Egypt Has Only Begun to Tackle Subsidy Problem, World Bank Says

Egypt has “a long way to go” with an overhaul of its economy before it can regain the confidence of foreign investors, the World Bank’s chief economist for the region said.

Steps by the government in July to reduce energy subsidies were “tremendous,” Shantayanan Devarajan said in an interview in Cairo yesterday. “But keep in mind that the gasoline price in Cairo today is one quarter of the world price.”

President Abdel-Fattah El-Sisi, a former army chief who was elected to the post a year after toppling his Islamist predecessor, has been struggling to revive an economy that has stagnated as the 2011 uprising was followed by years of often violent unrest. El-Sisi has already gone further with subsidy cuts than past Egyptian governments, which often debated such measures then shied away from taking them amid concern they would create public anger.

Egypt posted a budget deficit of 12.6 percent of economic output last fiscal year. About a quarter of spending typically goes on subsidies, much of it for energy. The recent drop in oil prices doesn’t lessen the need for change, according to Devarajan.

“If I’m an investor and I see the government spending a large percentage of GDP on fuel subsidies and I know that there’s a good chance that the fuel prices can go up, then all of a sudden this economy — even if there’s political stability — could be in deep trouble,” he said.

‘Political Connections’

Subsidy cuts should be accompanied by an expansion of the safety net for the poor, to ensure social justice and avoid instability, Devarajan said.

Investors and tourists have steered clear of Egypt amid unrest that worsened after the overthrow of Islamist President Mohamed Morsi last year, leaving the economy dependent on the largess of Gulf Arab benefactors. Saudi Arabia, the United Arab Emirates and Kuwait have provided billions of dollars in aid, helping plug the gap in the country’s foreign exchange reserves.

Egypt will hold an economic conference in March in an attempt to attract more funds. Investors who attend will be looking for signs of the government’s commitment to restoring economic stability, such as lower subsidies, Devarajan said.

Egypt must also increase competition in the private sector, where the dominance of a few large, politically connected firms is strangling opportunity for others, he said.

“You have people in political power, who have political connections, who were getting favorable treatment,” he said. “Let’s make sure that this doesn’t happen again.‘‘

Source: Bloomberg