Egypt prepares to crack down on human rights groups

On Aug. 12, a special delegation from Human Rights Watch was to visit Cairo. However, Egypt’s government had other plans.

The organization was to deliver a briefing alongside the release of its comprehensive report on the Egyptian security forces’ “clearance” of Rabia al-Adawiya and other Muslim Brotherhood sit-ins last year that resulted in the deaths of at least 1,150 people.

On Aug. 10, when Human Rights Watch attempted to enter the country, the Egyptian authorities held director Ken Roth, head of Middle East and North Africa division Sarah Leah Whitson and fellow Omar Shakir up at the Cairo airport and refused them access to the country. The Interior Ministry claimed that the holdup was due to nothing more than a failure on the organization’s part to attain proper visas before travelling, and that it had informed Human Rights Watch that its delegation must get travel papers in advance.

However, Whitson confirmed to Al-Monitor that the organization followed the same procedure that it has “for decades” in Egypt, and had received no contact from the Interior Ministry prior to the trip.

The report has been released regardless and its indictments of the highest level Egyptian officials, including President Abdel Fattah al-Sisi, for authorizing pre-planned mass killings that rivalled that of China in Tiananmen Square have if anything been magnified by the authorities’ actions.

The barring of Human Rights Watch was no aberration. According to senior representatives of Egyptian human rights groups, the authorities are now following a new policy toward them that could end their activities.

“What we’re currently facing is the police storming our offices and arresting us at any moment,” said Mohamed Zaree, head the Egypt program at the Cairo Institute for Human Rights Studies (CIHRS) and a leading human rights worker.

Egypt is home to a range of Egyptian civil society organizations like CIHRS that have incurred the government’s ire because of their criticism of state policy, especially toward dissent, but their legal position has always been uncertain. Now a new “draft law on associations” being weighed by the government is poised to fully criminalize their operations.

“This law criminalizes groups and associations that haven’t been approved by the government,” Zaree explained, “and we can’t be officially registered because the government-approved groups are controlled — they can’t work properly.”

He explained that there are a strict set of state-defined rules that government-approved groups have to adhere to, which include a ban on any activity that could “harm public unity” and that make effective human rights monitoring all but impossible.

To make matters worse, on July 18, Egypt’s Minister for Social Solidarity Ghada Waly posted a notice in Egypt’s state-owned al-Ahram newspaper warning “entities carrying out civil society work” that they will be dissolved within the next 45 days.

“The government sees this as a great opportunity to silence any critical voices, which it portrays as against the interests of Egypt,” said Gasser Abdel Rizak, the head of the Egyptian Initiative on Personal Rights.

“We are seeing horrendous rights violations of a magnitude probably not seen in Egypt before, and it isn’t sustainable. By documenting these abuses we’re trying to help those in power to make the right decisions and not shut down completely all dissent — that is in Egypt’s interests,” Abdel Rizak told Al-Monitor.

On Aug. 14, Egypt’s Ministry for Social Solidarity issued a statement emphasizing its “commitment to come up with a final draft that is in line with the 2014 Constitution” and claiming the final form of the law on nongovernmental organizations “would respond to the needs of the Egyptian people and fulfill their aspirations as well as ensure their cohesion.”

Human rights campaigners in Egypt have long faced allegations from conservative forces that their work is little more than defamation of the country and its interests.

“The conditions for carrying out human rights work are already not good at all,” said Ahmed Kheir, executive director of Egypt’s Support for Information Technology Center, an organization that monitors the media and campaigns for freedom of information.

“People working on highlighting human and civil rights issues are shunned by the media and the government and labeled as Muslim Brotherhood fronts or supporters of terrorism, even though they said the same things when [Mohammed] Morsi was president,” he told Al-Monitor.

Egypt’s rights groups regularly meet with diplomats from international embassies in Cairo, including the United States and European missions, during which they have expressed their fears about the near future.

However, little help has been forthcoming. Rights groups say while Western diplomats claim they are sympathetic to the causes of the rights groups, they are more concerned with maintaining strategic relationships with Egypt’s ruling regime, and these are based on security, stability and energy interests.

The British Embassy in Cairo told Al-Monitor that the British government supports the role of civil society organizations as part of a secure, prosperous and democratic Egypt and that it has made clear the importance of upholding human rights written into Egypt’s constitution.

However, the rights groups do not feel they are sufficiently supported, and say human rights abuses are not high on the agendas of Western governments.

“We think there has been a shameful response from the the Western governments and we’re afraid that the security forces will see their silence as a green light,” said Zaree.

CIHRS is coordinating the groups to try to fight the government’s plans, and it has formally submitted a letter signed by 23 Egyptian human rights organizations to Prime Minister Ibrahim Mahleb in an attempt to elicit a change in policy. But when asked what the group thinks its chances are, the reply is “not good.”

“We know the old [Hosni] Mubarak regime officials were very scared by what happened in 2011 … and under the Supreme Council of the Armed Forces, there were similar attempts to get rid of us right after the uprising,” said Zaree.

