A rising tide lifts all boats in Egypt

Egypt has returned to regional leadership. The country played a vital role in brokering a ceasefire between Israel and Palestinians in Gaza, ending the week-long violence. It also recently reached a staff-level agreement with the IMF for the eagerly awaited 4.8 billion dollar deal. On the domestic front, President Mohamed Morsi has further immunized himself and the Constituent Assembly, together with the Shura Council, against all court actions. All this happened in less than a week.

I find the news about the IMF to be the most significant. Egypt can be an important regional actor only if it has a stronger economy. If its economy strengthens, it will stabilize not only itself, but the entire region. As a rising tide lifts all boats, a stable Egypt would also be a blessing for Turkey. Inversely, if Egypt’s economy deteriorates, we will find ourselves in a storm.

At TEPAV, we have lately been working on the complementarities between the Egyptian, Turkish, and European Union economies, looking for the prospects of economic cooperation. One major problem for the analysis is the unsustainable and non-targeted subsidy program. Non-targeted subsidy is waste. Additionally, when prices are not right, data is not reliable at all. Fortunately, fiscal reform is a key element of Egypt’s new economic program.

The annual cost of electricity and fuel subsidies to the national budget is around 15 billion dollars, a fifth of budget outlays. The deficit was around 7 percent of GDP in 2011. Needless to say, the situation is unsustainable. Why are non-targeted subsidies a waste? In a country where 20 percent of electricity goes on air conditioning, the electricity price cap becomes a subsidy for the rich foreign tourists in Sharm El Sheikh. That at least, is what I thought while shivering in a Cairo conference room a few months ago. Lowering the travel expenses of those who can afford it doesn’t help Egypt’s poor, which makes the subsidy a waste.

Now look at this on an international scale. Sometime in October, the government-owned Ahram Online ran a piece on the surge in Egyptian cement exports to Libya in 2012. This may sound good, until you consider that cement is a production line that consumes vast amounts of energy. You cannot make industrial performance comparisons with a highly subsidized energy prices in place. Egypt’s market should be pricing energy much higher than it is, which may make cement exports inefficient. This means that the cap on Egyptian energy prices might in effect be a subsidy to Libyan’s construction sector. I somehow doubt that any Egyptian politician would know how to explain that to the public.

Price reforms in Turkey started in the early 1980s. The formula is rather simple: design targeted programs for the poor while dismantling the non-targeted ones. Avoid waste.