As 2007 closed with inflation edging into ever-higher territory, low- and middle-income Egyptians looked forward to the end of a year in which their pocketbooks had been seriously squeezed. The business community, on the other hand, hoped for another 12 months of the solid economic growth, spiralling equities prices and near-limitless foreign investment that helped fuel the very inflation that hobbled consumers.

Flash-forward to December 2008 and both sides are looking forward to the end of a year punctuated by bread riots and a stock-market massacre. Only consumers may get a break in the year ahead, even if it is only a temporary one: After spiking to record levels in 2008, inflation is finally cooling off. The problem is that the downward trend is coming only because the Egyptian and global economies are cooling.

For families at subsistence levels, 2008 was about survival. For anyone on a budget — government and business included — it has been one of revised expectations, particularly since the aftershocks of the catastrophic meltdown of global debt and equity markets began washing over Egypt this past fall.

Egypt and other developing economies have been able, and will likely continue, to weather the global economic downturn better than the United States, Europe, Japan and other developed nations, where the expectation of continued growth and big payoffs from risky mortgage-backed securities and overconfidence in the free market proved devastating this year. Egypt has certainly not been insulated from the crisis, and the full impact will become even clearer in the first months of the new year: Foreign direct investment is on a downward trend, and foreign institutional investors have pulled hundreds of millions of dollars out of the Egyptian Stock Exchange.

Citing projections that economic growth should be in the 5–6 percent range (the global average for next year will likely be 1.1 percent) as well as ample liquidity in banks and Egypt’s low reliance on commodity exports as a source of hard currency, analysts and government officials say that the country is in a relatively good position to weather the global downturn. The fact that Egypt has a largely cash-based economy and is still seen as a safe place for Arab investment has also helped.

After 2007 — an ambitious year that brought promising GDP growth, a push to increase foreign direct investment, strengthen ties with European trading partners, and a chance to again narrow the LE 70 billion budget deficit — it would have been easy for 2008 to fall short of expectations. And so it did: bread riots, escalating social unrest, violent protests, a public-sector wage hike that the state budget could accommodate only by cutting fuel and energy subsidies, record-high inflation and the September-October stock market correction.

Associated Press The government predicts growth of 5–6 percent next year, despite a predicted global average of 1.1 percent.

Could 2009 be any worse?

Heading into 2007, global food prices soared as transportation costs increased with the price of oil — which rose above $100 (LE 553) per barrel early in the year — and farmers abroad continued to switch land and crops to biofuel production, decreasing the supply of grain. In the United States, 30 percent of the 2008 grain harvest was reserved for biofuel, and ethanol production is expected to account for about 7 percent of the world’s grain consumption in the 2008-2009 financial year, according to the International Grains Council.

In Egypt, which imports about half of its wheat, making it one of the world’s largest wheat importers, the average household expenditure on basic foodstuffs and services rose 50 percent in the first three months of 2008, according to the United Nations World Food Programme. In a country where about 40 percent of the population lives on less than $2 (LE 11) per day, the rising prices of bread, rice, cooking oil and other staple commodities forced the nation’s poor to rely even more on already-strained government co-operative stores and the limited supply of subsidized bread.

Those who had previously bought higher-quality bread also began turning to the five-piaster-a-loaf subsidized bread when they saw the prices in private bakeries jump. Waiting hours in line became a daily ritual for many who desperately banged on bakery doors after the dawn prayer, hoping to get their small round loaves before supplies ran out.

Associated Press A public-sector pay raise was followed almost immediately by a hike in petrol prices.

Since the 1960s, the government has kept the nation fed on the water-based bread by subsidizing nearly the entire cost of wheat. The Ministry of Social Solidarity supervises the program and sells flour to private and government-owned bakeries at about 5 percent of its market value. Of the country’s 23,664 bakeries, just over 17,000 are licensed to sell subsidized bread, according to government statistics agency CAPMAS.

As food prices skyrocketed, selling flour on the black market became far more lucrative than using it to produce the five-piaster loaves. Some bakers also began cutting the flour with sawdust and other ‘additives’ to stretch their supplies. Earlier this year, Magdy Sobhi, an economist at Al-Ahram Center for Political and Strategic Studies, estimated that bakery owners could get as much as LE 260 on the black market for a 100 kilogram bag of flour that they had bought from the government for LE 16.

Squeezed by a shortage of the food that makes up most of their diets, citizens queuing up in bread lines often got violent. In February and March, shootings, stabbings, heat and exhaustion killed at least seven people (and possibly more than a dozen by some media accounts) in Middle and Upper Egypt, including Minya and Fayoum.

In 1977, then-President Anwar Sadat was forced to back down from cutting bread subsidies when riots broke out, killing 80. Knowing that violence in the bread lines could ignite something more volatile, President Hosni Mubarak took steps to control the problem this spring. In March, he ordered military and police bakeries, which typically make bread only for uniformed personnel, to increase production and distribute bread to the public. Military Police lined the streets in hotspots, overseeing distribution and keeping order. He also ordered the government to release additional foreign currency reserves to buy wheat, increase spending on bread subsidies and add 15 million people to the lists for subsidized cooking oil, sugar and rice rations.

