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Egypt To Cut Subsidies, Ease Deficit

Yael Rein

On July 6th, Egyptian President Abdel Fattah al-Sisi announced that he would support a proposal to cut fuel subsidies and raise taxes on cigarettes and alcohol. He hopes the move will help balance the government’s budget deficit and reduce government debt, estimated to be 92 percent of GDP. Partly as a result of recent political turmoil, the Egyptian economy is suffering its worst financial crisis since the 1930s.

Al-Sisi’s decision sparked protests by taxi and microbus drivers, disrupting a form of transportation used by many working class Egyptians. The drivers parked their cars to block major roadways in Cairo and charged customers higher flat rates fares.

An Egyptian woman walks past a currency exchange in Cairo. (Photo: AFP)

Since President Hosni Mubarak’s overthrow in 2011, the Egyptian economy has fallen dramatically, prompting the international community to offer assistance. The International Monetary Fund (IMF) has been negotiating a $4.8 billion loan with the government, reorienting budget funds towards infrastructure, education, and health. As a precondition for the loan, the fund required a reduction in government subsidies, especially on food and fuel, which compose one-third of the nation’s budget. Cairo previously opposed the move, as it was also unpopular on the streets.

The Egyptian economy faced some structural challenges before Mubarak was toppled in 2011. Stable inflows of foreign investments and growing reserves helped limit the rise in the country’s poverty level. However, after the revolution, the government’s foreign-currency reserves dropped by 60 percent, foreign direct investment dried up, and tourism revenues have drastically fallen. These conditions led to rising unemployment and shortages of fuel and cooking gas. Now, nearly 50 percent of the Egyptian population lives on the brink of poverty and rely on government subsidies.

While Egypt has had difficulties negotiating with the IMF, other Arab countries, primarily the oil rich Gulf States, have provided aid. The United Arab Emirates, Saudi Arabia, and Kuwait have pledged to loan over $12 billion since last year. Similarly, the U.A.E. set up an office in Cairo to supervise projects, such as the establishment of clinics, schools, and housing projects.