Research and analysis

Egypt: monthly economic report - April 2014

Published 6 May 2014

0.1 Summary

Two candidates will be running in Egypt’s upcoming presidential elections in May. The government takes some steps to reform the bread and energy subsidy systems – introducing smart cards for subsidised bread and raising the prices of natural gas and electricity. Egypt passes a law that prevents third parties from challenging contracts between the government and an investor. Annual inflation remains unchanged in March at 9.8% with the bulk of the monthly increase driven by food prices. The Egyptian pound weakens on both the official and black markets. The Saudi Cabinet approves a project to link its power grid with Egypt to allow power trading.

0.2 Detail

Two candidates will be running in Egypt’s upcoming presidential election, which is scheduled to take place on 26-27 May. Nominations closed on 20 April leaving former Defence Minister Field Marshal Abdel Fattah Al-Sisi and leftist politician Hamdeen Sabahi as candidates. Platforms and economic plans have not yet been announced but there is a general sense among the business community that the official policy tide is flowing strongly towards the revival of the state sector of the economy, to the disadvantage of the private sector as the playing field becomes increasingly skewed.

0.3 Reforming Subsidies: Bread and Flour

The government has taken some steps to reform the bread and energy subsidy systems ahead of the presidential elections. A pilot scheme was launched earlier this month to introduce a smart card system for subsidised bread, which costs about LE22 billion (£2bn) a year. Rather than subsidising the flour, the government will sell the flour to the bakeries at market prices and pay them for the bread they produce. People will be allocated 150 bread loaves per person per month at the subsidised price of LE0.05 (less than 0.5p) to be distributed on ration cards. Those who do not need their full bread quota may choose to replace the unused allocation with other subsidised products. Profiteers had exploited the system by selling the subsidised flour on the black market and feeding bread to livestock because it is cheaper than animal feed. The government is also using UAE funding to build grain silos in order to reduce waste.

0.4 Energy

The government has started restructuring energy subsidies by increasing natural gas prices for homes with effect 1 May and announcing that other measures will be introduced in July, including raising electricity prices for large consumers and launching the new smart cards for fuel. The Petroleum Minister, however, denied rumours that petrol and diesel prices will be increased at this stage. On 20 April, the government raised the price of piped gas for residential and commercial users to LE0.40 per cubic metre for users of less than 25 cubic metres per month (from LE0.10 per cubic metre). Those consuming 25 to 50 cubic metres per month will pay LE1 per cubic metre (from LE0.5), while those consuming over 50 cubic metres will pay LE1.5 (from LE0.5).

The government says the price increase will not impact the poor as the majority use butane gas. About 70% of households use less than 25 cubic metres a month. The government expects the price increase to save LE800 million to LE1 billion (£73-91m), which they hope to use to finance the extension of the natural gas grid to new homes.

The price hike does not apply to the electricity generation sector, which is the largest consumer of gas in Egypt. The government had raised the price of bottled gas (butane gas) last year from LE2.5 to LE8 per cylinder (compared to an actual cost of over LE55) but piped gas remained unchanged. Energy subsidies are expected to cost more than LE130 billion (£12bn) this year, around 7% of GDP.

0.5 Contract Law

Egypt has passed a law that prevents third parties from challenging contracts between the government and an investor. However, the Public Prosecutor has the right to challenge a contract if there is evidence of misuse of public funds. Since the revolution, Egypt has seen a raft of lawsuits filed by lawyers and activists challenging contracts that were signed under the Mubarak administration. The courts have issued at least 11 rulings annulling privatisations and contracts since 2011. The government had set up a ministerial dispute resolution committee in an attempt to reach out of court settlements with investors but a number of foreign investors have resorted to international arbitration with total claims estimated by the Head of the State Litigation Authority at LE100 billion (£9bn). The new law will apply on cases that have been filed but will not apply on cases where a final ruling has already been issued.

0.6 Inflation

Egypt’s annual urban consumer price inflation stood at 9.8% in March, unchanged from February. On a monthly basis, inflation increased by 0.7% in March from 1% in February. The bulk of the monthly increase in prices was driven by food prices and higher prices of fruits and vegetables. Food inflation stood at 15.6% y/y in March and 1.4% m/m. Currency

The Egyptian pound has weakened on both the official and black market, hitting a seven-month low. The central bank sold dollars at a cut off price of 6.9853 to the dollar at yesterday’s foreign exchange auction. Banks are allowed to trade dollars at rates determined by ranges set by the regular dollar sales. The bank rate now hovers around LE7.02/$1. On the black market, the dollar trades at around LE7.50.

0.7 Egypt-Saudi Arabia Electricity Link

The Saudi Cabinet has approved the Egypt-Saudi Arabia power link project, which will allow power trading between the two countries during peak hours. Last year, Egypt and Saudi Arabia signed a $1.6 billion agreement to link their electricity grids. Egypt and Saudi Arabia will share the cost of the 3000 MW undersea transmission cable. The project will be operational in 2016. The Arab Fund for Economic and Social Development, the African Development Bank, and others have agreed to contribute to the project.

0.8 Disclaimer

The purpose of the FCO Country Update(s) for Business (”the Report”) prepared by UK Trade & Investment (UKTI) is to provide information and related comment to help recipients form their own judgments about making business decisions as to whether to invest or operate in a particular country. The Report’s contents were believed (at the time that the Report was prepared) to be reliable, but no representations or warranties, express or implied, are made or given by UKTI or its parent Departments (the Foreign and Commonwealth Office (FCO) and the Department for Business, Innovation and Skills (BIS)) as to the accuracy of the Report, its completeness or its suitability for any purpose. In particular, none of the Report’s contents should be construed as advice or solicitation to purchase or sell securities, commodities or any other form of financial instrument. No liability is accepted by UKTI, the FCO or BIS for any loss or damage (whether consequential or otherwise) which may arise out of or in connection with the Report.