Private bakeries also extended their hours and increased production.

In a bid to insulate the local food supply from price increases, the government suspended rice exports for six months beginning in April and reduced or suspended import duties on dairy, certain cement, steel and other products that are heavily influenced by fuel prices.

Bread lines shortened and violence abated, but averting crisis strained the state budget, increasing annual food subsidy costs to $13.7 billion (LE 75.8 billion) this year from $10.6 billion (LE 58.6 billion) in 2007.

Angry at the food shortage, rising costs of living and stagnant wages, workers at the main state-owned textile factory in Mahalla El-Kobra organized a strike for April 6 to demand wages that would keep pace with inflation, which was approaching 16 percent at the time. News of the planned strike by Misr Spinning and Weaving Company employees spawned calls from activists for a nationwide day of civil disobedience.

SMS messages and posts on the social networking site Facebook called for people to stay at home to demonstrate solidarity with the workers and draw attention to economic and political grievances. On the day of the strike, even the streets of Cairo were quieter than usual as people stayed home to support the strikes —or to avoid being caught up in potential clashes between demonstrators and riot police.

Small groups of protestors who showed up in Tahrir Square were arrested, including members of Al-Ghad opposition party as well activists from Kefaya and other protest movements.

In Mahalla, where workers clashed with security forces, the scene was quite different: Police clashed with demonstrators who damaged stores, overturned cars and set fire to two schools. The confrontation again turned violent the next day, when families gathered at the local police station demanding the release of their loved ones. Demonstrators threw stones at the station and at police, who peppered the crowd with rubber bullets and more tear gas.

Reports differ on the tallies, but hundreds were arrested or detained, several killed and more than 100 injured during the two days of riots.

Hoping to avoid another national strike planned for May 4, the day of his eightieth birthday, Mubarak chose May 1, Egyptian Labor Day, to order the government to give public sector employees a 30 percent pay increase. The 2007-08 fiscal year budget had included a 15 percent pay raise, and the decision to double that left the government grasping for a way to cover the estimated LE 13 billion price tag. The May 4 strike never materialized.

Three days after announcing the wage hike, the government announced dramatic cuts to petrol and energy subsidies, a 10 percent increase in the price of cigarettes, and an increase in registration fees for luxury vehicles. Tax allowances for private schools and universities and some free zone allowances for steel, fertilizer, petroleum and other industries were eliminated, contributing to a 20 percent increase in the price of steel.

“The government needs about LE 12.5 billion to cover the wage increase President Mubarak announced earlier, and we need that money in a way that does not create inflation,” Minister of Finance Youssef Boutros-Ghali said, justifying the subsidy cuts and price increases to Egyptian National Television.

Boutros-Ghali said that the Ministry of Finance was considering selling state-owned assets to pay for the wage increase until it could find a long-term solution, but efforts to privatize became difficult as the year wore on. By June, the drying up of liquidity on the global credit markets and slumping European economies caused the state to call off the hotly anticipated sale of Banque du Caire, the smallest of the three remaining state-owned banks, after five bids from international banks fell short of expectations. Economic nationalists, led by the opposition Wafd party, breathed a sigh of relief.

The petrol subsidy cuts caused fuel prices to increase by more than 30 percent overnight, angering taxi and microbus drivers who took matters into their own hands. In the Aswan governorate, 10 bus drivers were arrested and prosecuted for doubling their fares without authorization, according to local news site Masrawy. In Cairo, five drivers in the Sayyida Zeinab district were arrested for fighting with customers about fare increases, which were not implemented uniformly throughout the city. In an effort to ease tension, Cairo Governor Abdel-Azeem Wazir officially increased microbus fares by LE 0.25 for trips less than 25 kilometers and LE 0.40 for longer trips. Metered cab companies also saw their fares increase from LE 1.10 to LE 1.25 per kilometer.

The higher diesel prices and associated transportation costs also caused flour prices to jump to LE 3,700 per ton from LE 3,500, but anxious to prevent further unrest, the government quickly promised to pay bakeries the difference.

With the cost of the wage hike added to the growing food subsidies budget, Boutros-Ghali acknowledged that the treasury would not meet Mubarak’s goal of reducing the LE 70-billion deficit by one percentage point each year to reach a target deficit of 3 percent of GDP in the 2010-11 fiscal year. Instead, the goal would be to hold the deficit at its current level, approximately 6.9 percent of GDP. But staying within its means was nearly as difficult for the state this year as it was for families who watched inflation and prices continue to climb.

“We think a gradual reduction [of the deficit] is more feasible than a short one,”says Reham El-Desoki, chief economist at regional investment bank Beltone Financial. “We said before that the government would not be able to meet its goal of [reducing the deficit to] 3–4 percent of the GDP by fiscal year 2010–11, it was possible, but at a later date.”