“It’s like the state now is trying to shut down the avenues of expression that Egyptians created and that led to the January 25 revolution.”

 

This article was originally published with Al-Monitor on August 15 2014.

Algeria to capitalise on EU-Russia rift

On July 19, Algeria’s state energy company Sonatrach finalized a $100bn five year investment plan designed to considerably increase the country’s capacity to produce and export energy.

The plans feature more than $22bn of investment in the country’s natural gas industry, which will include the development of six new gas fields, along with another $20bn for the production of oil. The distribution of the rest of the total has yet to be decided.

The expansion plans comes as Sonatrach – the largest energy company in Africa – announces it has reshuffled its C-suite management. Previous CEO Abdelhamid Zerguine has been replaced by the company’s former vice president for production Said Sahnoun. The change is believed to have come at the behest of energy minister Youcef Yousfi himself, according to This is Africa sources within international energy companies operating in Algeria.

Algeria has the fourth largest oil reserves in Africa, and the second-largest gas reserves. Hydrocarbons constitute about 60 percent of the country’s budget revenues, and more than 95 percent of exports.

However, the sector has been struggling. Declining production has combined with rising domestic demand for energy to seriously hit the state’s key source of revenue. Oil and gas output dropped by 7.5 percent in 2013, wiping out $5bn in value. Export revenues have also shrunk. Algeria earned just $63.8bn in hydrocarbon exports in 2013, down from $69.8bn in the previous year.

The government is now preparing to take bids next month from foreign companies for 31 new oil and gas fields in order to counter the decline. Some hydrocarbon industry deals are beginning to come to light.

At the US-Africa Summit on August 5, General Electric CEO Jeffrey Immelt met with Prime Minister Abdelmalek Sellal to discuss the country’s operations in Algeria. The pair also announced orders for eight gas generators, and a gas engine project.

GE has a well established presence in Algeria. Its technologies generate almost 70 percent of the country’s electricity, according to Rania Rostom, the company’s chief communications officer for the Middle East and North Africa.

“We are committed to being Algeria’s growth partner by supporting the development of the country’s energy infrastructure,” said Lorraine Bolsinger, CEO of GE’s distributed power division.

In March, GE signed a $400m deal with Sonelgaz, Algeria’s state-owned electricity and natural gas distributor, to build a new gas complex in the eastern province of Batna. On June 25 Sonatrach also signed a major deal worth more than $600m with India’s Dodsal for a gas facility near the eastern town of Hassi Messaoud.

The government also plans to start developing the country’s less conventional energy sources, namely the country’s vast untapped shale reserves. Algeria is believed to be home to the third largest shale gas reserves in the world, and Sonatrach will begin drilling at four shale gas wells this year.

The British company Clarke Energy, which operates in Algeria, told This is Africa that it signed two deals for efficient power plants in Algeria earlier this month – and that it was looking to do more.

“There is massive potential in the country for the use of flare gas for power generation – that is, gases that are normally, flared as waste products when companies are extracting crude oil,” said Clarke’s marketing and compliance manager, Alex Marshall.

“We would like to build upon our other successful flare gas projects in Africa such as the Waha plant in Tunisia,” he said.

Renewing exports

With the retail price for natural gas fixed (now below cost price) since 2005, Algeria has the second cheapest domestic prices for natural gas in Africa, according to the IMF.

This means a large share of hydrocarbon production is satisfying Algerians’ demand for energy. The government’s plans to boost production and expand renewables is not targeting domestic markets, but geared towards attracting large export contracts.

“The programme aims to install a capacity of 12,000 megawatts of renewable energy by 2030 with the installation of 20 new photovoltaic plants in Algeria by the end of 2014,” says Professor Noureddine Yassaa, director of Algeria’s state Renewable Energy Development Center (CDER).

“As the biggest country in Africa and in the Mediterranean basin, we have huge potential renewable energy resources, especially in solar energy, and all the conditions are met for Algeria to be leading on renewable energy in the region,” Professor Yassaa says.

The government has also introduced a feed-in tariff scheme for photovoltaic solar power, which will last for the next 20 years. The tariff offers compensation to renewable energy producers – effectively subsidising renewable energy production.

Foreign investors have begun to take interest. On June 12, the German company Group Eurosol signed a preliminary agreement in Algiers with Algeria’s Aurès Solaire for a stake in developing new photovoltaic plants.

Supplying Europe

In light of the current diplomatic crisis between Russia and the European Union over Ukraine, European Commission planners are considering alternative forms of supply to substitute for Russian imports. This is a window of opportunity for Algeria, which already supplies around 70 percent of its crude oil exports and 80 percent of its gas exports to Europe.

Algerian officials have met frequently with European representatives to discuss its energy supplies to Europe. On June 5, negotiations were held with Greece on importing Algerian gas to market in Romania and Bulgaria. On June 16, the mayor of London, Boris Johnson, visited Algiers to promote British business interests in Algeria’s energy industry.

