After negotiating a $12 billion dollar loan with the International Monetary Fund (IMF), Egyptian President Abdel Fattah al-Sisi declared that he will not hesitate to muscle through tough reforms of which the loan is predicated.
On Thursday a spokesperson for the IMF announced the organization was willing to disperse the three-year facility given the Egyptian government implements an number of reforms that will open the embattled nation to international trade and foreign investment.
Some of the reforms upon which the loan is contingent include cutting government subsidies on a number of commodities, introducing a value added tax (VAT), and making Egypt’s exchange rate on currency more flexible, which speculators predict will also entail a steep devaluing of the Egyptian pound.
Past regimes have been hesitant to enact these kinds of reforms, particularly subsidy cuts, given the historical riots that previously resulted from such reforms.
Speaking at a factory in Alexandria, according to Reuters, Sisi mentioned a failed attempt at austerity measures in the late 1970s passed by President Anwar al-Sadat, cutting bread subsidies. This measure resulted in a mass riot, making successive regimes hesitant to try such reforms again.
“The first effort at reform came in 1977, and when it was not accepted by the citizens, all the governments hesitated to make reform efforts, afraid of the reactions,” said Sisi. “All the difficult decisions that many hesitated to take over many years, that they were afraid to take, I will not hesitate to take for one second.”
Without specifying which subsidies would be cut under the new reforms, Sisi assured his audience that he would make more announcements via press conferences as planned cuts are proposed or implemented. The current plan for fiscal year 2016-2017 is to cut subsidies by 14 percent.
The reforms also aim to reduce the country’s national debt, which Sisi blames in part on wage inflation in the public sector. According to Sisi, public sector salaries rose from an $80 billion annual total to $228 billion since the 2011 revolution overthrowing President Hosni Mubarak, who ruled the country with an iron fist for three decades.
Along with slashing these salaries, Sisi has suggested eliminating certain public sector jobs he claims are unnecessary, pointing out in his speech that 900,000 new employees had been added to the public sector since the Arab Spring.
Sisi also hinted at raising the price of Cairo’s metro, according to Ahram Online, claiming that the government was spending more on the service than it was getting back from rider fees, which he says have not been raised in 12 years.
It currently costs one pound for a one-way ticket on the metro, but costs the government an estimated 10 pounds, according to Sisi.
A lack of foreign investment and tourism in the country, which Sisi blamed on terrorism and government instability, has led to a dollar shortage in the foreign reserves. Plans to open Egypt up to increased foreign investment are two-fold. First, the central bank must alter exchange rate policy to allow more flexibility in the Egyptian pound. Second, it must devalue the Egyptian pound to reduce inflation and theoretically encourage foreign investment and boost exports.
“Moving to a flexible exchange rate regime will strengthen competitiveness, support exports and tourism and attract foreign direct investment,”said Chris Jarvis, spokesman for the IMF Egypt delegation in an interview with Bloomberg. “This would foster growth and jobs and reduce financing needs.”
The central bank immediately began to devalue its currency back in March after news that the Sisi administration was preparing to strike a deal for a loan with the IMF, but it has still not altered exchange rate policy.
Edward Coughlan of BMI Research predicts the Egyptian pound to drop all the way down to anywhere between 20 and 30 percent lower than it’s current rate by the end of 2018.
“The Egyptian pound is on a one-way trajectory – significant depreciation will occur in the next two years,” said Coughlan.
Sisi also addressed the poor, who will likely be affected significantly by all these reforms if they are successfully implemented, claiming that he would also impose programs protecting them from the impact, but gave no specifics.
[Photo by Seth Wenig/AP Images]