By Alaa Shahine
CAIRO, Nov 20 (Reuters) - The world economic crisis could
lead to a repeat of the unrest that broke out in Egypt earlier
this year if the government fails to cushion millions of poor
people from its impact.
A new bout of discontent is unlikely to threaten the
survival of the government. But it could discourage investment,
which has driven Egypt's economic boom of the last four years.
Analysts said the government should try to improve ways of
getting food subsidies to the poor to reduce wasteful spending.
It should carefully increase public spending and cancel a
new corporate tax which is unpopular with investors, they said.
Egypt, the Arab world's most populous nation with 82 million
people, is not among the countries hardest hit by the crisis.
Expectations are that real gross domestic product growth
will drop to 5.25 percent in the 2008/09 fiscal year, down from
7.2 percent in 2007/8, according to a Reuters poll. [LH651534]
Compared to industrial countries facing recession, that
looks good, analysts said.
The problem is that even when the economy was growing
between 6 and 7 percent over the last two years, high inflation
and low wages provoked violent protests and labour strikes.
"In the absence of a clear social policy to protect the
poor, Egypt remains threatened by more social protests,"
political analyst Amr El-Choubaki said.
FOOD, EDUCATION AND TAXES
The unrest culminated in April when thousands of workers in
the industrial town of el-Mahallah el-Kubra clashed with police.
At least two people were killed and more than 100 wounded.
The government responded by increasing public-sector
salaries by 30 percent. It later raised fuel prices and imposed
taxes on firms operating in free-zone areas as part of measures
to finance the wage hike, exacerbating inflation.
"Everybody now knows that the tax increase for companies in
free zones was a wrong decision," said Monette Doss, a senior
analyst at Prime Holding, an Egyptian investment bank.
Lower global commodity prices and base effects are expected
to cut inflation to an average of 9.1 percent in 2009 from 18
percent in 2008, the Economist Intelligence Unit said. With
inflation receding, unemployment will be the main concern.
The government, which has not signalled an interest in
reviewing tax policies, has announced an economic stimulus
package worth 15 billion Egyptian pounds ($2.71 billion), one
third of it directed at new water and sewage projects.
"These are the two most important things for the people. The
spending will create jobs, and the subsidies will ensure that
they have access to basic needs," said Mohamed Abu Basha, an
economist at investment bank EFG-Hermes.
The state is projected to spend nearly 80 billion pounds
this fiscal year on subsidies, more than it spends on health and
education.
But the government has yet to find a better way to
distribute food subsidies. Critics say the current system, which
offers items such as bread and cooking oil at cheap prices, is
flawed because the subsidies also go to the rich.
Nor has the government done any meaningful work to overhaul
a poor education system that is ill-equipped to provide students
with the necessary skills for the job market, analysts say.
Part of the problem with public education is that it remains
free, which limits the state's ability to secure more funding
for teachers' wages. Meanwhile, Egyptian households spend
billions of pounds a year on private tuition.
"Fixing education should be the first move," Choubaki said."
The economy could also be harmed by the rise in piracy off
the coast of east Africa. Shipping companies are choosing to
avoid the Egptian-owned Suez Canal and send cargoes of oil and
other goods around southern Africa.
Unrest could also make it difficult for the ruling elite to
rally around Gamal Mubarak, the politician son of President
Hosni Mubarak, as successor to his 80-year-old father, analysts
said. He has denied any such ambitions so far.
While opposition groups remain too weak to pose a challenge
to the government, the younger Mubarak could prove to be too
controversial a candidate among pillars of the ruling elite such
as the army.
(Editing by Angus MacSwan)
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