And on June 25, the Italian industry minister Federica Guidi met with Prime Minister Sellal to discuss expanding Italy’s energy relationship with Algeria. Italy derives around 40 percent of its energy from natural gas, and is increasingly concerned about the security of its Russian supply.

In Algiers, Ms Guidi said her visit – the first by an Italian minister since 2012  – was a chance “to confirm the strategic importance Italy attaches to Algeria, especially as regards oil and gas supplies”.

According to CDER’s Professor Yassaa,  Europe’s desire to diversify away from Russia “is extremely important given the proximity of Algeria to Europe,and the huge Algerian potential for a partnership which is sustainable and long lasting”.

“The current crisis in Ukraine has propelled questions of Algerian supplies to the centre of  EU–Russian tensions. With Russian supplies in question, EU member states are looking to Algeria as a possible substitute,” writes Mansouria Mokhefi, special advisor for the Middle East and North Africa to the French Institute of International Relations.

Ms Mokhefi argues that though the ossification at the heart of Algeria’s political system is problematic, there are prospects for a closer energy relationship between the EU and Algeria

“European leaders are looking to Algeria as the most reliable alternative source of energy for the EU, and have engaged in conversations with the Algerian leadership to increase their energy co-operation.”

 

This article was originally published with Financial Times: This is Africa on August 12 2014.

Analysis: Morocco is no regional beacon

With the US-Africa Leaders Summit in full swing, much of the analysis on Morocco holds up the kingdom as a model for cautious, but essentially successful reform in the Middle East. Such analysis serves to underpin both United States and European policy, which is currently designed to support and maintain, rather than challenge, the kingdom’s political order. Critically examining Morocco’s record, however, shows that its reformist image is mostly undeserved, and its position as a potential regional model unearned.

The Moroccan monarchy’s response to popular demonstrations in late 2010 and early 2011 was essentially two-pronged. First, it violently dismantled protest camps in the Western Sahara and used extensive force against the activist February 20 movement. Second, it organized a referendum (under conditions that, having witnessed the voting process, I believe were questionable) on a new national constitution.

The palace has successfully presented the adoption of the new constitution in July 2011 as a sign of its commitment to reform and even partial democratizing of the country. In reality, the reforms were limited in letter and even more so in practice. In fact, the regime remains a repressive authoritarian monarchy—facing serious allegations of human rights violations—and presides over an unequal social and economic order.

Even by regional standards, political power in Morocco is unusually highly concentrated. While the constitution did devolve some modest legislative power, the intelligence services and military are still closely controlled by King Mohammed VI who also chairs a council of state that must endorse all legislation even before it goes to parliament and furthermore may dissolve parliament, call elections, and dismiss government ministers.

The king also operates a secretive royal council comprised of his closest advisers, which appears to function as the country’s real policy and decision-making body. Prominent among its members are royal adviser Fadel Benyaich, adviser Fouad Ali El Himma, and the head of the external intelligence service (DGED) Yassine Mansouri. All three are former classmates of the king.

Meanwhile economic policy has been mainly designed by, and in the interests of, a narrow ruling class often referred to as the Makhzen. Recent economic reforms to cut public subsidies may have been supported by the rating agencies (and the IMF which just announced another $5 billion precautionary credit line) but will do little to alleviate poverty, which despite some improvements in the cities is stillwidespread in rural areas.

Details of the monarchy’s business interests are closely guarded but they arecertainly extensive. The king’s wealth is substantial and the royal family holds the majority stake in the National Investment Company (SNI), which has been repeatedly accused of corruption.

King Mohammed VI’s father, Hassan II, ran a security regime that openly engaged in arbitrary detentions, the repression of dissents, and assassinations of its own citizens. Despite differences in style, at its core the regime today operates in much the same way.

The state now uses anti-terrorism discourse and laws as a cover, but international human rights organizations have documented that it still imprisons and prosecutes journalists, disappears political opponents, and crushes peaceful protests. Criticism of the king is illegal.

The regime also operates secret prisons and engages in the systematic torture of political dissidents, especially from its Sahrawi population. Human Rights Watch,Amnesty International, and the US State Department have detailed the extraction and use of torture-tainted confessions.

Most significant of all Morocco is still maintaining a military occupation of Western Sahara, a territory larger than the United Kingdom. The regime invaded and annexed Western Sahara in 1975, drove tens of thousands of its inhabitants into refugee camps in Algeria, and holds the land in violation of international law. Within Western Sahara, a harsh security order is maintained to suppress the Sahrawi population while Moroccan settlement is promoted by subsidy.

In this context one might ask why Morocco enjoys the reputation it does. The answer, in part, lies in its operation of a sophisticated public relations machine, including a multi-million dollar lobbying mission in Washington.

For the United States, Morocco is seen as a valued strategic ally in a “historic and proud partnership,” in the words of Senator John Kerry on July 29. The kingdom is willing to accommodate almost any counter-terrorism demands that are made of it and regularly purchases US arms, with recent transactions including twenty-four F-16s, $1 billion of refurbishment for its 200 Abrams M1A1 tanks, military radar systems, and Sidewinder missiles. For Western Europe, it is a key trading partner.

