OPINION: Egypt - Hanafy's hotel, the wheat scandal and the IMF deal - CNBC Africa

OPINION: Egypt - Hanafy's hotel, the wheat scandal and the IMF deal

Special Report

by François Conradie, Head of Research, NKC African Economics 0

Wheat harvest in ancient Egypt. Picture: Wikimedia.

A fairly routine expenses scandal fits into a story of grand corruption amid austerity in a way that illustrates some important political dynamics in Egypt. On Friday, August 19, television journalist Mostafa Bakry revealed that Supply Minister Khaled Hanafy had been occupying a suite at the five-star InterContinental Cairo Semiramis hotel since February 2014, for a total bill of 7 million Egyptian Pounds (E£7m).

“If one night in the suite costs E£10,000 and the minister's salary is E£30,000 per month, who is paying?” Bakry asked rhetorically.

Hanafy explained on Saturday, August 20, that he paid his own bill and that where he chooses to stay was a private matter. He did concede, however, that he had a responsibility to reassure Egyptians that he had not spent State funds on the hotel.

Hanafy’s explanation rings hollow, more especially in light of a far more serious scandal that surrounds his department.

Since July a parliamentary committee of enquiry has been looking into fraud in the wheat sector, historically an attractive one for crooks because of a complicated subsidy system that has enabled those with the right connections to profit massively. Some industry officials told the committee that as much as two million tonnes of the five million bought for the current harvest may have been fictitious, with corrupt entities in charge of operating silos having pocketed the connected subsidies without actually storing any grain.

A much-touted high-tech monitoring system purchased from Blumberg Grain, a US service provider, was not operational in time for the current year’s imports. A second phase of the Blumberg System was rejected by the government’s Holding Company for Silos and Storage, while Blumberg lobbied cabinet for the rest of the project to go ahead.

Hanafy said in July that he had done an inspection and that only 4% of the value of the harvest was missing.

The committee’s final report is being reviewed by Parliament, and if its estimate that “there is more than one million tonnes missing” (in the words of Yasser Omar, a legislator on the committee) is correct, then that will mean Egypt will have to buy yet more wheat this year.

These scandals around the importation of Egypt’s most crucial basic food item come at a sensitive time: government is busy negotiating a deal with the International Monetary Fund (IMF) that will unlock $12bn in loans over three years, but which involves cuts to public spending that will have serious effects on living standards.

Subsidies are being cut yet further, a value-added tax (VAT) is in the works, and the public sector wage bill will need to be slashed. Shortages of foreign currency have pushed importers to buy hard currency at black market rates, and this has pushed inflation to 14% y-o-y in June and July. 

From an economic point of view, the dynamics set out above will tend to constrain the demand side, and this will keep happening as prices go up further in the wake of the currency devaluation   expected before the end of the year, and government implements the measures the IMF imposes.

From the political risk point of view, the environment is one in which our measure of legitimacy risk is negative: people are watching as they get poorer. Corruption perceptions are extremely important in such an environment.

Hanafy’s scandals give the clear impression that he has made money essentially taking food from poor people. Such scandals will tend to accelerate the decline in support for President Abdel Fattah Al-Sisi’s government. It would be good for stability Hanafy were sacked, but we have long had concerns over grand corruption in Sisi’s authoritarian government, and expect to hear more stories like this, especially if State-owned entities are privatised in terms of the IMF deal. Each story like this increases political risk.