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Expert Q&A on Egypt’s Price Hikes

Nonresident Fellows Osama Diab, Timothy Kaldas, and Mohamed El Dahshan discuss the price hikes for the Cairo Metro, electricity, water, and fuel, their connection to the IMF loan, and their effects on Egyptians.

Over the past two months, Egypt has raised the price of the Cairo Metro, electricity, water, and fuel. Metro users will pay a base fare of 3 Egyptian pounds (LE) and as much as LE7, depending on the number of stops, from a flat price of LE2. Electricity prices were raised by 26 percent on average, while piped drinking water prices were raised by up to 45 percent and gasoline prices up to 50 percent.

The price raises and subsidy cuts are part of Egypt’s economic reform program implemented with the International Monetary Fund as part of an agreement signed in November 2016 for a $12 billion loan, but disproportionately affect poorer and middle-income Egyptians. Nonresident Fellows Osama Diab, Timothy Kaldas, and Mohamed El Dahshan discuss the price hikes, their connection to the IMF loan, and their effects on Egyptians.

The Tahrir Institute for Middle East Policy (TIMEP): What do these decisions have in common? How are they different?

Osama Diab: The one thing they have in common is being a result of the so-called economic reform program, which is intent on removing subsidies in order to reduce the budget deficit. This was a strict IMF condition—along with pound devaluation—before Egypt could receive any installments of the $12 billion loan.

Timothy Kaldas: One thing that ties many of the recent increases together is that the rate of price increases has been highest for the poorest consumers. With electricity, the lowest tier saw prices rise 69 percent, whereas the highest tiers saw increases of only seven percent or eight percent. Even with the increased fares on the metro, the government seems to have failed to considered (or wasn’t concerned about the fact) that most riders who are economically compromised can’t gather hundreds of pounds at once to buy the one- and three-month passes, and so must pay a much more expensive price to buy individual tickets for their daily commutes to work. Riders who earn more and can afford the passes will be able to pay far less per journey as a result.

Mohamed El Dahshan: I’ll point out that the water price increase is different because, in addition to being a deficit reduction measure like the others, it went virtually unnoticed, because water bills in Egypt are negligibly low. But more importantly, the water price reform has—or at least I hope it has—secondary purpose: push people to reduce consumption. Egypt is rapidly approaching dangerous water paucity levels, and with average consumption of 200 liters per person per day (twice Germany’s), and this figure reaches 330 liters per day in Cairo. Consumption behaviors are absolutely unsustainable, and hopefully this price increase will help change that.

TIMEP: To what extent are these decisions dictated by the IMF? Are any of them specific demands, or is it just part of a general cost-cutting requirement?

MED: Government deficit reduction is a requirement of the IMF, but the modalities of it remain the country’s to choose. Subsidies reform is a common measure in that regard, and a logical place to start for prompt results, as it allows the government to overnight transfer a part of its government expenditure onto private expenditure, which, naturally, is significantly easier and faster than attempting to increase revenues.

OD: The elimination of energy subsidies was a pillar of the IMF program. However, the metro was not subsidized; other sources of revenues, such as advertisements, covered the operational cost of the metro company. However, the government claims that the metro was losing money, by including investment costs of new metro lines to demonstrate that there was a loss. The government wanted the ticket price to cover more than just the operational cost and to also cover investments that will yield future returns.

TIMEP: Who do these price hikes affect most?

OD: The poorest, for sure. The metro is mostly a public utility of the poor, because the well off in Egypt will more often than not transport in their own private vehicles or in taxis. Also, the more recent hike in electricity prices was regressive; the increase for the lowest consumption bracket was about 70 percent, whereas for the highest it was a mere 7.4 percent.

The highest increases in fuel prices were also for the lowest consumption brackets. For example, diesel, which fuels microbuses (collective taxis), has increased by 50 percent, and the butane gas cylinders also mostly used by those who do not have gas connection at home has increased by 66 percent. On the other hand, petrol for private cars increased by 35 percent (92 octane) and 17.5 percent (95 octane). As for water, the lowest consumption bracket also saw the largest increase, which is the third increase in two years, with an accumulative increase of more than a 100 percent.

Just like water, this is not the first increase in electricity prices. The government has set up a three-year plan in which electricity would increase every year in July, from July 2016 until July 2018. The recent hike was therefore the third one since 2016. This strategy was also applied to fuel and metro tickets, with frequent and significant increases leading to a series of shocks without allowing sufficient time for the economy to adjust and absorb the shock.

TK: Undeniably, those who are most economically vulnerable are the most severely affected by these changes. While it’s true that many of the subsidy reductions leave wealthier Egyptians paying higher rates than the poor, the poor have the smallest buffer with which to absorb any increases in their cost of living. Nearly 30 million Egyptians live below the poverty line of 800 Egyptian pounds (or about $45) a month. At that level of poverty, even the smallest price increases can be extremely challenging to absorb.