Those relationships are underwritten and partly justified by the view of Morocco as a haven of regime stability, moderation, regional reform. The West should thoroughly reassess these underlying assumptions about Morocco’s ruling regime—and subsequently the strategic and diplomatic relationships with the kingdom. This is particularly important for the United States and France, where relations with the kingdom are strongest and influence highest.

Morocco is no regional beacon. Its Human Development Index ranking remains the worst in North Africa, and it leads the way on both income inequality and illiteracy. Its record on political reform, democratization, and human rights is not impressive and certainly not comparable with Tunisia’s. A more suitable comparison for its record could be found in the GCC monarchies that are rarely presented in the same positive light.

Holding the kingdom up as an example for the region is misguided and could be damaging to popular democratic forces within North African societies, which are already benighted. Such movements could be discouraged by international acceptance of authoritarian behavior, and the potential remains for long-term popular resentment of US policy that is seen as implicitly encouraging a violation of principles surrounding human rights and good governance.

Instead, the United States should use the opportunity created by the US-Africa Leaders Summit to critically assess Morocco’s ruling regime and pressure it to begin real reforms, especially on human rights and its conduct in Western Sahara. The consequences of ignoring this imperative could result in increased public resentment towards the United States (at best) and increased extremism (at worst) as avenues for civil discourse and political engagement remain impeded.

 

This article was originally published with The Atlantic Council on August 5.

Libya burns, world ignores it

Tripoli is in flames. A large fire that started July 27 during fighting between rival militias on the city’s central airport road now engulfs two major fuel tanks and has continued to spread while the body count ticks upward.

Not only are Tripoli’s few firefighters, who must brave what is effectively a war zone to do their job, making little progress, but bullets continue to hit the huge storage facility of the Brega Oil and Gas Co. The fires were so large that at their peak they were visible on satellite images.

Aside from the physical danger posed by the fires, the sight of what is Libya’s overwhelmingly most important resource billowing into the sky adds to the sting of gasoline prices in the capital, now more than 30 times the standard rate.

The Brega depot is under the control of the most prominent militias from the western city of Zintan. These militias, principally Uthman Mulayqithah’s al-Qaqaa and Isam al-Trabulsi’s al-Sawaiq, have been fighting Islamist militias from Misrata that first attacked their position at Tripoli airport on July 13. While former Defence Minister Osama al-Juwali is believed to be helping coordinate the Zintani forces, the former parliamentarian Salah Badi is leading the Misratans.

Badi had originally been appointed head of military intelligence by Nuri Abu Sahmain, the Islamist head of the General National Congress, but was rejected by senior military figures. He is now coordinating Libya Shield Forces — a paramilitary group nominally under the control of armed forces Chief of Staff Abdel-Salam al-Obeidi — along with forces from the Interior Ministry-aligned Supreme Security Committee militia.

As Badi and his forces fight through the streets of Tripoli, assassinations in the rest of the country continue unabated. Hasan Kamouka, police chief of the western city of Sabratha, was found assassinated on July 27.

Overall violence in Libya has been high this year, with July by far the worst month for killings. According to Libya Body Count, to date in 2014 at least 650 people have suffered violent deaths, and among those, 348 were killed this month. Dozens were killed this past weekend alone.

In Benghazi, the fighting between Islamists and forces led by Khalifa Hifter, a retired general and former chief of staff for Moammar Gadhafi, is becoming bloodier. Hifter began his campaign in May in response to violence by Islamist militant groups and their open discussions of a purge of senior military officers. He counts multiple influential militia leaders among his allies.

Hifter’s forces have also been bolstered by the defections of former air force chief Saqr al-Jaroushi, head of the navy Hassan Abu-Shannaq, and the air defense forces chief Jomaa al-Abani. Hifter has publicly stated that he intends to establish what he calls the Supreme Council for the Armed Forces in Libya.

The fighting on July 27 left dozens of fighters dead, including Ahmed al-Zahawi, the brother of Mohammed Ali al-Zahawi, leader of Ansar al-Sharia in Libya. Posts on the group’s social media accounts indicate that over the weekend Ansar al-Sharia obtained armor and artillery and has begun to use it. As fighting peaked, Zahawi was spotted on the front lines.

Lining up with Hifter’s forces in Benghazi are the Saiqa Brigade, under Col. Wanis Bukhamada, and the influential tribal leader Ezzedin Wakwak, who granted Hifter use of the Benina airbase. Against them are three Islamist militias — Ismail al-Sallabi’s Februrary 17 Martyrs Brigade, the Rafallah al-Sahati Brigade, led by Mohamad al-Gharabi, and most important, Zahawi’s Ansar al-Sharia.

Benghazi has become so dangerous that members of the newly elected House of Representatives, who decided to move the legislature from Tripoli to Benghazi, are planning to relocate the body even farther east, to Tobruk, according to Libya analyst Mohamed Eljarh, who attended meetings of the body.

