Patrick Werr: Deluge of austerity evokes memories of Egypt’s 1977 bread riots

Egyptian austerity to reach a deal with the IMF led to bread riots in the 1970s. Could history repeat itself this year?

A bakery in Cairo. Egypt’s current austerity trend is reminiscent of its subsidy cutbacks in the 1970s, which culminated in riots over the price of bread. Mohamed Abd El Ghany / Reuters

The electricity bill collector delivered a 713 Egyptian pound bill (Dh295) on Wednesday, then warned me that next month’s would be four times larger, because the meter reader hadn’t been bothering to check my meter.

I winced. The government last month announced it was raising electricity prices retroactively by 25 to 40 per cent, depending on consumption levels – and now I was feeling it.

But I’m well off compared to most people in Cairo. So I asked him if others were complaining when he delivered their bills.

“Some get angry, others try to bargain it down, and yet others break out in tears,” he said. The higher electricity prices are only one in a swoop of measures the government is piling on to take control of its huge budget deficit, which hit 11.5 per cent of GDP in the fiscal year that ended in June. The government recently raised water bills and the price of cigarettes and this month increased the value-added tax to 13 per cent from 10 per cent. It is said to be planning increases in diesel and petrol prices and a devaluation of the pound.

It hopes the measures will help it to gain approval for a US$12 billion financing package it is negotiating with the IMF.

This deluge of austerity has conjured up memories of an earlier IMF agreement that sparked riots in the streets in January 1977. Could something similar happen again?

Many but not all of the events of the late 1970s are reminiscent of Egypt’s problems of today.

Egypt in 1976 was just emerging from the costly 1973 October War against Israel. The president, Anwar Sadat, was riding a groundswell of popularity for the army’s success in crossing the Suez Canal and breaking through Israeli lines.

Imports soared after the war and food subsidies were costing the government 500 million to 600m pounds a year. The budget deficit soared to 1.39bn pounds in 1975 from 249.8m pounds in 1973. The current account deficit rose to about $2 billion. Egypt was relying increasingly on short-term debt on which it had to pay up to 19 per cent.

Sadat toured the Arabian Gulf states, which had been sending aid in the war’s aftermath, in spring 1975 seeking funds to meet Egypt’s massive short-term debt obligations.

But by 1975 the Gulf states were getting donor fatigue. They eventually gave $2.5bn in 1975, but the payments were late and Egypt was forced to delay $450m in short-term debt repayments.

The country fell seriously behind in debt payments again in early 1976 and again Sadat, in late February, rushed to the Gulf, where he was said to have received pledges of $300m each from Saudi Arabia and Kuwait. He also called in an IMF team, which arrived in Cairo in March.

Saudi Arabia, Kuwait, Qatar and the UAE agreed in April 1976 to put $2bn into a fund to bolster Egypt’s economy.

Egypt refused to devalue its overvalued currency and instead, in May 1976, established a two-tier currency system, with a 0.39 pounds to the dollar official rate for essential goods such as foodstuffs and petroleum and a 0.68 pound “incentive” rate used by private sector importers, tourists and Egyptians living abroad.

In exchange for the loan, Egypt agreed to reduce spending on food subsidies and on January 17, 1977, the government said it was increasing the price of high-grade bread by 50 per cent, flour by 67 per cent, sugar by 4 per cent, rice by 20 per cent, butane cooking gas by 46 per cent and petrol by as much as 31 per cent. It also raised the price of cigarettes and removed the subsidy on tea. It did not increase the price of the widely eaten baladi bread.

The next day two days of riots and battles with police broke out across the country. The government set up barricades and imposed a night-time curfew. In Cairo alone, 77 people were killed; about 1,250 people were said to have been arrested. On the afternoon of January 19, the government announced it was cancelling the price increases entirely.

Four days later the United States announced it was lending Egypt an immediate $20m and within weeks agreed on another $170m. In April, the IMF approved three standby arrangements for a total $125m and the Gulf states agreed to lend another $1.5bn so Egypt could pay off high-interest debt.

Instead of reducing subsidies, the government expanded them, with subsidy spending rising from 15.5 per cent of government expenditure in 1977 to 20.5 per cent in 1980-81. The government doubled its overall spending in the first half of 1977, swelling the deficit to more than 1bn pounds from the originally planned 150m pounds.

Perhaps the moral of the story in 2016 is that the government must tread very carefully, lest an over-ambitious reform programme make Egypt’s financial problems even worse than before.

Patrick Werr has worked as a financial writer in Egypt for 26 years.

Follow The National's Business section on Twitter