Egypt Quietly Raising Many Prices : Trimming Subsidies, Deficit Seen Necessary to Avert Crisis

Discreetly, almost secretly, the government of President Hosni Mubarak is doing something that it hopes people won’t take much notice of--it is raising prices.

Without any public announcement, the prices of a number of essential commodities and services have been increased recently. The price of bread has risen by as much as 3 cents, gasoline has gone up by 14 cents a gallon and electricity has increased by anywhere from 20% to 50%, depending on the type of user. Prices for industrial goods, such as steel and coke, have also crept up.

The price increases, along with others being contemplated, are meant to ease the burden imposed on the economy by state subsidies, which according to Western economists cost the Egyptian government between $6 billion and $8 billion a year.

Reducing the huge subsidies, roughly equivalent to a third of the national budget, is now considered essential by Western and Egyptian economists if Egypt is to solve the economic crisis into which it is sliding at an increasingly alarming rate.

The situation is critical, economists say, because foreign debts are mounting while Egypt’s traditional sources of revenue are shrinking. The imbalance is reflected in a $1.3-billion balance of payments deficit this year, in contrast to the modest surplus of previous years.

Warning From IMF

In a report issued this summer, the International Monetary Fund warned that there was an “urgent need” to implement a “comprehensive package of vigorous measures” to expand the export sector, reduce imports, eliminate subsidies and rationalize a chaotic, multitiered system of exchange rates in which the value of the Egyptian pound ranges anywhere from 0.7 to 1.8 to the dollar, with the higher figure being the black market rate.

Without such reforms, Western bankers warn, Egypt will run into increasing difficulties in obtaining the foreign loans on which its economy is still heavily dependent. Already, major foreign banks are talking about slashing supplier credits--credit extended for the purchase of capital equipment--from the normal 360 days to 180.

So far, Egypt has managed to make the payments on high-visibility commercial loans, but it has been stalling on the repayment of supplier credits and is now estimated to be more than $1 billion in arrears.

“Because the delayed payments have been scattered, it doesn’t have the same impact as putting off payment on one big loan,” a Western banker in Cairo said. “But within the financial community, people know what’s happening. As a result, there’s very little appetite for more supplier credits from the U.S. and Europe.”

A Western diplomat said: “They’ve been stringing out their payments (effectively rescheduling their debt), but now they’ve used up all their maneuvering room. They no longer have that option open to them.”

To the extent that it feels it can, the government is trying to follow the IMF’s advice by reducing subsidies, expanding the private sector, boosting productivity in the still-dominant public sector and curbing imports. A new economic team headed by Prime Minister Ali Lutfi, an economist brought into the government by Mubarak last September, has begun to introduce reforms, starting with the price increases.

But it is moving cautiously, much more slowly than the IMF would like, because of fears of social unrest. The last time the government tried to increase bread prices, in 1977, there was widespread rioting and the increase was rescinded. With urban inflation estimated to be running as high as 20%, the government “is clearly worried about the social impact of further price increases,” a Western diplomat said.

Dr. Ragaa Rassoul, an economist who is director of Egypt’s Institute of National Planning, said: “The IMF writes its prescriptions from a technical point of view, but we have to be very careful about how we implement them.”

Thus the government is approaching price reform with the hesitation of a child sneaking into the kitchen to steal from the cookie jar.

The latest price increases have resulted in a lot of grumbling on the streets--Cairo cab drivers are particularly loquacious on the subject--but so far have not caused any serious unrest. Nevertheless, the government “isn’t publicizing these price increases, because it’s afraid of what the reaction will be,” a Western diplomat said, adding, “It’s constantly looking over its shoulder to watch the social and political impact.”

This time around, a greater effort is being made to prepare people to accept fiscal austerity by increments. Appealing to their patriotism and sense of pride, Mubarak last month called upon his 49 million countrymen to join in a “great awakening” to arouse the slumbering economic giant that Egypt, he implied, could be.

Mubarak offered visions of economic self-sufficiency, higher productivity and wealth. But first, he suggested, Egyptians would have to start by helping their government pay off $31 billion in foreign debts.

A national “debt campaign” was launched, and Egyptians were asked to contribute to it. To foster the feeling that everyone has a stake in solving Egypt’s problems, a nationwide suggestion box, called the “Idea Bank,” was set up, and people were asked to phone or write in with their suggestions for improving economic performance.