The international community‘s response to the Libyan crisis has been limited. Special envoys from the Arab League, the European Union, France, Germany, Italy, Malta, Spain, the United Kingdom and the United States have called for an immediate cease-fire, and on July 23 British Ambassador Michael Aron met with Prime Minister Abdullah al-Thani to discuss the importance of getting the militias to put down their arms.

On July 28, the prime minister’s office officially requested international assistance to put out the fires. Officials were hoping for planes to extinguish the flames. This request, like similar requests by the government for help enforcing a cease-fire, will not be granted. No country appears to see itself as having sufficient interest in assisting the government, which has little real authority. In any case, militia forces are equipped with anti-aircraft weaponry and would be none too pleased with foreign intervention of any kind.

Not only is there no appetite for genuine assistance, but the Austrian, Dutch, German, Japanese, Turkish, and US embassies have all closed and evacuated diplomatic staff within the last few days. One European ambassador told Al-Monitor, “We’re staying, but we’re just trying to find a way out of this mess.”

The Libyan government has formed a team led by Mustafa Abdul Jalil, former head of the National Transitional Council, to negotiate a cease-fire with the militias, but little has been heard from the effort thus far. Meanwhile, the influential embassies are mostly empty, with the notable exceptions of the United Kingdom and France, and the United Nations has withdrawn its mission.

 

This article was originally published with Al-Monitor on July 29.

Will Sisi’s Presidency hurt the rich, or the poor?

Egypt’s new President, former military head Abdel Fattah el-Sisi, is beginning to show his hand on economic policy – but despite tax hikes intended to appease populist demands, his regime is still rooted in the support of the country’s business elite.

Following Mr Sisi’s formal election in late May, after nearly a year at Egypt’s helm following last summer’s military coup, the Finance Ministry has revealed plans to raise taxes on companies and high earners. These initiatives are being used by the government to bolster its claim to be pursuing the redistributive policies demanded by protesters in Egypt’s 2011 popular uprising.

The policy drive began when Finance Minister Hani Qadry announced plans for an additional 5 percent tax on individuals with incomes in excess of 1m Egyptian pounds (around $140m) in May.

Although Mr Qadry was keen to stress that the tax would only be in place for the next three years, the announcement of a further tax, this time a 10 percent capital gains tax intended to raise $1.4bn for the state coffers, hit the stock market hard. The country’s key index fell by over 4 percent in two days.

The Finance Ministry feared the market’s reaction and immediately moved to announce that exemptions would be added to the legislation for low value dividends. The tax was also amended to halve the rate paid by the country’s biggest investors – shareholders who own more than 25 percent of a company – thereby tempering the effects of the legislation considerably.

The government then announced that it would abolish a 2013 transactions tax, and that state employees would receive a 10 percent raise beginning at the end of this month. The pay rise will further widen Egypt’s budget deficit which is currently estimated to be around 12 percent of GDP.

According to Amr Saleh-Ahmed, tax consultant at Metlife Egypt, many in the market believe the new taxes are a mistake.

“The tax will definitely raise revenue for the government, but a lot of the gains will disappear because of lost investment,” he tells This is Africa.

“The government says this tax regime will only be in place for three years; however, it is possible that it will go on longer. They are doing this because of holes in the budget, and holes in the budget will not disappear after three years,” he says.

Nevertheless, Egypt’s investors are still treating Mr Sisi kindly, and despite some volatility the market is performing far better than at any time under deposed President Mohammed Morsi. A number of prominent investment decisions have recently been announced, with British Petroleum’s plans to invest $1.5bn in Egypt this year to boost production of natural gas heading the list.

Meanwhile Egyptian billionaire Nassef Sawiris, whose family heads the sprawling Orascom group, announced on 10 June that he will set up a new investment firm with backing from investors in the Persian Gulf, Europe, and the United States. The firm claims to have already invested $55m in Egypt’s health sector.

“Examining the macro picture of Egypt, one would realize immediately that the economy needs fiscal consolidation. This is a measure that would entail increasing the revenue side and reducing the expenditure, and hence this tax would be a step in this direction,” Wael Ziada, head of Research at the Egyptian investment bank EFG Hermes, tells This is Africa.

But Mr Ziada believes that for now the planned taxes will actually have relatively little effect, neither making investors poorer nor the government richer. The true aim may well be to provide the appearance of softening the blow of coming austerity measures, including cutting fuel subsidies.

“The importance behind this move is to usher a clear message to the masses, who perceive investors in the stock market as the highest income bracket, that everyone with no exception will have to shoulder the burden of fiscal consolidation – especially if you are about to deregulate energy prices and restructure subsidies,” he says.

The government is attempting to fill gaps in the budget by cutting spending, especially on social welfare programmes for the poor, and is planning to issue an international bond with a value of between $750m and $1bn sometime this year.

Mr Sisi’s regime has also hired US consulting firm Strategy & (formerly Booz and Company), and Bermuda-based US investment bank Lazard to advise on economic policy. The firms are promoting pro-austerity policies that will prepare Egypt for negotiations for a loan from the International Monetary Fund.

