#Egypt’s economy: A state of ‘zugwang’

The Egyptian economy is slated for a growth of only 2% in the fiscal year ending June 2013. Despite President Mohamed Morsi’s hope for a 5.5% growth next year, the outlook for 2014 is not flattering. Earlier this year, the World Bank forecasted economic growth at 3.8% for 2014 and in a recent poll of economists by Reuters this figure is projected at only 3%.

What needs to be done is by no means rocket science. But the issue here is one of “will” versus “skill”. It is not that we do not know what to do; it is that we do not want to do it. The change needed is simple math which translates into cutting down the budget deficit. This growing deficit is largely attributed to dwindling income due to slow tourism and vanishing foreign direct investments coupled with an untenable subsidy program. Egypt’s subsidy stands close to 10% of GDP which is eerily similar to its debt percent of GDP.

Since the times of President Gamal Abdel Nasser, successive governments have chosen not to tackle the subsidy issue for fear of public backlash. Ironically, it was former president Hosni Mubarak’s finance minister Youssef Boutros-Ghali who was the closest to reforming it but was kept in check by Mubarak himself. Therefore, subsidies have remained the big white elephant sitting in the middle of the room that everyone has chosen to ignore. To add insult to injury the Egyptian subsidy programme is quite inefficient, marred with corruption and not entirely effective at reaching the poorest of the poor. It is also no secret that the reluctance to show commitment on this topic is the main reason behind the delays in the International Monetary Fund’s (IMF) $4.8bn loan.

Elsewhere in the world, there are various successful examples of subsidy reform initiatives with far reaching social impacts. Bolsa Familia, which is the Conditional Cash Transfer (CCT) programme enacted in Brazil, has helped streamline Brazil’s subsidy programmes. There are also lessons to be learned from Iran’s successful reform of its petroleum subsidies in 2010. There are even lessons to be learned from the unsuccessful reform attempts such as the botched plans of Nigeria’s government to reform petroleum subsidies last year.

The Egyptian government however has chosen to ignore the big white elephant. The president and cabinet members are globetrotting to pursue additional funding in an attempt to extend the current reality for few more months instead of attempting meaningful reforms. It must also be understood that the issue is politically motivated. Egypt’s current political mayhem makes the prospects of a broad and effective subsidy reform particularly challenging. In a recent press conference, opposition leader Mohamed ElBaradei stated: “Egypt needs political consensus to heal the economy.” While he may have not been particularly referring to the subsidy issue, this statement is actually very pertinent. It is indeed a mesmerising scene of a country where a short term power consolidation is taking precedence over a long term economic welfare.

To be fair, there is a broad recognition amongst Egyptian policymakers that subsidy programmes must be reformed. The will to do so however remains lacking. In chess, there is a position called “zugwang”, where you must make a move, even though that move will cause you to lose. An economic standstill is unsustainable and any move towards meaningful reforms will be considered back paddling on a presidential campaign filled with grandiose promises of Egypt’s new found wealth. Unfortunately, those dreams and promises of a Turkish or Malaysian model are now reduced to a mere game of survival.


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