Egypt risks unrest if poor not protected in slowdown

Reuters, Friday November 21 2008

By Alaa Shahine

CAIRO, Nov 20 (Reuters) - The world economic crisis could lead to a repeat of the unrest that broke out in Egypt earlier this year if the government fails to cushion millions of poor people from its impact.

A new bout of discontent is unlikely to threaten the survival of the government. But it could discourage investment, which has driven Egypt's economic boom of the last four years.

Analysts said the government should try to improve ways of getting food subsidies to the poor to reduce wasteful spending.

It should carefully increase public spending and cancel a new corporate tax which is unpopular with investors, they said.

Egypt, the Arab world's most populous nation with 82 million people, is not among the countries hardest hit by the crisis.

Expectations are that real gross domestic product growth will drop to 5.25 percent in the 2008/09 fiscal year, down from 7.2 percent in 2007/8, according to a Reuters poll. [LH651534]

Compared to industrial countries facing recession, that looks good, analysts said.
The problem is that even when the economy was growing between 6 and 7 percent over the last two years, high inflation and low wages provoked violent protests and labour strikes.

"In the absence of a clear social policy to protect the poor, Egypt remains threatened by more social protests," political analyst Amr El-Choubaki said.

FOOD, EDUCATION AND TAXES

The unrest culminated in April when thousands of workers in the industrial town of el-Mahallah el-Kubra clashed with police. At least two people were killed and more than 100 wounded.

The government responded by increasing public-sector salaries by 30 percent. It later raised fuel prices and imposed taxes on firms operating in free-zone areas as part of measures to finance the wage hike, exacerbating inflation.

"Everybody now knows that the tax increase for companies in free zones was a wrong decision," said Monette Doss, a senior analyst at Prime Holding, an Egyptian investment bank.

Lower global commodity prices and base effects are expected to cut inflation to an average of 9.1 percent in 2009 from 18 percent in 2008, the Economist Intelligence Unit said. With inflation receding, unemployment will be the main concern.

The government, which has not signalled an interest in reviewing tax policies, has announced an economic stimulus package worth 15 billion Egyptian pounds ($2.71 billion), one third of it directed at new water and sewage projects.

"These are the two most important things for the people. The spending will create jobs, and the subsidies will ensure that they have access to basic needs," said Mohamed Abu Basha, an economist at investment bank EFG-Hermes.

The state is projected to spend nearly 80 billion pounds this fiscal year on subsidies, more than it spends on health and education.

But the government has yet to find a better way to distribute food subsidies. Critics say the current system, which offers items such as bread and cooking oil at cheap prices, is flawed because the subsidies also go to the rich.

Nor has the government done any meaningful work to overhaul a poor education system that is ill-equipped to provide students with the necessary skills for the job market, analysts say.

Part of the problem with public education is that it remains free, which limits the state's ability to secure more funding for teachers' wages. Meanwhile, Egyptian households spend billions of pounds a year on private tuition.

"Fixing education should be the first move," Choubaki said.

The economy could also be harmed by the rise in piracy off the coast of east Africa. Shipping companies are choosing to avoid the Egptian-owned Suez Canal and send cargoes of oil and other goods around southern Africa.

Unrest could also make it difficult for the ruling elite to rally around Gamal Mubarak, the politician son of President Hosni Mubarak, as successor to his 80-year-old father, analysts said. He has denied any such ambitions so far.

While opposition groups remain too weak to pose a challenge to the government, the younger Mubarak could prove to be too controversial a candidate among pillars of the ruling elite such as the army.
(Editing by Angus MacSwan)

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