The three formidable E's: Egypt, elections,and energy
Field Marshal Abdel Fattah Al Sisi is the new President of Egypt. Three years after the fall of Hosni Mubarak amid a street uprising in Tahrir Square, Egypt’s political and economic future is still uncertain.
Egypt’s hard currency reserves have fallen to $16 billion, barely four months import cover despite a $12 billion financial lifeline from Saudi Arabia, the UAE and Kuwait. Tourism, once a tenth of the Egyptian GDP, has fallen as European tourists avoid Cairo, the Red Sea beach resorts and the Sinai due to fear of violence. The military faces an insurgency in the Sinai and tribal unrest in the western desert border with Libya, a post Gaddafi state which itself has begun to disintegrate amid rival armed militias.
Like President Hosni Mubarak, Al Sisi must defeat the insurgents in the Sinai and the military’s extremist opponents in the cities before he dare initiate economic liberalisation and reform. It is simply unrealistic to expect Egypt to reform fuel subsidies or reduce the budget deficit at a time when millions of young people are angry, bitter and unemployed. Bread is a Nile Valley staple that has been subsidised by every Egyptian government in Cairo since Ottoman/Mamluke times, even in the ancient Pharaonic kingdom of Thebes. Like Thailand, Egypt is a polarised society where unending political crises take their toll on export, tourism, private consumption and business spending.The security situation in Egypt has destabilised since the July 2013 last summer and its strategic energy assets — the Suez Canal, to the Sinai oilfields, LNG export plants, pipeline networks, and Western Desert gas processing plants — are now under constant threat of sabotage and terrorist attack.
Egypt has spurned an IMF loan in favour of grants from the Gulf because the Al Sisi government simply cannot cut its vast energy and food subsidies during a time of crisis. There were “IMF bread riots” in Egypt under both Presidents Sadat and Mubarak. Due to the peace treaty with Israel and Suez Canal naval transit for the Sixth Fleet, Egypt has received $50 billion in military and economic aid from the United States thus reducing the necessity of going for an IMF loan that will mean “structural adjustment”, an unacceptable political risk for the military elite in Cairo. Houston’s Apache Corp has reduced its exposure to Egypt by selling one third of its local assets to China’s Sinopec.
Egypt’s energy crisis is a subset of its larger political and financial crisis. The government cannot cut food and fuel subsidies in a nation where 40 million citizens survive on less than $2 alley even though the budget deficit is 14 per cent of GDP. Egypt owes $6 billion to foreign oil companies such as Apache Corp and LNG output for export is diverted for home consumption. Power outages in Egyptian cities are a daily occurrence and even crude oil/natural gas production has been impacted by erratic power supplies. Inflation is 12 per cent, the official unemployment rate is 14 per cent, though youth unemployment is above 30 per cent. Egypt’s rulers cannot realistically impose reforms on a population living amid such hardships. However, economic crises lead to political instability in a vicious circle, which hits FDI, tourists, exports and output.
The $20 billion in assistance from Saudi Arabia, Kuwait and the UAE since the military coup has averted a sovereign default and currency meltdown in Egypt. However, Egypt cannot finance its government deficits in definitely via assistance from the Gulf states. Egypt must cut its food and fuel subsidies, privatise vast state owned companies, raise tax revenues and boost central bank reserve to avoid a sovereign default. However, I do not think Al Sisi will risk cutting subsidies, 30 per cent of the budget, at a time of near civil war in the Sinai. Energy alone accounts for 80 per cent of all Egyptian subsidies. Egypt is now a net importer of oil and gas.
By Sarie Khaled
The writer is a Dubai-based research analyst in energy and GCC economics. Views expressed by him are his own and do not reflect the newspaper’s policy.