But the vast majority of Egyptians are struggling to cope with the price increases experienced in the past few years. Most Egyptians have had to make significant sacrifices in terms of their lifestyle and diets. Only the truly wealthy have been in the position to absorb such significant collapses in purchasing power and cost of living increases, and even they have been complaining. Incomes simply haven’t been keeping pace.

MED: As always, the poor are the worst hit, as consumption represents a larger component of their total income. However, it is also clear that middle classes are also underappreciated victims. Shouldering the brunt of those increases, they are also the source of most private taxes—with many in poorer economic strata either exempt from taxation or evading it through informality—and were the most hit among consumers of the currency devaluation. As such, they are seeing their purchasing power steadily decline.

It is worth pointing out that the latest gas price increases were also clearly, disproportionally directed at the poorest segments of the population, but this was largely because higher octane gas (95 and 92) had already shed much of their subsidies.

TIMEP: Are there countermeasures in place to offset the cost (e.g., increases to general social security or increased subsidies in other areas)?

TK: The state has been working with the World Bank to establish means-tested cash transfer through the Takaful and Karama programs. They originally sought to cover seven million people, but have expanded the programs to reach 10 million. While this is an important start, it still fails to cover two-thirds of Egyptians living below the poverty line. As subsidies are rolled back, part of the savings should be used to offset the price increases for those in poverty. While the Egyptian government has made some headway in doing this, much more needs to be done. The unfortunate reality is that prices are climbing far faster than aid is being rolled out, leaving many economically vulnerable Egyptians to fend for themselves as they are faced with several waves of subsidy reductions and inflationary shocks.

OD: Further, these programs only cover the very poorest of households, which means that if you narrowly escape this definition you will be drastically affected by the program and left with no support, which will leave the lower middle and middle income groups with much more difficulties and exposed to slip into poverty. There are also doubts about how comprehensive the coverage is and whether Egypt is prepared with good data systems to ensure the inclusion of all deserving households.

TIMEP: What has the public reaction been so far? Are there any signs of protests like those that accompanied a proposed bread subsidy reform last year?

TK: The public has been clearly and understandably frustrated and upset by the pace and scale of the price increases. No issue has been more damaging to the popularity of the president and his government than inflation. In 2017, rumors that bread subsidies were being cut resulted in spontaneous protest springing up in a number of provinces. The minister of supplies had to hold a press conference the same evening to state unequivocally that bread subsidies for individuals would not be reduced.

OD: So far there hasn’t been significant or wide-scale protest movements like those witnessed in Tunisia or Jordan against similar (but even less brutal) austerity measures. On the day of the most recent increase of metro tickets in May 2018, there were some protests and skirmishes in some metro stations, but it didn’t last for long and was dealt with very violently and swiftly by the security forces, preventing it from spreading. There has also been some social media activity, where social media users launched a hashtag last week asking President Abdel-Fattah El Sisi to leave and it was trending for a few days, but it is not expected to lead to any substantial outcome or reversal of any of these decisions.

MED: The public reaction has been one of resigned despair. People knew the increases were coming, but thought they would come with the new fiscal year on July 1. But that resignation to further deterioration of their purchasing power was, unlike previous price increases, mired in sadness and despair rather than outrage and willingness to protest.; the The memory of the brutality against those protesting against the metro price increase remains fresh in people’s memories; those arrested during those events are not free yet.

TIMEP: Are there policy alternatives to what is being done?

MED: First, reducing a deficit doesn’t uniquely involve reducing expenditure, but also increasing revenues. It seems that the government is systematically choosing the path of least resistance, and rather than thinking of ways to increase revenue, they’re opting to slash subsidies.

Second, “subsidy reform” does not, as Egyptians might be excused to think, only mean slashing subsidies, but also targeting them in a more appropriate and equitable manner. However, the government has long implicitly admitted its inability to rely on targeted subsidies (i.e., those that would go to the poor only) because the system is terribly leaky and the government has neither the ability nor the will to supervise it and ensure compliance, and any price discrimination of goods would create leakages and a black market, and ultimately fail to reach the targeted audience. So Egypt has been operating with blanket subsidies. The attempts for the electricity bill—charging different prices per kilowatt by tranches—is nonetheless a good step toward more equitable subsidies.

Regarding the implementation of the price increases itself, like most policies, an important part of the discussion is how they’re implemented. The government chooses sudden, large price increases rather than gradual ones. This is ripping the Band-Aid in one swift move—it hurts, but it’s done. The logic is that the government doesn’t want to be perceived as increasing prices regularly; they’d rather present it as an inevitable, one-off event, and an almost exogenous requirement they can blame on the IMF or some outside force of sorts.

OD: Both economically and socially, this set of decisions is nothing short of a disaster. Even if deficit-reducing measures had to be taken, these measures should have been less regressive, with most of the increases directed at top income and wealth groups rather than the opposite. These measures will only lead to increased poverty rates and even larger gaps between different wealth and income groups, and subsequently kill effective demand and the creation of long-term, sustainable job opportunities.



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