Shortages in Egypt Push the Economy to the Brink of Collapse
Diesel supplies are drying up as a cash-strapped government struggles to cap a mounting bill for subsidies it has promised the IMF it will reform to secure an elusive $4.8 billion loan desperately needed to keep a sagging economy afloat.
The situation appears near breakdown with growing shortages, unsustainable subsidies and foreign exchange reserves running out, raising the risk that fuel bottlenecks lead to food shortages and pose a risk to political stability.
Foreign reserves are down below $15 billion, less than three months' imports, despite deposits from Qatar and Turkey. The Egyptian pound has lost 8 percent of its value this year and a black market has emerged for hard currency.
The nation's strategic reserve of diesel fuel is down to three days' supply, the official MENA news agency quoted a government official as saying last week. Bakeries that use diesel to make staple subsidized bread have been told to keep 10 days' fuel supply but not all have the capacity.
The Muslim Brotherhood-led government of President Mohamed Mursi this week postponed for up to three months a rationing system for subsidized fuel due to start in April in what looks like an attempt to avoid upsetting voters before parliamentary elections due that month.
But reforms cannot be delayed for long, economists say.
"Fuel shortages are a symptom of the strains on Egypt's unsustainable subsidy system," said Simon Kitchen, an economist at EFG-Hermes in Cairo.
All of this can't be blamed on the Brotherhood. But they have done precious little to stem the flow of funds out of the country, and many of the measures they have taken, have hurt rather than helped:
Two government measures have aggravated the problem.
In December, the subsidy on 95-octane petrol used by the wealthiest Egyptians was scrapped. That drove some motorists down-market to buy lower-grade fuel, raising the demand for subsidized 92-octane gasoline.
Then in a drive to curb theft, smuggling and other abuses, the government restricted distribution of heavily subsidized low-grade gas oil used by trucks, tractors and buses to filling stations owned and operated by the military.
That caused longer lines at the pumps and increasing economic disruption. At several filling stations, queues led to fights breaking out this week, Egyptian media reported.
Only through the good graces of a few Arab states, including Qatar and Turkey have the Egyptians avoided calamity. That $4 billion IMF loan, which is hanging by a thread because of President Morsi's inability to reform the massive subsidies for basics the government gives Egypt's poor, would only be a drop in the bucket of what Egypt needs. It would buy the government a little time to generate some growth, which might relieve some pressure by creating some jobs.
But long term, as Spengler has pointed out, the outlook is dismal. Egypt's number one source of hard currency -- tourism -- has dropped off substantially and as long as the Muslim Brotherhood is in power, it is not likely to recover.
Eventually, the whole rickety house of cards is likely to collapse and chaos ensue. This does not bode well for civilian government in Egypt as the army has repeatedly warned that they would not sit idly by while society disintegrated.
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