What Goes Up Must Come Down?

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Contrary to the common belief that what goes up must come down, prices in Egypt have been surging with consumers seeing no foreseen hope of their decline in the near future. Everyone these days is talking about the increase in prices, and some people are so concerned that they have taken their concerns to the next level; strikes.
Good Inflation, Bad Inflation
Inflation is defined as the continuous increase in consumer prices or the continuous decrease in the purchasing power of money.
Inflation is not an uncommon side effect of growing economies, and is usually acceptable if it remains at certain levels. Egypt’s economy is currently displaying good growth levels, a current account surplus, an appreciating currency and strong financial markets. However, a few factors are causing inflationary pressures and have brought up the inflation rate from 3.5% in fiscal year 2006 to 8.5% in fiscal year 2007.
A stronger Egyptian pound stimulating imports, coupled with increased investment demand fuelling asset inflation in real estate and the stock market, have inevitably affected overall inflation rates. Furthermore, supply-wise, avian flu breakouts have contributed to an increase in food prices.
From the government’s side, a strategic plan of reducing the budget deficit (currently at 7% of gross domestic product) by 1% annually has been translated into subsidy cuts among other things. In fiscal year 06/07 total subsidies amounted to around L.E 60 billion with L.E 9.4 billion going to bread and consumer goods, L.E 4.5 billion to housing and electricity, and L.E 40 billion for petroleum.
The government started its subsidy reduction plan with increases in prices of water, electricity and various services in 2004 and again in 2007 coupled with a 50% increase in the price of petroleum. In August 2007 the government announced a 3-year-plan to remove subsidies on energy for 40 energy intensive industries, specifically those involved in the manufacturing of cement, steel, fertilizer and petrochemicals.
Subsidies on consumer goods and services have also been included in the government’s subsidy reduction policy, with plans to eradicate them completely and replace them instead with monetary subsidies to insure the correct allocation of subsidy funds.
On another level, strong foreign direct investment (FDI) inflows resulted in a capital account surplus of US$1.7 billion. However, due to the central bank’s constant intervention to keep the pound competitive, these inflows have not corresponded with matching currency appreciation, ultimately leading to inflationary pressures.
Civil Unrest
Although Egypt has been witnessing steady economic growth for the past 5 years, the structural makeup of Egypt’s economy makes income distribution very uneven. The key factor here is whether the inflation rate is balanced out by reasonable levels of income for the lower middle class and lower class echelons. Unfortunately the answer is no.
As a result, the past couple of months saw varying levels of middle and lower class Egyptian society express unease regarding current pay and wage conditions.
On one level, 2000 angry real estate tax collectors protested and carried out a strike in Cairo, angered and driven by poor wage conditions. With wages ranging from L.E 150 to L.E 350 per month the tax collectors demanded that they be returned under the umbrella of the Ministry of Finance instead of belonging to local municipalities, which should bring up their wages to more acceptable levels.
Similar strikes and demonstrations were carried out by Egyptian University Professors, demanding better financial and social status.
This wave of labor unrest was initially fuelled by a workers strike at the Misr Spinning and Weaving Company in December 2006, demanding better pay and better working conditions. Another strike was carried out a year later by more than 27,000 workers at the company complaining that profit-sharing promises and an improvement in working conditions were not followed through by the management.
Evidently, Egypt’s economy is developing and moving forward, however the lower and middle classes are not reaping the benefits of such development due to increased inflationary pressures in addition to uneven income distribution and poor wages. Unless measures are taken to alleviate such dire conditions, will it be possible that the Egyptian society will witness more severe forms of civil unrest?
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