Rising prices diminish prospects of economic revival in Egypt

Egypt’s efforts to relieve a crippling dollar shortage are pushing it towards a sickly combination of rising prices and lower growth, undermining hopes for economic revival after years of political upheaval.

Prices have soared since Egypt devalued its currency by 13 percent in mid-March to end speculation against the pound and ease a dollar shortage that has disrupted trade in a country that relies on imports of everything from food to fuel.

But the black market for dollars has since rebounded, putting Egypt back at square one: under pressure to devalue and spark a new round of price rises just as economic growth slows.

Affordable food is an explosive political issue in Egypt, where tens of millions live a paycheck from hunger and economic discontent has helped unseat two presidents in five years.

Living in a slum built on an abandoned refuse dump in Cairo, Mahmoud Abdallah describes the daily battle to make his family’s income stretch beyond beans and potatoes as core inflation hit a seven-year high above 12 percent in May.

“Fruit? What fruit?” the father of six asks with a bitter laugh. “It’s enough for us to look at fruit in the street.”

Importers say devaluation has made shipments more costly, while the hard currency shortage forces some to pay a premium on the black market where one dollar sells for about 11 pounds. The official rate is 8.8, but banks cannot meet demand.

In an effort to cut imports it blames for excessive dollar demand, Egypt increased customs duties this year. The idea is to nudge consumers toward locally-made substitutes, boosting Egyptian firms and encouraging exports.

But exports fell 13.9 percent in the first half of 2015-16, with manufacturers saying the dollar shortage made it harder to import raw materials. The devaluation means they pay more for those inputs too, so local produce is also more expensive.

“They want to make it more difficult to import things but they are also effectively risking engineering a recession,” said Timothy Kaldas, non-resident fellow at the Tahrir Institute for Middle East Policy. “I don’t envy anyone having to deal with this situation because there are no good solutions.”

Abdallah has struggled to find regular work since the 2011 revolt that ended Hosni Mubarak’s 30-year rule and was propelled, in part, by anger over economic policies that appeared to benefit the rich and leave everyone else behind.

“The situation is below zero… Every time prices rise, we fall, others fall… the poor are lost,” he told Reuters.

Calling in the army

The dangers are not lost on President Abdel Fattah al-Sisi, who promised to revive the economy after taking power in 2013 and has called in the army to help keep a lid on prices.

Over the past year, army vans have begun roaming the country selling cheap groceries and military outlets have popped up.

“Air Defence Outlet. No to Higher Prices. No to Greedy Merchants,” reads a sign above one such store in Cairo.

Through its barred window, customers call out their orders.

The colonel who manages the shop says the goods are made by military companies primarily to feed troops, but are being sold to consumers to combat price rises he blamed on merchants.

But business people say they cannot offer the same prices as the military, which is exempt from tax and uses conscripts as free labor in its factories and farms.

By offering subsidized goods they cannot compete with, economists say the state is undermining the private sector and increasing reliance on subsidies the state cannot afford and should be scaling back.

“Look at the rise in the price of oil, butter and vegetables and you’ll know why we raised prices,” said Mohamed Abdel Rahman, a bakery owner.

Competing for customers

At a wagon selling cheap cuts of meat at an open food market in Cairo, a woman buys a bag of cow intestines. Another asks the price of a shin and walks away on hearing the answer.

At another stall, women pick through a pile of rotten tomatoes selling at a discount. A fresher batch, at twice the price, sits untouched.

The month of Ramadan, when Muslims fast from dawn to dusk, is normally busy for food-sellers as families gather for the evening meal. This year, it is more subdued.

“We used to wait for this season,” said a butcher, who declined to give his name. “This was the season when people bought quantities and varieties. Now they just look and leave.”

As people cut back on spending, the slowdown could gather pace, say economists, spelling trouble for a government that needs faster growth to create jobs for a growing population.

Growth slowed to 4.5 percent in the first half of 2015-16 from 5.5 percent a year earlier, robust by Western standards but too slow, say experts, for a population that expanded by 1 million, to 91 million, in the last six months.

Yet rising inflation forced Egypt to hike interest rates by 1 percentage point last week to their highest levels in years.

That makes borrowing, and expansion, more expensive for private sector firms in a country where banks already prefer to invest in high-yield, low-risk government debt.

A plan to introduce Value Added Tax is in the works but has been delayed as policymakers fret over the political repercussions of another round of inflation.

The past two years have already seen the government slash electricity and petrol subsidies, though further cuts were delayed due to declining oil prices. In recent weeks, Egypt has raised price caps on the cheapest generic medicines.

The prospect of more price rises is a nightmare even for middle class Egyptians like civil servant Shadia Abdallah, whose husband is retired and two grown-up sons live at home.

“Our income is fixed but prices are rising,” she says.

source: Reuters