Will Ethiopia’s Proposed Dam Crush Egypt's Economy?

As Ethiopia’s planned Grand Renaissance Dam reduces Egypt’s share of Nile waters, repercussions will inevitably hit Egypt's cash-strapped economy.

Rational use of water reserves at Nasser Lake, estimated at 70 billion cubic meters, may help ease the situation for a while. The government may also have groundwater resources that may add four billion cubic meters. But according to government estimates, Egypt will need an extra 32 billion cubic meters of water  by 2050 as its population grows.

Egypt gets more than 95 percent of its water from the Nile, and already suffers from water scarcity -- supplies have fallen to 750 cubic meters per capita a year. (The international average is 1,000.) Egypt’s current share of Nile water totals 55.5 billion cubic meters -- experts say the share may be halved over the coming three years until a lake is created in front of the Ethiopian dam, and supplies may fall below 400 cubic meters per capita in the interim period.

The most populous Arab country with 90 million inhabitants, Egypt has 8 million cultivated acres of land. Roughly 6.5 million people work in agriculture, accounting for 25 percent of the country’s labor force. Any shrinking of the agricultural sector will ultimately affect labor. Unemployment in Egypt is currently reported at 13 percent, but unofficial reports put the actual rate over 20 percent.

Egypt consumes around 18 million tons of wheat and 4 million tons of rice annually, according to the Supply Ministry. It imports roughly 10 million tons of grain a year to meet growing demand. As the country’s population grows by 1.2 million annually, the water-supply gap may jump to 20 million tons as local grain harvest declines. Total cultivated land may plummet by half due to falling water resources.

Urbanization in the Nile Delta and scarcity of water will reduce the country’s crop output. Consequently, the country’s bill of food imports will be on the rise. Egypt is expected to consume more than 19 million tons of wheat in the fiscal year 2012-2013 that ends on June 30, according to the U.S. Department of Agriculture (USDA). The gap between grain imports and exports may widen in the future.

Most of the wheat imports are allocated for subsidized bread, which is expected to total around $2.3 billion of the country's budget in the fiscal year 2012-2013 according to the Finance Ministry. More than 40 percent of Egypt’s population lives on less than $2 a day, according to the World Bank. With a deteriorating macroeconomic outlook, future governments would not be able to sustain subsidy schemes.

Decreasing subsidies has been forbidden territory for over 50 years, since the socialist era of the late president Gamal Abdel Nasser. In 1977, Egyptians took to the streets when President Anwar al-Sadat wanted to liberalize the economy by lifting food subsidies. Sadat had to shelve his plan in the wake of a popular revolt that could have toppled him. The question now: how would the Muslim Brotherhood deal with a similar situation?

The country’s bill of agri-food imports tops $10 billion annually. If local crop output takes a dive, the bill will be higher. As the Egyptian pound falls versus the U.S. dollar, the gap in the country’s balance of trade will widen. A deficit in the balance of payments will rise and the budget deficit will rise, deepening the country’s economic crisis.

Egypt’s economy has been bleeding over the past two years, with the state budget forecast to incur a deficit exceeding 200 billion Egyptian pounds for the fiscal year 2012-2013. Cairo-based EFG-Hermes expects the country’s balance of trade to post a deficit totaling $33 billion in 2013.

The growing population will add insult to injury. By 2017, Egypt’s water needs are expected to reach 86 billion cubic meters per year. The population of Egypt will hit 105 million by 2025, according to a UN report. Ethiopia’s population is expected to reach 113 million by 2025. In the past, Egypt did not object to dams like Khashm el-Girba and Gabal al-Awliya in Sudan and Owen Dam on Lake Victoria, but Egyptians say Ethiopia’s Renaissance Dam has been planned without “any consultations,” either politically or technically.

Top Egyptian political figures have been heard inciting President Mohammed Morsi to bombard the site of the dam; Morsi’s advisers have said “all options" are open. In 1979, Sadat similarly threatened Ethiopia: “The only matter that will take Egypt to war is water.” His remark was a reaction to Ethiopia’s former ruler Mengistu Haile Mariam, who had threatened to reduce the Blue Nile’s flow if Egypt transferred water to the Sinai.

Ahead of massive rallies scheduled June 30 to oust Morsi, the Muslim Brotherhood seems to care little about the dam issue, instead focusing on cementing its grip of the nation’s top institutions.