Considering that the government is going ahead with the economic stimulus package at a time when it is implementing fiscal reforms that would result in a rise in revenues, Beltone doesn’t expect a significant jump in the budget deficit, El-Desoki adds.

The government will likely cut fuel and energy subsidies again late next year, focusing on cuts to products such as high-octane petrol used by luxury car owners. The aim is to keep spending under control and restructure energy subsidies, which account for 60-70 percent of total subsidies, on average, according to El-Desoki. The government started restructuring energy subsidies in 2004, raising energy prices in September 2004, July 2006 and May 2008 by varying degrees.

“Basically, the government has been raising energy rates 5-15 percent every year unannounced since 2004, this is just the first year they’ve really come out and said they were raising electricity prices,” she says.

On the back of both rising global commodity prices and red-hot domestic growth, inflation rose sharply from 11.5 percent in January to a 16-year high of 22 percent in July before peaking at 23.6 percent in August. By the year’s end, inflation had cooled to 20 percent. Six interest rate hikes this year from the Central Bank of Egypt may have helped, but inflation dipped largely in response to falling global commodity prices and slower domestic GDP growth.

With global oil and food prices still coming down, the government expects inflation to drop back into the low teens by the end of fiscal year 2008-2009 in June, and is anxious to see the lower commodity prices passed on to consumers.

During a speech before the American Chamber of Commerce in Egypt, Minister of Trade and Industry Rachid Mohamed Rachid said international commodity prices dropped 16 percent in October and warned merchants against price gouging.

The CASE 30 index hit a high of nearly 12,000 points in May, but celebration was short-lived as international markets crashed as the US sub-prime mortgage crisis came to a head. With the crash of New York and London equities markets in September as major global investment banks went out of business or sold themselves virtually over the course of a weekend, investors pulled out of markets around the world, and Egypt’s bourse was no exception.

The exchange continued to drop to below 7,500 points in September and then below 5,500 points in October. It rebounded slightly following announcements of financial bailout plans and rescue packages for world banks in October, but then dropped again shortly after. In mid-November, the index hovered below 4,000 points, its lowest point since 2005.

Last month Minister of Investment Mahmoud Mohieldin announced that the government is putting together a voucher privatization plan to offer all Egyptians over the age of 21 a stock portfolio containing shares in more than 150 state-owned companies. Although the specifics have not yet been announced, the plan is designed to give low-income Egyptians both a supplemental source of income and a stake in the performance of those companies when they begin to be publicly traded in 12-24 months’ time. The plan has left critics skeptical that citizens will hold onto the portfolios long enough to collect dividends and see their investment grow rather than selling the shares immediately to earn a quick buck. In the 1990s, the Czech Republic and Russia used a similar program to privatize state assets. Both countries stumbled — the Czech Republic with several rounds of voucher auctions to value the companies, and Russia with corruption and public mistrust — but ultimately their programs were deemed successful.

In many ways, 2008 was a reality check for governments, investors and financial institutions here and abroad who expected their share prices and economies to continue growing without incident.

Responding to the demand for wheat and rising prices, farmers have planted a crop that could yield the largest wheat harvest in history in fiscal year 2008-2009, according to the International Grains Council. And breadwinners will, hopefully, soon see the decrease in global food prices make it easier to feed their families.

The falling price of oil may also provide some relief to the government’s subsidy budget, or at least allow it to stretch further than it would have, had oil stayed above $100 per barrel.

Although foreign investment is sure to drop as world leaders struggle to find the elusive balance between strengthening financial regulation and devising rescue plans and stimulus packages that won’t overburden taxpayers, Egypt will still see more growth than developed nations, most of which are expected to crawl along at less than 1 percent next year.

The country will likely see growth dip to between 5.5 percent and 6 percent, according to El-Desoki, who noted that Beltone is still revising its growth estimates. The good news, she says, is that workers shouldn’t expect significant job cuts as a result of the global economic crisis and foreign investors pulling out.

“Usually private sector [companies] are more efficient in terms of hiring vis-à-vis the work load — and there is a skilled labor shortage, so as soon as the slowdown comes to an end they still need high-skilled labor and they don’t want to do the whole thing again in terms of [searching for skilled labor].”

Mohieldin recently told our sister publication Business Today Egypt that the government would not halt its reform program in the face of the credit crunch and economic slowdown.

“We did not compromise our growth target when we had threats of high inflation and we will not do so now,” he said. “Our challenges are still creating job opportunities, fighting poverty and raising incomes and our bias is towards growth.”

As inflation returns to pre-2008 levels next year and the Central Bank of Egypt lowers interest rates as expected, both local and foreign investors may regain confidence in the CASE.

With European markets failing, the government has also reached out to trading partners, especially those in the Arab world who still see Egypt as a safe place to invest. Mohieldin has recently visited Bahrain, Kuwait and Oman to strengthen or form ties with regional partners. et