According to Joel Beinin, professor of Middle East history at Stanford University, these firms now appear to be some of the key actors shaping Egyptian economic policy.

“This suggests that there is very likely to be a continuation of the main lines of economic policy followed in the last decade of Hosni Mubarak’s rule, although Sisi will try to cordon off the military’s economic activities from market competition and privatization,” he says. “If this economic program can be successfully installed, the rich have nothing to fear.”

Egypt’s business world is strongly tied to the military establishment that forms Mr Sisi’s power base, and the chief executives of many of its largest companies are former generals. For now, all signs indicate that Mr Sisi stay the course approved by the country’s wealthy investors. Egypt’s poor, however, face the likelihood of austerity measures that will continue to push living costs higher.

 

This article was originally published with Financial Times: This is Africa on June 17 2014.

North Africa Burns Billions on Energy Subsidies

In total, the governments of Egypt, Algeria, Libya, Morocco and Tunisia spend more than $45bn on energy subsidies each year – a figure that dwarfs spending on healthcare and education, according to the latest available data. Yet as the cost of fuel continues to grow, governments are trapped between the unsavory options of cutting subsidies and facing popular unrest, or going broke trying to continue paying for them.

Governments in energy producing countries, including those in North Africa, have traditionally supported domestic demand for energy by fixing prices at levels deemed affordable so their citizens are not priced out of the market by global energy demand.

The subsidies not only help with the cost of goods like petrol or cooking gas, they also indirectly reduce the costs of goods and services which use energy in production, lowering overall living costs.

However the cost of subsidies has ballooned in recent years. In Egypt, for instance, the government now spends around 20 percent of its annual budget fixing the price of energy.

“The extent of a government’s ability to cut subsidies is dependent on the amount of confidence and support it has from the population. In North Africa, there is clearly little of that at the moment,” Glada Lahn, senior research fellow for Energy, Environment and Resources at Chatham House, tells This is Africa.

However, Ms Lahn says, “the question is whether this is economically sustainable, and the answer in North Africa is definitely not. Governments have seen disasters in other countries where reforms have been tried and are naturally concerned, but long term the problem will have to be addressed.”

Taking the plunge

On 1 February, Morocco broke rank and announced that it had become the first country in the region to stop subsidising gasoline and fuel oil, and that it would be substantially reducing subsidies for diesel over the next few months.

Morocco spent more than $5bn on energy subsidies in 2013. Diesel subsidies were one of the most substantial state bills, but 80 percent of the fuel was consumed by the richest 60 percent of Moroccans.

Plans to reduce subsidies have been in the works for some time. With support from the IMF, the government developed a plan which linked the hikes to an agreement extending a $6.2bn loan to the Moroccan state in 2012. In addition, a new deal with the World Bank will see the state receive an extra $400m per year between 2014 and 2017.

When the plans were first announced last October, five ministers from the ruling coalition party, Istiqlal, resigned. They accused the leading Islamist Justice and Development party of hurting the poor.

In Tunisia, the Islamist Ennahda government – which was replaced by an independent cabinet in December – had also planned to heavily reduce the amount of money it spends on energy subsidies. The state energy subsidy bill in Tunisia is the smallest in the region, but is still estimated to be worth around $2bn, or more than 10 percent of the national budget.

However, plans had to be suspended in the face of popular pressure. Protests and demonstrations in the capital made policy makers – already burdened with managing a political transition and bringing in a new constitution – cancel the price hikes. Tunisia’s unemployment rate is the highest in the region at 15.9 percent, and youth unemployment has been estimated at around 30 percent.

The IMF ‘s crusade

According to the IMF, which has been strongly lobbying for the removal of the subsidies, while poorer consumers are the main target of subsidy benefits, but in fact disproportionately end up going to the rich and middle classes.

In one example, the IMF shows that in Sudan only around 3 percent of fuel subsidies go to the poorest 20 percent of people, while the richest 20 percent receive over 50 percent of the subsidies.

The IMF now says it is time for action, and has particularly targeted North African countries, where national finances have been severely affected by both the global financial crisis and the wave of popular uprisings that began in 2011.

“Everyone, the rich and the poor, benefit from these subsidies by paying lower prices, but governments in North Africa would get more ‘bang for the buck’ if they removed or reduced subsidies and targeted the money directly at helping only the poor,” a spokesperson for the IMF told This is Africa.

In high level meetings with Finance Ministries and Executives across the region, the IMF is pushing for cuts that would allow funds to be reallocated to more productive public spending, including promoting energy saving technology and reducing pollution.

A World Bank official in Cairo told This is Africa that the Bank is supporting the IMF in this drive, particularly by holding roundtable meetings with government officials, and arranging for international economists to make presentations to leaders promoting subsidy reductions.

But cutting subsidies is often easier planned than done. Sudan is a case in point: last September, the government made a shock announcement that it was removing fuel subsidies, doubling the price of fuel overnight. In response, widespread protests turned into riots. In the end, more than 200 were killed in a brutal crackdown by security forces.

