Dealing with energy shortages, subsidies and a weak currency: Al-Sisi versus Sabahy

By Mohamed Ayyad

Daily News Egypt interviewed officials working on the economic files for the campaigns of presidential candidates Hamdeen Sabahy and Abdel Fattah Al-Sisi on Saturday, two days before the elections, to explore their visions on how to solve the crises in energy, subsidies and foreign currency reserves.

The officials are Hani Sarieddin, working on economic policy for Al-Sisi’s campaign, and Abdel-Khalek Farouk, working on economic policy for the Sabahy’s campaign.
The country is suffering from a severe energy crisis, with a low oil production versus increasing consumption rates and slowing output of foreign companies, who are owed $5.9bn. This has led to power outages and a shortage of supplies for factories. How do you plan to deal with the energy crisis?
Hani Sarieddin:  There is a serious lack of energy supplies. Al-Sisi plans to hold meetings with representatives of foreign companies working on oil excavation in Egypt to consider the problems they are facing and reassure the scheduled repayment of their dues, in return proposing increased production in addition to rationalised consumption by citizens and government bodies. Energy production quotas will be used to ensure local production.

The energy crisis has accumulated as a result of years of neglect, but consultations are now being held with foreign and local entities on investment partnerships to establish power plants for solar and wind energy. Long-term solutions need to be implemented in order to ensure the needs of future generations and hedge against population growth, what will require more energy.

Abdel-Khalek Farouk: We suffer from chaotic management on the energy file. We will work to organise it according to a plan that will include restructuring the administration of petroleum companies. It will also work on the liquidation of unproductive phantom companies established by former Minister of Petroleum Sameh Fahmi for the sons of government officials. There needs to be a comprehensive review of all contracts with foreign partners, especially as there are contracts wasting public money. We also need to speed up tenders for oil exploration in the Mediterranean and elsewhere to increase production while reconsidering the pricing for the shares of foreign partners.

The subsidy system still suffers from distortions supporting the wealthy at the expense of the poor. Allocations eat up a fifth of public expenditure in the state budget, exceeding EGP 205bn, with high energy consumption industries benefiting from the support. What is your plan to reform this without hurting the poor and avoiding a rise in prices?
Sarieddin: As General Al-Sisi noted, the rich currently benefit the most from subsidies, and this is impermissible. We will be working to reform the subsidy system, but gradually. This will begin with the activation of smart cards so that subsidies are not funding 2000cc cars. This will come in conjunction with the gradual change in prices for some of the petroleum derivatives, so that the poor don’t pay the price for inflation. If elected, Al-Sisi will work with the government to take oversight measures to ensure that factories do not pass on price increases in gas to the consumer. Adjustments in gas prices for steel mills and cement factories are also probable, as they currently obtain energy at $4 BTU. Cement factories have begun to use coal, which will help create savings in the government’s gas supply.

Farouk: Sabahy aims to root out endemic corruption in the state. The distortion of subsidies generates much of this corruption. The subsidy system for goods will be reviewed and restructured along with petroleum derivatives, which have been tainted by approximately EGP 55bn in corruption. Natural gas and petroleum subsidies will also be restructured and bread distribution will be reviewed, as a great deal of profiteering has taken place, leading to losses of at least EGP 8bn annually. Sabahy’s economy program will work to save EGP 175bn of the state’s budget during the first year of his term. This will be done by rationalisation of government expenditures and new fiscal and tax policies, in addition to a number of other areas that will save the government money. However, subsidies for high energy consumption industries need to be lifted, as they sell their products at international prices while receiving government support.

Egyptian currency is suffering from significant weakness due to falling dollar revenues of the country as a result of the exit of tourists and foreign investors. How will you strike a balance between strengthening the state’s currency for imports and allowing it to weaken in order to increase competitiveness in exports?

Sarieddin: The weakness of the pound against the dollar is due to the weak economic situation we are dealing with. We are working to resuscitate the economy through economic stimuli and pumping large amounts of money into the system in order to attain real improvement, and increase the calm and stability that citizens can actually feel. The Central Bank of Egypt must commit to inflation targeting as its primary objective and follow a flexible exchange rate policy, which will help contain inflationary pressures and maintain competitiveness of exports. Al-Sisi’s program seeks to raise GDP growth to 7% and decrease the unemployment to 8% by 2017-2018. This will be accompanied by steps to improve the business environment through measures such as issuing a unified law for investment as well as land use and reconsidering how utility fees are estimated.

Farouk: The Egyptian pound is under pressure because of the decrease of the country’s hard currency reserves due to the exit of tourists and foreign investors. It has now reached its lowest level ever on the official market, at EGP 7.1249 [per dollar]. We are thus working to strengthen the economic situation, reform the investment climate and restore security in order to bring back tourists and foreign investors, the main sources of foreign currency. During the last period officials overshot monetary policy in supporting the pound. This led to 60% of foreign reserves being drained, which puts the country at risk of not securing its imports of petroleum and food from abroad. That said, I am against leaving the currency to the forces of supply and demand, because this may allow it to collapse. We will thus work to strike a balance between strengthening the currency and increasing the competitiveness of our exports by strengthening our overall economic situation.

A rise in prices slammed the markets because of a lack of government oversight and a lack of alternatives provided by consumer cooperatives. These price rises greatly affected Egyptians, most of who suffer from wages so low they can scarcely secure their basic needs.  In light of this, what is your plan to control prices and raise incomes?
Sarieddin: Al-Sisi hinted at the fact that he may utilise the military establishment to create parallel markets to secure the basic needs of citizens at affordable prices if the current prices in the market do not go down. Prices are currently inflated and not reflect the cost of production. We are going to work to restructure the public sector without privatising its companies, but instead focusing on reforming them to allow them to compete with the private sector. We will develop the consumer cooperatives to meet the needs of citizens at respectable prices. And the government will tighten its control over markets to combat the greed of merchants. We will also be working to create 200,000 job opportunities. In addition to this, we will also remove obstacles to investment, especially for local projects. We know very well that real income – the purchasing power of wages earned for goods and services – is low, but the reason for this is high prices. We are thus going to work immediately on controlling prices as a means to increase purchasing power of citizens. This will be followed by an increase in wage rates, but only after the improvement of the economy. Minimum and maximum wages will be adjusted. Minimum wages currently are set at a level below what is needed to achieve basic societal needs.

Farouk: The withdrawal of the state from the economic landscape, even in a monitoring capacity, is what allowed a mad spike in prices. It is time for the public sector to return to serving the needs of citizens to control distorted prices in markets and to pay its taxes. We will work on redistributing the roles played by the public and private sectors as well as their cooperation. Sabahy’s program seeks to address the deficit but without adding new burdens on citizens. The program favours the poor; applying a minimum wage is not a thorny issue as some have contended, because the necessary budget for it can be found by imposing progressive taxation, especially on high-income earners.