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Fuel Fights Expose Egypt’s Depleted Cash as Mursi Seeks Loan

April 03, 2013

Fuel Fights Expose Subsidy Struggle as Egyptian Economy Stumbles

An Egyptian man directs a truck as drivers line up to buy fuel at a gas station in Cairo. Photographer: Khaled Desouki/AFP/Getty Images

For most of the past three months, Hamdi Othman’s days have begun like this: He gets up at dawn, lines up for hours for diesel, argues with fellow drivers and watches the occasional fight that breaks out.

“Our lives have become unbearable,” Othman, 54, who works for the state, shouted from his white bus. Around him were 16 other vehicles all waiting for diesel, a commodity in as short supply as patience in Egypt. “I’ve been a driver for the past 40 years, and I’ve never seen any crisis like this.”

More than two years after Cairo captured the world’s attention with the protests that led to the overthrow of former President Hosni Mubarak, the grievances that triggered them in the most populous Arab nation are stronger than ever.

Complaints about the fuel shortage, rising cost of food and electricity blackouts have replaced the initial hope of prosperity since Islamist leader Mohamed Mursi, 61, took power last year and promised to raise wages and end the cronyism and economic inequalities under his predecessor.

Instead, a shortage of hard currency and a widening budget deficit are undermining the economy and forcing the government to target the subsidies Egyptians rely on to afford basics.

“The social cost of any subsidy reform is going to be high,” said Hany Genena, head of research at Pharos Securities Brokerage in Cairo. “Consumers across the board, from households to companies, are going to be hurt.”

IMF Visit

An International Monetary Fund team arrived in Egypt today to discuss the $4.8 billion loan sought by the government. Prime Minister Hisham Qandil said in an interview in Cairo he hopes an initial accord will be completed before the end of the visit.

As the talks began, criticism surfaced, with a protest planned against the loan. The Popular Current, one of the parties in the opposition National Salvation Bloc, said in a statement that the “vast majority of Egyptians are going to bear” the consequences of the cost cuts linked to the loan.

The government is reducing spending in a plan outlined as part of an effort to secure the funds, which it sees as key to unlocking other aid. The budget deficit is projected at 10.9 percent of gross domestic product in the current fiscal year and at 9.5 percent the following, according to the Finance Ministry.

Gas, Bread

Egypt subsidizes everything from gasoline to bread to keep prices lower than if they were exposed to the effect of import costs. The program consumes roughly a quarter of state spending.

Foreign-currency reserves have plunged by more than 60 percent since December 2010 to $13.5 billion at the end of February, according to the central bank. At about 2 percent in 2012, economic growth is at its slowest pace in two decades. GDP rose 5 percent in 2010, the year before Mubarak was ousted, while unemployment is at 13 percent.

Inflation meanwhile is accelerating as the Egyptian pound weakens and daily protests mushroom into violence. The pound has lost 6.6 percent of its value against the dollar this year, more than any other Middle Eastern currency, doubling the cost of diesel based on black-market prices.

Protesters, including butane dealers, demonstrated outside the Supply Ministry yesterday, hours after the Oil Ministry doubled the price of the subsidized canisters used by households to 8 Egyptian pounds ($1.18) and for businesses to 16 pounds. The increases prompted some distributors to refuse to accept their quotas, fearing public backlash when they sell them at the new price, the Al-Shorouk daily reported yesterday.

‘Paupers’

Much of the criticism against Mursi has been about the lack of tangible improvements in daily lives since the uprising. His critics contend that Mursi has focused on bolstering the Muslim Brotherhood that fielded him for office, and is seeking to replace one authoritarian regime with another.

Salah Fouad, a 53-year-old minibus driver, said he’s often forced to park his vehicle because he can’t get the needed fuel. Each day he is unable to work, Fouad said he can’t bring home money for his seven children.

“We are almost starving,” said Fouad, putting the blame on Mursi. “We are going to become paupers.”

The ill-tempered lines aren’t limited to demand for fuel. Bakers of subsidized bread have protested against a government push to keep them producing the low-cost loaves on which the majority of the country’s more than 84 million people rely, while their costs are rising. The Supreme Constitutional Court ruled in March that it was illegal for the bakeries to turn their operations into private businesses.

Vicious Circle

At the heart of the strife, like under Mubarak’s 30-year rule, is the government’s ability to pay.

Rolling blackouts in Cairo and elsewhere in the country have already begun, an omen for the peak summer months when air conditioning drives up demand.

The Electricity Ministry has said part of the blame lies with the Oil Ministry, which it maintains has failed to deliver the needed fuel to power the plants. The Oil Ministry, in turn, has said it is owed billions of pounds for fuel already supplied and that it, too, has bills to pay.

