Is pressure for Egypt’s reform coming from the IMF or from oil prices?

Nicholas Mehling
3 Min Read

Gone are the days of 2008 when oil prices reached their peak of $147.27 a barrel. Now the world is adjusting to the “new normal” of oil prices ranging between $40-60 a barrel, according to a report released by the World Bank on Friday.

Supply disruptions due to wildfires in Canada and Islamic State sabotage of Nigerian oil wells have led to a moderate rise in oil prices to $50 a barrel since January 2016 when oil prices hit a decade low of $26.55. However, despite minor disruptions over supply, there is increased production from Iraq, Iran, Russia, and Saudi Arabia, which are producing at their highest levels since the beginning of the year.

According to the World Bank, the drop in oil prices is potentially changing the “social contract” of the Middle East and North Africa where oil wealth has been used to provide subsidies, public sector jobs, free health care, and education, in return for limited accountability.

The report states that governments have begun to embark on reform agendas that drastically challenge previous power relations. Recently, due to a lack of reserves and state income, Egypt has done what would have been unthinkable under former president Hosni Mubarak, such as cutting subsidies to electricity and water, liberalising domestic fuel and gas prices, implementing new taxes like value-added tax, and considering measures to reform public sector employment like the Civil Service Law.

In Timothy Mitchell’s book Carbon Democracy, Mitchell draws parallels between uprisings during the Arab Spring and countries that produce oil but derive their revenue from other sources. Declining oil revenue made governments impose new taxes, leading to a decline in standards of living and demands for new political organisations.

Egypt’s top income sources have all declined since the drop in oil prices. Suez Canal funds are down 7% despite the expansion; remittances revenue is down 12%; oil revenue is down 42%, and tourism has been haemorrhaging EGP 2.2bn a month representing its largest loss in 20 years. Foreign direct investment (FDI) is also likely to remain depressed as most of the FDI coming to Egypt is invested in the energy sector. Egypt will also feel the burn of lower tourism and less aid from Gulf countries, which have experience the brunt of lowered oil prices, slashing welfare, and new taxes.

After the Arab Spring, oil importers like Egypt and Tunisia increased subsidies and civil service wages when oil prices were still high and state budgets could afford to increase spending. Egypt was additionally boosted by remittances and aid from oil exporting countries. However, according to the report by the World Bank, this post-Arab Spring panacea is no longer sustainable.

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