CAIRO — Egypt's struggling economy stands at the brink of bankruptcy. Revenue from virtually all of its sources of foreign exchange are falling and will be off by more than $1 billion in the coming year, Western economists here say.
Egypt has been hard hit by the continuing slide in oil prices, by a dramatic decline in revenue from tourism and money sent back by workers in the Persian Gulf states, and by a recession that is causing a banking crisis as private-sector debtors default on loans.
At the same time, payments on international loans incurred a decade ago are coming due. Egypt's foreign debt is estimated at about $36 billion, more than a quarter of it owed to the United States. Servicing this debt will cost Egypt $3.5 billion this year, substantially more than it receives in foreign aid.
The crunch is expected to come later this year when Egypt's available sources of foreign exchange will, by most experts' reckoning, not be enough to meet commitments. Central Bank reserves currently total $1 billion, enough to cover only six weeks of essential imports.
Predictions about the foreign exchange shortfall that Egypt faces this year range from a conservative $1.5 billion to as much as $5 billion, if oil prices remain depressed.
"Technically," a Western banker observed, "this place is already bankrupt."
The government of President Hosni Mubarak has been squirming over this economic dilemma for months. There is, for the first time, talk about seeking agreement with creditors on a formal rescheduling of the debt.
But the United States, which gives Cairo more than $2 billion a year in assistance, and the International Monetary Fund and other foreign lenders are reluctant to pump more money into Egypt until it agrees to begin reforming what virtually everyone sees as major structural flaws in its economy.
Foremost among these is a massive and complex system of state subsidies--direct commodity supports and indirect payment of some fuel costs for state industries and consumers--that costs the government about $7 billion a year.
Nearly all Egyptians--97% according to U.S. Embassy estimates--have ration cards entitling them to buy essential commodities such as rice, sugar and cooking oil at heavily subsidized prices.
A net food exporter 15 years ago, Egypt must now import more than half of its food to support a population that has doubled in 30 years to 50 million, and is still growing at the rate of 1 million people every nine months. Food imports cost Egypt $8 million a day, yet the subsidy system has resulted in price distortions that make bread so cheap that much of it is thrown away or fed to animals in place of more expensive fodder.
The subsidy system, poorly administered and subject to much abuse, has grown so large that it appears to be on the verge of collapsing under its own weight. Shortages are chronic and panic buying is common at the government cooperatives where subsidized foods are sold.
"Whenever I get sugar, the housewives come and buy it out in a day," the manager of one of the co-ops said. "Then they take most of it to the free market and sell it for several times more than they paid."
According to Ali Lutfi, an economist whom Mubarak appointed prime minister last September, the subsidy system benefits the rich more than the poor. Citing the example of bottled cooking gas, Lutfi told a business seminar recently that a poor family buys one bottle of gas a month while a rich family may buy as many as five. Since the government sells the gas for three Egyptian pounds ($2.20) less than it actually costs, "the poor family gets a three-pound subsidy while the rich family gets 15, five times as much," Lutfi said.
The government has already introduced a number of reforms. It has cut back drastically on public sector imports, recently raised customs duties on private-sector imports and is cautiously pushing up the prices of many subsidized commodities.
The cost of gasoline and electricity, for example, has gone up substantially in recent months. The one-penny loaf of bread, the staple of most Egyptian peasants and virtually all their livestock, has been replaced, gradually though unofficially, by better-quality two- and five-penny loaves.
The budget for the fiscal year that began July 1 anticipates added revenue of $365 million from higher customs and excise duties, a savings of $180 million from reduced subsidies and a 20% increase in tax revenue from more-efficient collection and a crackdown on tax evaders.
Still Not Enough
But most economists, Egyptian as well as foreign, agree that this is not enough.
"Their reform program falls short in a lot of ways," a Western economist said, adding that the IMF, which has withheld standby credits to Egypt pending the drafting of credible reforms, "is not impressed."