State-run Egyptian General Petroleum Corp. is struggling to pay foreign energy companies, while also trying to cope with the cost of fuel imports.

“The most important thing is to cover our essentials,” central bank Governor Hisham Ramez told reporters yesterday. “Once things start moving, the market will go back to normal and supply and demand will be met.”

Draining Money

The Egyptian General Petroleum Authority got about $6.45 billion in funds from the central bank in 2012, more than twice the amount it received a year earlier, according to a table posted on the bank’s website outlining foreign funds it provided to the government. The amount provided to the General Authority for Commodities, which imports wheat for the subsidized bread, dropped 12 percent last year to $2.52 billion.

It’s money Mursi’s government can ill afford when investment and tourism, two key sources of foreign revenue, have yet to rebound to anywhere near their pre-uprising levels.

The country’s political battle the past two years contributed to a decision by Moody’s Investor’s Service to lower Egypt’s credit rating to Caa1 on March 21, putting it on par with Pakistan, while the central bank raised its deposit and lending rates by 50 basis points for the first time since November 2011.

The request for the IMF loan was again delayed late last year amid mounting outrage over both Mursi’s attempt to impose new taxes and fallout from his efforts to temporarily shield his decisions from court review in a bid to push through a contentious, Islamist-backed constitution.

Running Dry

The charter was approved and the president pushed ahead with new parliamentary elections initially planned for this month. That effort has also run aground amid court challenges to his decree setting the date for the vote, which opposition parties had said they would boycott.

“Within three months, things in Egypt may come to a head as foreign reserves are depleted and the country needs to purchase more wheat,” Hani Sabra, a Mideast analyst at Eurasia Group in New York, said in an e-mail. “Egypt’s currency reserves, already less than ‘critical,’ may run dry.”

Fuel is particularly touchy for the government because it accounts for almost 85 percent of total subsidies, according to Hossam Arafat, head of the Federation of Chambers of Commerce’s Petroleum Products Division in Cairo.

Diesel subsidies account for as much as 55 billion Egyptian pounds of the spending, compared with 20 billion pounds each for gasoline and butane gas, Arafat said.

Cash Crunch

Arafat attributes the shortage to a cash crunch, while Oil Minister Osama Kamal has said that smuggling is a factor.

Sayed Adel, who drives a pick-up truck delivering milk, said he’s been routinely offered fuel on the black market, at almost double the rate at gas stations. Officials have been struggling to deal with the issue, though their efforts have been impeded by worries over popular backlash.

“For those who can’t take the fights, they just have to go and buy it on the black market,” Adel said.

Egyptian police arrested the manager of an oil-product company after initial investigations showed he sold 5.53 million liters of diesel on the black market since the start of the year, the state-run Middle East News Agency said yesterday.

The government has discussed possible ways of revamping the subsidy system, including introducing smart cards or coupons with quotas for commodities like fuel and bread.

Smart Cards

The parliament’s upper house, the de facto legislature until new elections are held, rejected Mursi’s proposal to ration fuel with smart cards, the Al-Borsa newspaper reported on March 21. The legislature said it would have “dangerous consequences.” It suggested handing out cash instead of the subsidies, the daily reported.

That would mirror Iran, which in December 2010 introduced a five-year program to cut food and energy subsidies while trying to offset the impact by handing out cash to those in need.

The second phase of the program was put on hold as the currency weakened and inflation quickened. The IMF said in a July 2011 report the implementation of Iran’s first stage lowered the incidence of poverty to 2 percent of people from 12 percent on the basis of a $2 per day poverty line.

Egypt, though, doesn’t have the financial resources of oil- producing Iran, albeit a country subject to international sanctions. The government also must contend with a society that’s becoming increasingly agitated.

Street Risk

The smart card technology can be activated within days, “but it’s a matter of whether the street is ready for such a thing,” Kamel, the oil minister, told reporters on March 25.

Even Mubarak’s government “didn’t dare approach this issue,” even though they had the full backing of the police and ruled with an “iron fist,” he said.

What’s also needed are “safety nets, either in the form of foreign aid, good economic conditions or a popular government,” said Genena, the analyst at brokerage Pharos. “Any reform program executed in the absence of safety nets will backfire at a time when people are facing real income compression. The timing cannot be worse.”

Back at the fuel line in the working class Cairo neighborhood of Shoubra, Othman blasts his horn and shouts to stop other drivers from cutting in front.

“We’ve never witnessed anything like this,” he said. “Even at the time of Mubarak, there wasn’t such a crisis.”

To contact the reporters on this story: Ola Galal in Cairo at ogalal@bloomberg.net; Tarek El-Tablawy in Cairo at teltablawy@bloomberg.net

To contact the editor responsible for this story: Andrew J. Barden at barden@bloomberg.net


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