Egypt fears for stability

In Egypt, energy subsidies have become all but unaffordable. Constituting around one fifth of the annual budget, the spend is equal to three times the bill for education and seven times what is spent on healthcare.

Oil minister Sherif Ismail has said that petroleum product subsidies alone are expected to increase by 10 percent in 2014, which would see the cost to the government rise to almost $20bn.

The benefits are also particularly badly distributed. Only around 3 percent of diesel and gasoline subsidies benefit the poorest 40 percent of the population.

The Islamist government of Mohamed Morsi attempted to cut subsidies, but due to popular opposition to the plans – and recollections of riots in Cairo when President Anwar Sadat attempted to cut state subsidies in the 1970s – the administration back-pedalled.

However, the Finance Ministry announced on 15 April that it will again attempt to make Egypt swallow its medicine. The head of the ministry, Hani Qadri, said in a public statement that plans to cut subsidies will be announced after the May Presidential elections, which are expected to bring Field Marshal Abdel Fattah el-Sisi to power.

The smuggling problem

In Algeria, energy subsidies have created additional problems beyond balancing the state’s books. The country spends more than $14bn per year (7 percent of GDP) subsidising energy. Not only do the benefits often miss the poor, many of them are going abroad.

Smuggling across Algeria’s almost 4,000 miles of land border is booming. The black market in fuel along the border with Morocco, which has been officially closed since 1994, is particularly active. As a result, in addition to rising domestic demand for energy damaging export revenues, criminal gangs are profiting from the handouts. The World Bank reports that roughly 25 per cent of all the fuel consumed in Tunisia in fact comes from Algeria through smuggling.

The losses that the Algerian state sustains due to smuggling have been estimated at $1.3bn per year. According to oil minister and temporary prime minister Youcef Yousfi, “smuggling of fuel is a gangrene on the national economy”.

In Libya, the subsidy problem has largely been lost amid drastic security concerns, according to a Libyan banker working for an international bank based in Britain. The aftermath of the country’s 2011 revolution that overthrew long-time dictator Colonel Muammar Gaddafi has been turbulent, with militant groups still roaming the country.

“The two key policy issues we should be talking about are subsidy reductions and the privatisation of state companies, but in the country’s current state important reforms are very difficult,” the individual told This is Africa.

Libya’s subsidy bill is equal to around 9 percent of GDP, or $7bn, taking up almost 16 percent of a national budget already strained by ever rising salaries in a system where almost the entire working population is employed by the government.

 Popular backlash

Critics of IMF policy largely accept that energy subsidies are unsustainable in the long term, but say the IMF is disconnected from the political reality of actually removing them, and that mitigating social projects often will not be enough to support the poor.

“In North Africa, where a significant fraction of the populations suffers from poverty, unemployment, and depressed wages, any near-term subsidy elimination could carry severe socio-economic repercussions for the region’s most vulnerable citizens,” says Hassan Sherry of the Arab NGO Network for Development.

The IMF does note that cutting subsidies poses a risk to the poor. “Price increases can still have a substantial adverse impact on the real incomes of the poor through higher energy costs of cooking, heating, lighting, and personal transport,” the IMF explained in a briefing.

But Mr Sherry says that however much North Africa is spending on subsidies, the wider consequences of cuts have not been fully thought through.

“Given the heightened regional instability and the deteriorating social and economic conditions in North African countries, subsidy reform in the near-term is likely to provoke significant popular backlash,” he says, “which might entail using force by the authorities.”

This article was originally published with Financial Times: This is Africa on May 2.

What future for Libya’s Banks?

While Libya’s government and economy struggle to stay afloat through the tumultuous post-Gaddafi transition, the country’s banks are holding assets valued at up to $170bn that are doing little more than gathering dust, according to banking sources and financial institutions.

In the last 12 months, rebel blockades of eastern oil terminals and the Tripoli-based central administration’s inability to maintain authority in eastern and southern towns have crippled the country’s national finances.

Only last week, rebel groups orchestrated the lifting of oil from the Es Sider port without authorization from Tripoli. The stolen oil was loaded onto the Morning Glory III, a North Korean flagged 21,000 tonne tanker named, which managed to evade the Libyan authorities for almost a week before being stormed by US Navy SEALs and returned to Libya. The incident led to the sacking of Prime Minister Ali Zeidan by the country’s interim General National Congress (GNC) on March 11.

Oil exports account for more than 90 percent of Libya’s government revenue, so blockades such as this one have led to a ballooning budget deficit. As a result, the country is desperate for capital in order to bridge shortfalls and rebuild vital infrastructure.

The capital is there, at least in theory. According to one source in the Central Bank, the total value of assets held in Libya’s banks may be as high as $170bn, with $90bn at the direct disposal of the Central Bank and $60bn controlled by the state investment company, the Libyan Investment Authority (LIA).

“There’s a huge amount of dormant money because the banks are acting like safe deposit boxes, not financial institutions,” Namaan el-Bouri, the fund manager of Tadawul Real Estate Fund, tells This is Africa.

