rose to US$8.08 billion in the period between July and March compared with US$7.08 billion the same period the previous year, as remittances jumped to US$13.9 billion from $12.9 billion, according to a statement published on the Ministry of Finance website.
But these positive numbers do little to pacify the simmering grievances amongst Egyptians. While the dire economic situation has been used by the opposition to point to Morsi’s failures, supporters of the Muslim Brotherhood and the president have brushed off the blame directed at him and his governments.
Mohamed Gouda, head of the economic committee of the Freedom and Justice Party, from which Morsi hails, argues that the government has done “the best it can under the given circumstances.”
“We cannot say that the government is unable to import its needs. This is completely untrue. We have to consider that the country is still reeling from a revolution. The institutions are not functioning properly, there is no legislature and there is a security vacuum,” Gouda says.
“The economic burden passed on by the former regime is heavy,” he adds.
Meanwhile, the patience of the average citizen has been stretched thin and continues to be tested in fuel queues and amid frequent power outages.
The economy would have represented “a huge burden on anyone coming to power and after Mubarak … but the governments of Morsi could have dealt with it better,” Atallah says.
“The best [approach] for someone who came to power in June 30 2012 would have been to re-balance things by taking measures and policies that are radical. The worst is to keep things as they are, so that problems are exacerbated.”
“In my assessment, Morsi went for the worst-case scenario by keeping things as they are,” he adds.
At least twice, the government delayed plans to decrease subsidies on diesel and gasoline fuel that would have saved between LE20 billion and LE40 billion, according to an estimate announced by former Oil Minister Kamal.
It has also shied away from enacting further measures to remove subsidies for the industrial sector, meaning increasing prices of natural gas or other fuels supplied to plants that sell its products at market prices.
“The advance with regard to wider reform measures has been very minimal, which is expected to further widen the fiscal deficit to over LE200 billion in fiscal year 2013/2014,” Mansour says.
In addition to a ballooning budget deficit, the economy is expected to grow only around 2 percent in fiscal year 2012/2013, less than last year’s 2.2 percent, as private spending weakens and unemployment rises, Mansour adds.
“As long as the underlying problem persists, these issues will resurface,” Atallah says. “If we continue to make the same mistakes, we will end up with…worse results.”