What's Behind Egypt's Problems?
What's Behind Egypt's Problems?
We have all been reading about Egypt in the newspapers, and wonder what is behind their problems. Let me offer a few insights.
At least part of Egypt’s problem is the fact that in the past the government has threatened to reduce food subsidies. Now it is planning to hold food subsidies level and raise energy subsidies, but it is not clear that the dollar amount of subsidy will be enough. The government is taking steps to make food and energy affordable for most, but there is worry that the steps being taken will not be enough.
Egypt’s Declining Financial Situation
There is a good reason why one might expect Egypt to start running into problems with energy and food subsidies. Its own financial situation is declining at the same time that the cost of food imports is soaring. If we look at a graph of Egyptian oil imports, exports, and consumption (using a graph from Energy Export Databrowser, which graphs BP Statistical Data), we find that Egypt’s oil use has been rising rapidly, at the same time the amount extracted each year is declining.
Figure 1. Egypt’s oil production, consumption, and exports
Starting about 2010 or 2011, Egypt will change from an oil exporting nation to an oil importing nation, if there are imports available on the world market. The catch is that Egypt isn’t the only one with declining oil production–world oil production has been approximately flat since 2005, and the countries that produce the oil are using more and more of it themselves. The result is that there is less oil available for export, even as countries like Egypt need more.
The oil that Egypt exports provides funds for the subsidies that it offers, so reduced exports mean less funds are available for subsidies. Egypt has recently been able to ramp up natural gas exports, and these exports have allowed subsidies to remain in place.
Figure 2. Egypt's natural gas production, consumption, and exports
If a person looks closely at the green portion of the graph, natural gas exports have been fairly flat since 2005. It sounds like they can be expected to remain relatively flat, too, because according to the US Energy Information Administration:
So Egypt is still getting some export revenue from hydrocarbons, (and just as importantly, tax revenue related to the export revenue), but the natural gas amount is likely close to flat, and the amount from oil exports has gone to zero. Egypt subsidizes both oil and natural gas sales internally, so it is likely that the government is not getting much revenue related to be portion that is used for internal consumption. In fact, it may very well be a net loser on the part that is used internally because of its subsidies–revenue on exports is supposed to make up the difference. If Egypt needs to actually purchase oil from abroad in the future, its expenses can be expected to go up significantly.
Other Budget Pressures
Based on information from the CIA World Fact Book, Egypt was already significantly overspending its revenue in 2009 (the last year available), with revenues of $46.82 billion and expenditures of $64.19 billion. For 2010, the Factbook reports government debt amounting to 80.5% of GDP, putting its debt level far above that of most other African and Arab nations.
If Egypt’s oil production is down, follow-on industries like refining and chemical products are likely down as well, making it difficult to increase revenues from these sources, or to obtain additional taxes related to the spending of workers in these industries. The Suez Canal is one of Egypt’s sources of revenues, but with world oil exports down, revenues from it are likely dropping as well.
Cutbacks in oil production and in Suez Canal transport can be expected to exacerbate unemployment problems. The Egyptian unemployment rate was listed at 9.7% in 2010 by the CIA World Factbook.
Egypt has a history of a fairly egalitarian approach to distribution of income. In 2001, the CIA Factbook lists its GINI coefficient as 34.4%, which is near that of the United Kingdom, and much better than, say, that of the US. But in recent years, the CIA Factbook says
These economic reforms likely raised the income of some people, but not of everyone, creating a wider gap between the rich and poor. This may lie behind reports of concerns by the poor that they are falling farther behind economically. With the county’s history of a more even income distribution and the recent rise in food prices, this rising income inequality may be becoming more of an issue.
Need for Food Imports
Egypt’s population has been growing rapidly (estimated at 2% per year by the CIA World Fact Book – about 3.0 children per woman), but the population is concentrated in a narrow strip along the Nile River. (Graph from Population Databrowser.)
read the full article here:What's Behind Egypt's Problems?
We have all been reading about Egypt in the newspapers, and wonder what is behind their problems. Let me offer a few insights.
