Egyptian households are bracing of an extremely costly Ramadan season. Ramadan will start at the end of May, and will last a month, in a period that promises to see another spike in food prices unless government controls are effectively implemented. As the Egyptians prepare to perform their religious duty, stress has been growing day-by-day as the value of the national currency collapses, and as food and commodity prices skyrocket (see chart below). The situation is so drastic that while the IMF is putting pressure on Egyptian President Abdel-Fattah El-Sisi to abandon subsidies, which he promised as part of an IMF loan agreement, he also pledged to his people that sweeping measures will be enacted to help the poor and those struggling financially to cope during Ramadan. Some of the measures include precisely what the IMF does not want. The multinational lender however is aware that forcing El-Sisi’s hand too hard would backfire and lead to popular rebellion. After all, more than half of the population lives in poverty. And so for the month of Ramadan, there are expectations that subsidies will be increased, albeit temporarily, and taxes will be reduced.
For el-Sisi, governing Egypt is no trivial exercise. Austerity measures are necessary to convince investors to resume business activity, but the population is taking a major beating in the form of lower income and high prices. So far, many foreign media have praised some of the measures undertaking by the Egyptian government, including currency floatation and subsidies reductions. These measures are part of a deal to secure a $12 billion IMF loan. But although so-called foreign investors, fund managers, and speculators say they endorsed el-Sisi’s decisions, millions of Egyptians are left with no resources as the pound lost half of its value since the central bank removed currency controls in November, and as annual inflation exceeded an unprecedented 30%, turning Egypt into worst performer in the emerging markets on the inflation front.
Inflation now in Egypt is explosive and can lead to major social unrest. So much so that even the disruptive IMF urged the government to control it. But el-Sisi’s administration is still focused on removing price support to central products like fuel and electricity, taking a major risk on the social front. But its policies are clearly contradictory. This week, the central bank upped its key interest rates by 200 basis points to 16.75%, arguing that the decision was necessary in light of “stronger economic growth and falling unemployment.” The reality is that there is absolutely no evidence of either. At the same time, el-Sissi promises the launch of a social package to help the needy, including public servants and low-income households, who represent a substantial share of the Egyptian population. Egyptian consumers have been facing a mind-numbing acceleration of prices, with inflation reaching 31.5% in April, according to official statistics. At this rate, Egyptian households will not be able to sustain spending during the June month of Ramadan and poverty will accelerate unless the government steps in. The problem is that despite an influx of foreign money, mostly speculative, Egypt does not have the extra resources to help its needy. At the end of March, Egypt’s total domestic and foreign debt reached EGP 3.676 trillion, equivalent to a massive US$203 billion. The country’s budget deficit is expected to exceed EGP 322 billion by the end of the current fiscal year, equivalent to almost $18 billion.
With these figures, the Egyptian authorities are facing the daunting task of balancing the need to keep social peace with the absolute need of getting the country out of its economic mess.