With another meeting earlier this week in Cairo, the Egyptian government continues its tortuous negotiations with the IMF about a $4.8 billion loan. The loan discussions have been ongoing for nearly two years, since soon after the fall of President Mubarak in February 2011. During that time, Egypt's foreign currency reserves have declined from roughly $36 billion to only $13 billion today, and the country faces an increasingly severe balance of payments crisis. It is literally running out of hard cash -- a dire problem since it imports much of its food and fuel. Egypt currently has less than 90 days of supply in its strategic wheat stock, an unnervingly small safety net for the world's largest wheat importer.
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Despite a growing sense of urgency, the Egyptian government has not been able, or willing, to close a deal with the IMF. In fact, in the most recent round of talks, the government back-pedaled away from the set of economic reforms it put on the table last November, and now proposes more gradual steps to combat its fiscal deficit. Among the major sticking points with the IMF is Egypt's costly and unsustainable regime of subsidies, which currently consumes close to a third of the government's budget.
While it is widely recognized that food and fuel subsidies are expensive and inefficient, Egyptian leaders do not want to touch the political third rail of subsidy reform. Who can blame them? Seared into the memory of just about every Egyptian politician is the winter of 1977, when bread riots nearly toppled the government of Anwar Sadat. At the behest of the IMF, Sadat tried to roll back state subsidies on food staples and cooking fuel. It took the army -- and the re-imposition of the subsidies -- to restore order, but not before scores had died and hundreds of buildings had been sacked.
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With an already tenuous situation on the streets of Cairo, Port Said, and other major cities, the Egyptian government is hardly looking to stir up more trouble for itself by rolling back the popular food and fuel subsidies that most Egyptians have taken for granted their whole lives. But Egyptian leaders also realize that without subsidy reform, the country's fiscal situation is untenable. Sooner or later, serious subsidy reform is inevitable. However, the Morsy government, like the military-led government before it, continues to kick the can down the road. Word has it that it's waiting until a new parliament is elected before tackling the subsidy behemoth.
Inconveniently, the date of the parliamentary election keeps getting postponed, and without some large cash infusion -- which doesn't appear forthcoming from either the IMF or Qatar, which has already given billions -- Egypt's coffers will run dry in just a few months.
Egypt is certainly not alone in its addiction to subsidies. Many rich and poor countries are likewise guilty of adopting subsidies that rarely meet their intended purpose but soon become politically entrenched. OECD countries spend more than $250 billion a year subsidizing agriculture, yet most of that goes to big agribusinesses rather than the revered family farmer. The International Energy Agency estimates that global energy subsidies amount to more than $500 billion. As in Egypt, the benefit of most energy subsidies is skewed not to the poor, but to businesses and middle class car owners, encouraging inefficiency and environmental issues. It is no surprise that Saudi Arabia, which spends some $43 billion per year to keep domestic fuel prices low, is the world's largest per capita consumer of oil. The steep rise of domestic consumption in the Kingdom due to subsidies has some analysts predicting that Saudi Arabia could become a net importer of oil by 2030.
In practice, subsidies create more problems than they solve by distorting the market in myriad ways, from encouraging wasteful consumption and corruption to depressing local production. In Egypt, decades of subsidized bread and other foodstuffs have discouraged domestic investment in the agricultural sector, resulting in lower local production. Corruption in the system is also rampant, with a thriving domestic black market and widespread smuggling of subsidized gasoline out of the country for resale at higher prices.
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