At least part of Egypt’s problem is the fact that in the past the government has threatened to reduce food subsidies. Now it is planning to hold food subsidies level and raise energy subsidies, but it is not clear that the dollar amount of subsidy will be enough. The government is taking steps to make food and energy affordable for most, but there is worry that the steps being taken will not be enough.
Egypt’s Declining Financial Situation
There is a good reason why one might expect Egypt to start running into problems with energy and food subsidies. Its own financial situation is declining at the same time that the cost of food imports is soaring. If we look at a graph of Egyptian oil imports, exports, and consumption (using a graph from Energy Export Databrowser, which graphs BP Statistical Data), we find that Egypt’s oil use has been rising rapidly, at the same time the amount extracted each year is declining.
Figure 1. Egypt’s oil production, consumption, and exports
Starting about 2010 or 2011, Egypt will change from an oil exporting nation to an oil importing nation, if there are imports available on the world market. The catch is that Egypt isn’t the only one with declining oil production–world oil production has been approximately flat since 2005, and the countries that produce the oil are using more and more of it themselves. The result is that there is less oil available for export, even as countries like Egypt need more.
The oil that Egypt exports provides funds for the subsidies that it offers, so reduced exports mean less funds are available for subsidies. Egypt has recently been able to ramp up natural gas exports, and these exports have allowed subsidies to remain in place.
Figure 2. Egypt's natural gas production, consumption, and exports
If a person looks closely at the green portion of the graph, natural gas exports have been fairly flat since 2005. It sounds like they can be expected to remain relatively flat, too, because according to the US Energy Information Administration:
Given increasing domestic demand, combined with popular pressures in recent years against LNG and gas export contracts (particularly with Israel), the oil minister declared in mid-2008 that no new gas export contracts would be made.
So Egypt is still getting some export revenue from hydrocarbons, (and just as importantly, tax revenue related to the export revenue), but the natural gas amount is likely close to flat, and the amount from oil exports has gone to zero. Egypt subsidizes both oil and natural gas sales internally, so it is likely that the government is not getting much revenue related to be portion that is used for internal consumption. In fact, it may very well be a net loser on the part that is used internally because of its subsidies–revenue on exports is supposed to make up the difference. If Egypt needs to actually purchase oil from abroad in the future, its expenses can be expected to go up significantly.
Other Budget Pressures
Based on information from the CIA World Fact Book, Egypt was already significantly overspending its revenue in 2009 (the last year available), with revenues of $46.82 billion and expenditures of $64.19 billion. For 2010, the Factbook reports government debt amounting to 80.5% of GDP, putting its debt level far above that of most other African and Arab nations.
If Egypt’s oil production is down, follow-on industries like refining and chemical products are likely down as well, making it difficult to increase revenues from these sources, or to obtain additional taxes related to the spending of workers in these industries. The Suez Canal is one of Egypt’s sources of revenues, but with world oil exports down, revenues from it are likely dropping as well.
Cutbacks in oil production and in Suez Canal transport can be expected to exacerbate unemployment problems. The Egyptian unemployment rate was listed at 9.7% in 2010 by the CIA World Factbook.
Egypt has a history of a fairly egalitarian approach to distribution of income. In 2001, the CIA Factbook lists its GINI coefficient as 34.4%, which is near that of the United Kingdom, and much better than, say, that of the US. But in recent years, the CIA Factbook says
Cairo from 2004 to 2008 aggressively pursued economic reforms to attract foreign investment and facilitate GDP growth.
These economic reforms likely raised the income of some people, but not of everyone, creating a wider gap between the rich and poor. This may lie behind reports of concerns by the poor that they are falling farther behind economically. With the county’s history of a more even income distribution and the recent rise in food prices, this rising income inequality may be becoming more of an issue.
Need for Food Imports
Egypt’s population has been growing rapidly (estimated at 2% per year by the CIA World Fact Book – about 3.0 children per woman), but the population is concentrated in a narrow strip along the Nile River. (Graph from Population Databrowser.)
read the full article here:What's Behind Egypt's Problems?
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