Egyptian Economy Caught In A Political Bind

With the preliminary results of a referendum on Egypt’s draft Constitution appearing to lean in the Muslim Brotherhood’s favor, President Mohamed Morsi’s now faces his most divisive challenge yet as he attempts to implement difficult economic reforms at a time of widening unrest.

Days before the vote on the new charter, Mr. Morsi postponed a request for a $4.8 billion loan from the International Monetary Fund and delayed tax reforms that had been drawn up under an economic program negotiated with the I.M.F., prompting economists and opposition groups to accuse him of appeasing the public to gain the popular vote.

The government, which has been caught between recognizing the need for strict economic overhauls and simultaneously fearing a public backlash, has stalled on important measures that would give the nation its best chance of recovery. The president has delayed reforms of energy subsidies, the biggest burden on the budget, and reneged on other cost-saving plans, including a curfew on shops and restaurants that was intended to conserve energy at a time of critical gas shortages.

Now the Muslim Brotherhood’s political future rests on its ability to make an impact on the economy, but economists and politicians say political turmoil has made that nearly impossible.

“The government is on the one hand fully convinced they should have an agreement with I.M.F., but at the same time they are reluctant to take any steps that were agreed because of the voting that took place on the Constitution, and because of the impending elections of a new Parliament,” said Samir Radwan, who was appointed finance minister by President Hosni Mubarak in January 2011, when the regime faced unprecedented protests.

The Muslim Brotherhood has claimed a narrow victory in the first round of the constitutional referendum, with unofficial polls showing that 56.5 percent voted in favor of the draft. Critics say Mr. Morsi held off on any unpopular reforms to gain the popular vote. But the close vote is likely to inflame the political situation and further divide the Islamist political majority and the mainly secularist opposition.

“They couldn’t square the circle here and sudden postponements have led to confusion,” Mr. Radwan said.

Egypt struck a preliminary staff-level agreement with the I.M.F. last month that encompassed an economic plan that would change the energy subsidy and overhaul the tax system.

But in an unusual turnaround, especially after a public announcement, Mr. Morsi said the loan would be delayed, creating anger and buoying the criticism that the government makes most decisions behind closed doors, despite promises of increased transparency.

With public support sorely lacking, reforms needed to rebalance the budget will be hard to make, analysts say.

The “missed opportunity to unite the country around a clear economic vision has undermined the economy,” said Rachel Ziemba, a director at Roubini Global Economics in London.

Tax increases, which had initially been publicized by the government as progressive, in fact have fallen on many of the lower and middle classes. The reforms include taxes on essential items like water, oil and electricity, as well as on discretionary goods like cigarettes, soft drinks and alcohol.

Meanwhile, a coupon system for subsidized gas and fuel price increases were touted to start this month, but there has been no sign of any changes to the energy subsidy program.

Historically, there has been an unwillingness by Egyptian leaders to take any drastic actions. Mr. Mubarak was loath to make any changes to popular subsidies following the 1977 so-called bread riots when President Anwar Sadat tried to terminate state subsidies on basic foodstuffs. The government quickly rescinded the decision to halt the protests.

Economic advisers to Mr. Morsi concede that harsher reforms will be a hard sell but say they are discussing options that would soften the blow.

Abdallah Shehata, chairman of the economic committee in the Muslim Brotherhood’s Freedom and Justice Party and an economic adviser to the president, said the “key is to stimulate the economy” before making reforms.

“The government has to invest more in order to convince people of any type of reform. The people need to feel there is growth,” Mr. Shehatta said.

Nytimes