Egypt Faces Moment of Reckoning on its Economy as Protests Wane
The initial euphoria of those who backed the military overthrow of Egypt’s elected Islamist government is fading and Egyptians must now reckon with an economy that remains in crisis, despite a large injection of financial aid promised by Gulf states supportive of the coup.
Energy-rich Saudi Arabia, Kuwait and the United Arab Emirates this week committed a collective $12bn in loans, grants, deposits and fuel to shore up the interim government put in charge of the country by the armed forces after it deposed and held Mohamed Morsi, the former president.
The fresh money could buy the interim government six to 12 months of breathing space. But analysts say it fails to resolve the country’s deep economic problems, and could even exacerbate them.
Egypt needs about $25bn in external funding over the next two years just to plug budget holes and finance foreign debt.
Over the past year, Egypt’s Islamist government received about $13bn in aid from its principal regional supporters Qatar, Turkey and Libya to make up for fleeing international business, a collapse in foreign direct investment and a drop in tourism and tax revenues.
Experts predict economic growth of no more than 2 per cent over the next year, not nearly enough to make a dent in unemployment, which officially stands at 13 per cent but is thought to be far higher.
“The fundamentals have deteriorated over the past year,” said Neil Shearing, chief emerging markets economist at London-based Capital Economics. “The steady drip-feed of economic aid means that Egypt will always be just on the cusp of economic crisis …The best-case scenario is that Egypt muddles through.”
Egypt was on the verge of signing a $4.8bn International Monetary Fund loan deal last year when Mr Morsi, under political pressure, backed off commitments to raise taxes and trim costly fuel and food subsidies. Development experts say the loan deal would have given other aid agencies, multilateral organizations and western financiers the green light to up their support to Egypt.
Instead Mr Morsi made only minor changes to the country’s expensive subsidy system, which drains foreign currency reserves, and raised public-sector salaries, contributing to the widening budget deficit. He also turned to international allies to help pay the country’s bills, somewhat masking the deterioration of its balance sheet. The toppling of Mr Morsi’s elected government by the military has also added legal complications to the provision of aid by western governments.
The IMF said on Thursday that it was not discussing a possible loan with Cairo but said it would be “guided, as is usually the case in these circumstances, by the views of the international community, in particular those of the fund’s membership”.
Egypt remains $8bn-$9bn in arrears on debts to international energy companies. Despite improvements in recent weeks, power outages continue to darken Cairo and long queues for gasoline could be seen this week on roadways outside the capital.
Mr Mansour has appointed as prime minister Hazem el-Beblawi, a liberal economist who has in the past argued for cutting subsidies, and many economists say such a move could help shore up the country’s economy. But few believe Mr Mansour’s government would implement any unpopular measures before parliamentary elections, slated for early February, and fear the funds pledged this week will simply be lost to financing fuel, wheat and other imports.
“The feeling is that Egypt is very tense, so it’s unlikely that there’s going to be a push for reforms within the next six months,” said Farah Halime, editor of the blog Rebel Economy and a fellow at the European Council on Foreign Relations. “Egypt needs to tackle the cause of its budget deficit and not keep adding this buffer of money.”
Some economists and experts are urging Egypt’s new leaders to cut subsidies and instead use the savings to give each Egyptian a monthly grant, a strategy employed by Iran that mostly kept the social peace but spurred inflation. Ms Halime cited a study proposing each Egyptian receive a monthly stipend of about £E30 coupled with phased price increases.
But some experts argue that cutting any subsidies in the immediate future could be counterproductive. “If you slash them you will have people out on the streets again and the economy will be at a standstill again,” said Ibrahim Awad, a professor of public policy at the American University of Cairo.
Others are urging a government-directed stimulus plan to simultaneously ease unemployment and improve infrastructure.
“The only appropriate way to use these loans and grants is public works in order to bring temporary stability to the country’s economy,” said Nazmi Rezk, an Egyptian investor and financial commentator. “If the new government spends this money only in solving reserves trouble without investing it, it will be an economic suicide.”
Source: Financial Times