Launched amid much hoopla, the campaign appears to have faltered. When voluntary donations appeared to be less forthcoming than it had been hoped, some government ministries began deducting “contributions” from their employees’ paychecks, provoking a chorus of complaints. Although the government insists that the contributions are voluntary, Foreign Ministry sources confirm that a letter went around their offices notifying everyone of a 10% salary deduction last month.

The sources added that Egyptian diplomats abroad, who have been paid in dollars, have now been told that henceforth they will have to take 25% of their salaries in Egyptian pounds, which are virtually useless outside of Egypt.

Officials also seem to be having second thoughts about the Idea Bank, judging from their reluctance to talk about it. An Egyptian journalist said one official he interviewed was transferred to another post after talking to him about the ideas he had received, some of which were considered impractical or likely to cause controversy.

‘Create a National Awareness’

One caller suggested sending working women back to their homes in order to create more employment opportunities for men. Another called for the construction of a giant Disneyland in the desert to attract foreign tourists.

Western diplomats say the campaign is not likely to have any impact on the debt problem in light of the fact that the contributions, voluntary or otherwise, have all been in Egyptian pounds rather than in the hard currency needed for loan payments.

Economist Rassoul said that paying off Egypt’s debts “is clearly beyond the means of any campaign.” He said the real idea behind it is to “create a national awareness of what the problems are” and acceptance of the “firm and decisive measures” that will be needed to solve them.

The problems, according to the IMF, are largely structural and stem from an exploding population that needs to import 50% of its food and from distortions created by the economy’s abrupt swing from socialism to capitalism to its present and precarious position somewhere in the middle.

The oil boom of the 1970s exacerbated the problems as Egypt suddenly received large infusions of foreign exchange, which dwindled as the boom went bust.

“After years of sheltered, state-managed economics, we didn’t have time to develop adjustment mechanisms to deal with these changes or with the outside world,” Rassoul said.

Now, to make matters worse, the outside world seems determined not to give Egypt a break.

Egypt’s economy is still heavily dependent on oil or oil-related revenues, all of which are declining. Remittances from expatriate workers, most of them in the Persian Gulf area, are Egypt’s main source of foreign exchange. But, in the fiscal year that ended in June, these declined to $3.75 billion from $4 billion due to production cutbacks that are expected to continue.

Egypt’s oil earnings come next, and these fell to $2.77 billion from $2.957 billion last year; a further decline is considered inevitable as oil prices come down. The cutback in oil production also hit another major source of hard currency, Suez Canal revenues, which declined to $950 million from $970 million.

“The slide promises to get steeper in the coming year,” a Western diplomat said. “Their balance of payments is not in good shape, revenues are falling, domestic consumption is rising and things are not getting better.” According to another financial expert, “all their sources of income are threatened.”

Better Off Than Mexico

Still, as bad as things are, Egypt’s position is not hopeless or even as serious as that of a number of other countries, economists say. “Our problem is acute, maybe even critical,” Rassoul said, “but Mexico is in worse shape.”

And Egypt, a Western diplomat said, is still in a position “where some careful and well-chosen policy measures will take it a long way.”

Rassoul and others see several areas where Egypt can take up slack. Food imports, for instance, cost $3 billion in the last fiscal year--the largest single item in an $11.65-billion import bill. Grain was the major item, but as much as 25% of the imported grain never reached the consumer because of poor distribution.

Rassoul said that even more is wasted when it reaches the consumer in the form of price-subsidized bread, which is so cheap that farmers feed it to their animals in place of costlier fodder. Egypt’s figure for grain consumption is about 1.2 pounds per person per day, which Rassoul says is ridiculous. With bread so cheap, he added, “people are just throwing it away.”

Another area where the IMF wants reform is the exchange system. At present, according to U.S. Embassy estimates, there is more foreign exchange--$7 billion to $8 billion--in private hands than in the central bank, which has only enough hard currency on hand for about three months’ imports. Floating the pound and moving the official rate--which ranges from 0.7 to 1.35 to the dollar--closer to the black market rate of 1.8 might bring some of that money back to the central bank.

These and other reforms have been discussed at a series of Cabinet meetings in recent weeks, and one Western diplomat predicted that all the publicity being given to Egypt’s debt problems will culminate in decisions to devalue the pound and trim imports.

“There seems to be a tremendous amount of ferment under the surface,” the diplomat said. “My feeling is that we’re going to see some major decisions soon.”