In gas lines, a look at Egypt's credibility gap

[January 17, 2012]  CAIRO (AP) -- Rumors about an impending hike in fuel prices sent Egyptians lining up at gas stations, spotlighting the latest crisis in Egypt's political transition at a time when the economy is reeling and anger is widespread over the pace of reform after former President Hosni Mubarak's ouster.

The latest challenge confronting Egypt's military rulers and the interim government came after government approval of a plan to cut energy subsidies for some industries was widely interpreted by the public as a move to cut subsidies for fuel on which millions of Egyptians depend.

Lines formed at gas stations, with some reportedly selling out of key grades of gasoline while others saying they had not received shipments of the fuel. As motorists stocked up, supplies were depleted and some stations turned customers away, further stoking the belief that not enough was being produced by the country.

Wael Ziada, head of Egypt research at Mideast investment bank EFG-Hermes said whatever the root cause of the crisis, it could "become a self-fulfilling prophecy" in which prices rise solely in response to the rumors, irrespective of whether there is any truth to them.

At a time when the government is trying to rein in spending and foreign reserves are bleeding away, Egypt spends about 40 percent of its budget on fuel and food subsidies. The support ensures at the pump and many basic staples in the groceries stores are cheap, a vital consideration for many in the country, where about 40 percent of the population of 85 million is near or below the poverty line.

Egyptian officials have been quick to deny that there is a problem with fuel production, blaming the shortage instead on unscrupulous traders out to make a quick profit.

The fuel crisis is a new, unwelcome headache for officials, already under pressure from a populace angry over the pace of reform and worried whether the military will make good on pledges to hand over power to a civilian authorities following presidential elections slated for June.

Petroleum Minister Abdullah Ghorab was quoted in Monday's edition of the daily Al-Masry Al-Youm as saying that that traders were essentially hoarding fuel to drive up prices.

Deputy Oil Minister Mahmoud Nazim denied that fuel prices would be increasing, reported the official MENA news agency. Nazim said the country was currently producing enough to meet daily domestic demand.

Official denials, however, have carried little resonance in post-Mubarak Egypt. The fuel crisis offers a window into the country's broader economic problems that have mushroomed since the authoritarian president was pushed from power in mid-February.

Mass protests have built up momentum over the past year, disrupting daily life, helping inject tremendous uncertainty into country's political transition and, in the end, undercutting efforts to attract tourists and foreign investors. Those two sectors are among Egypt's foreign currency mainstays. Net international reserves have fallen by 50 percent since December 2010, reaching $18 billion last month.

On Monday, a team from the International Monetary Fund began a mission to discuss with officials a potential $3.2 billion support package -- measures that could come with the kind of cost-cutting conditions that could stoke further undercurrents of unrest in a country where economic pain has only grown since the Jan. 25 uprising.

Officials turned down the IMF loan in June, arguing they did not want to saddle any new, incoming government with additional debt. But conditions have since deteriorated, with borrowing costs climbing while reserves dropped precipitously.

While the government has blamed the fuel issue on the market and unscrupulous traders, analysts worry that it may be a product of the government's cash crunch.

"If you don't have the cash to buy more gas, then you deal with a shortage and have to face the possibility of a black market," said Abdel-Moneim Said, an economic analyst with the Al-Ahram Strategic Center. "The government is trying to increase production, but local production is at capacity."

Compounding the problems of paying for fuel, the government faces other pressures. The country has also seen borrowing costs spiral as its sovereign credit rating has been repeatedly downgraded by the three main reporting agencies. Meanwhile, it is looking for cost-cuts in hopes of realizing its target budget deficit of 8.6 percent of gross domestic product in the current fiscal year.

The plan to cut energy subsidies that was approved by the government targeted some heavy industries, which have long benefited from low fuel costs.

Cutting those subsidies may have been a prudent step, analysts said, but the fact that it sparked a public panic that prices at the pump would also be going up reflects the government's problems in communicating policy objectives to a population that, after roughly three decades of Mubarak rule, distrusts anything coming from officials.

"This is another example of the lack of direction in terms of policy," said Said Hirsh, Mideast economist with Capital Economics in London. "If you put out notice that you're going to cut subsidies, you're going to get a run on stations."

"I would imagine this (fuel issue) to be related to the sense of confidence in decisions the government is making," said Hirsh.

Most officials agree subsidy cuts must happen in one form or another, especially since the gas subsidies benefit Egypt's rich as well. The issue is likely to come up during the government's discussions with the IMF over the $3.2 billion loan. Still, economists said the IMF probably won't demand drastic moves or impose stringent conditions, given the delicacy of the moment.

"It's a standard IMF approach to look at subsidies," said Hirsh. "They would press the government on how to deal with it. But it would be impossible to deal with it straight away. They would be sensitive to the societal pressures."

[Associated Press; By HADEEL AL-SHALCHI and TAREK EL-TABLAWY]

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