These assets should be leveraged to help rebuild the country by providing funds for private business and public infrastructure investment, he argues.

“Most of the assets are sat in the Central Bank, and this is a big part of the problem. The status quo suits those in political power, some of whom really do not know what they are doing. Everyone’s focused on the security situation, but security could be restored with growth and investment,” he explains.

Accumulated wealth

In the decade preceding the 2011 uprisings that led to the dismantling of Muammar Qadhafi’s autocratic regime, Libya’s partial reabsorption into the world economic system led to selective wealth accumulation. The value of assets held in Libya’s commercial banks grew by over 300 percent. In 2003 they were held to be around $11.5bn. By 2010 estimates reached over $50bn.

But the assets have historically had difficulty finding their way to use in productive investments.

In 2010 just 13.5 percent of bank assets constituted loans to the private sector. The problem has continued in post-Qadhafi Libya. Last year, the country’s loan-to-deposit ratio was approximately 23 percent. By comparison, the regional average was more than 80 percent.

Libya’s population is growing at around 1.7 percent a year, and 45 percent of the population is under 25 years old. The state claims the unemployment rate is 15 percent, but youth unemployment is believed to be much higher. At least 150,000 jobs a year will be needed for the next five years in addition to the 860,000 jobs currently needed to fix the unemployment problem.

More freely available investment capital could help stimulate job creation, but banks face serious problems in loaning to business – in large part due to problems securing collateral.

“In Libya, unfortunately, we have a structural problem with securitizing any loan and this is the main reason banks are not lending,” says Husni Bey, the chairman of the largest private holding group in Libya, HB group.

“Property is key in all countries as an asset for banks to loan against, but in Libya this is not functioning.”

Mr Bey says that Libya lacks an accurate and readily accessible land registry that can provide a framework for collateral, and as a result banks are not willing to lend to businesses.

“The land registry system is so messed up that banks won’t loan because forgeries are rife and there is no working system to authenticate land ownership, let alone a usable database,” he tells This is Africa.

“We have a very limited stock exchange, so land should be all the more important because banks need security.”

Mr Bey says the procedure to recover debts through assets is currently next to impossible, but the private sector itself is showing some signs of strength, and with political will the problem could be solved.

“This is very easy to fix. We are a country of six million and maybe one million families. Libya is not a city state like Dubai or Kuwait, but neither is it Morocco or Egypt. In Libya we have our own capital – we don’t need foreign capital for investment,” he argues.

Pushing through such significant reforms will nonetheless be difficult without concerted pressure from financial institutions themselves and sympathetic political groups.

The central problem

Such pressure has thus far not materialised. Some point to a high degree of crossover between state institutions and banks as contributing to sclerosis at the heart of the financial system.

“Almost all the banks in Libya are majority owned or even fully owned by the state,” a Libyan banker who works for one of the world’s largest banks and asked not to be named tells This is Africa.

State-owned banks do still dominate Libya’s financial world, but partial privatisations in 2007 saw France’s BNP Paribas buy a 19 percent stake in Sahara Bank, and the Arab Bank of Jordan take 19 percent of Wahada bank.

“The head of the Central Bank, currently Sadiq Kabeer, is selected by the GNC. He is a politically important figure, but frankly thus far hasn’t played an important role,” the individual says. Mr Kabeer is widely considered to be an ally of the Islamist faction within Libya’s GNC.

There have been tentative moves to get rid of Mr Kabeer, who is technically only an interim governor, including opening up the applications process for a new governor. So far, nothing has come of it. Mr Kabeer was criticized as under-qualified and incompetent by multiple sources This is Africa spoke to about the Central Bank.

While leadership remains an issue, structural reforms are also needed in the Central Bank if there is to be any prospect of Libya putting its extensive domestic wealth to use, according to Mark Dempsey, a former advisor to the Central Bank of Iraq who has published extensive research on Libya’s financial institutions.

“The question is how does Libya get its Central Bank working,” he tells This is Africa. “Ultimately we have to stimulate the economy by getting banks lending.”

There are three reforms that are needed, according to Mr Dempsey. First the Central Bank’s duties must be separated by creating an independent regulator. Second conflicts of interest, such as several board members of the Central Bank also having stakes in state banks, should be eliminated. Finally, a credit bureau system should be built in order to provide banks with data to make risk management decisions on potential borrowers, he says.

Though the steps are clear enough, catalyzing the political will to push through banking reform deadlock is difficult while the tenuous security situation remains in the foreground of most players’ thinking.

“All of this comes back to the dilemma of reform in Libya: how can it be done when nothing moves and so much energy is being devoted to security sector reform because of the militia crisis?” Mr Dempsey asks.

Fixing the financial system will not be easy. However, if Libya is to rebuild or begin to shield itself from the economic and political dangers of oil dependence, getting the country’s billions working for it will be a good place to start.

 

This article was originally published with Financial Times: This is Africa on March 26 2014.

 

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