Published — Sunday 24 March 2013
Last update 24 March 2013 4:53 am
Egypt seems to be entering into a vicious circle where politics are impacting negatively on the economy while economic policies and performance add to the fuel of political instability. Street politics that have been driving the Egyptian scene for the past two years seem to be giving in for a more powerful engine — the economy — that is slated to shape the country’s future in the short-term at least.
Two developments have taken place recently to support this claim.
The three main rating agencies have downgraded Egypt’s economic performance describing the outlook as ‘negative.’
Moody’s Investors Service has downgraded the country’s sovereign foreign currency credit and hinted at increased possibility of default. And that was coupled with the inability to predict economic and fiscal policies due mainly to failure to reach a deal with the International Monetary Fund on the possibility of the much talked about $ 4.8 billion loan.
In a stark bleak statement, Moody’s said: “The sustained deterioration in Egypt’s external payments position and government finances have reached a level at which the country’s vulnerability to economic or political shocks has widened and the risk of default has consequently increased.”
The same ‘negative’ outlook has been echoed by the two other rating agencies Fitch and Standard & Poor’s.
The second development is the raising of interest rates by the country’s central bank by 50 basis points to 10.25 percent for both deposit and discount rates, thus falling on the side of curbing inflation that has risen by close to 2 percent to 8.2 percent between January and February, thus threatening the standard of living of many Egyptians and fuel the ongoing street demonstrations.
However, all eyes will be focused on the wheat production this year to see whether the hopes of a bumper crop will materialize, thus reducing the possibility of facing up to the tough choices of spending more on wheat imports or reducing the bread subsidy, which amounts to a political suicide given the current inflammable climate.
Memories are still fresh about the famous Cairo riots of 1977, when the late President Anwar Sadat curbed the bread subsidy, and smaller riots in 2003, and five years later, which were both driven by high food prices and low wages and salaries. That in the end led to the food subsidy program.
Though Egypt is the world’s top wheat importer because it needs to tap international markets to cover half of its 19 million ton requirement for domestic consumption and have a six-month strategic reserve, officials expect it to produce 9.5 million tons of wheat somehow this year, which is 7 percent more than the country’s output a year earlier. That is good news.
But with reserves of 2.2 million tons covering up to three months of domestic consumption, observers are looking into the very near future up to June to see how things can unfold.
Getting a good harvest depends to a large extent on the government’s performance, including mainly finance, purchasing local production from farmers at a higher price that beats even the international one. It is planning to pay $ 70 more for a ton in local currency to local producers than it pays to wheat imports; in addition it has to ensure the availability of fuel and so on so as to harvest what is actually produced and bring it under its control.
But even if all requirements were met to get a good wheat harvest, there is a need to cover whatever portion to meet domestic consumption.
It is interesting to note that there is some talk to diversify sources of wheat imports and India has been mentioned as one of the possible import areas.
There has been some hidden resentment against the US aid that provides a good portion of Egypt’s wheat imports as it was seen partly as a pressuring tool.
It was interesting to note that during the 2010-2011 season when Russia banned its wheat exports, Egypt became the top US wheat buyer with shipments exceeding 4 million tons, but last year that high figure dropped to less than one million tons.
But to go on with diversification of imports requires availability of hard currency and foreign reserves are tumbling by alarming rates. And that fact is pushing for the need to conclude the IMF deal, which is getting tougher as time goes by.
Unfortunately that IMF deal may be needed also to help in fixing local economic woes that may be even threatening the government plans to encourage domestic production and buy locally produced wheat at a higher price.
With the growing budget deficit, things are getting tighter by the day. In just six months that deficit has climbed to 5.1 percent and Planning Minister Ashraf Al-Araby is predicting it to hit 10 percent of the country’s GDP. That is a huge burden very difficult for the government to handle on its own and may make the IMF deal a necessity.