Politics Will Delay Egypt's Economic Reforms

Politics Will Delay Egypt’s Economic Reforms

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It was never going to be easy to reform and repair Egypt's finances. It is clear now that it won't be quick either says Una Galani

October 30, 2012 9:37 by kippreport

Politics look set to delay tough economic reform in Egypt. The government appointed by President Mohamed Mursi could win a quick boost of investor confidence by agreeing on a $4.8 billion loan next month from the International Monetary Fund. That, despite all the delays, might still be the easy part.

Interest payments, salaries and subsidies account for roughly three-quarters of total government spending. An IMF loan would help to keep the government afloat and come with an attractive interest rate. But it won’t do much to address the fiscal deficit, which the IMF expects to hit 10 percent of GDP this year.

Wage cuts for government employees are considered politically untouchable, but the government acknowledges that something must be done about wasteful subsidies, particularly the three-quarters of last year’s total bill accounted for by selling energy at below-market prices.

If energy subsidies were totally eliminated, the fiscal account would be almost in balance. The African Development Bank, however, suggests an adequate social net for the poorest typically requires the maintenance of one-third or half of the current subsidy, based on the reform experiences of other countries.

The Petroleum Minister has suggested some subsidy limits, and discussions of deeper reform are underway. However, the government is likely to face parliamentary elections soon, probably in March. Mursi’s Freedom and Justice Party, supported by the Muslim Brotherhood, won less than half of the ballot for the lower house in the last election. To protect its vote, the party has a big incentive to delay unpopular decisions, however necessary for long-term growth.

Delay might also help soften public opposition, reducing the chances of social disruption. Nigeria and Jordan suffered a sharp public backlash when they recently tried to cut back subsidies without much warning. Iran’s major subsidy reforms were more easily accepted, thanks in part to a long media campaign.

Mursi’s relatively inexperienced government must manage day-to-day affairs and negotiate the fault lines of the old regime. Investors want clarity but the economic plan is still being finalised. It was never going to be easy to reform and repair Egypt’s finances. It is clear now that it won’t be quick either.