Egyptian Premier Returns to Cage He Escaped Facing More Violence

The last stint in government for Egyptian Prime Minister Hazem El Beblawi ended in November 2011 when the entire Cabinet resigned after security services used deadly force to break up a protest without its knowledge.

The former finance minister now takes office days after clashes between Islamists and the army left more than 50 supporters of deposed President Mohamed Morsi dead. El Beblawi’s ability to stem violence, control the military and police, and bring money into the economy will determine whether Egypt escapes the turmoil that has plagued the nation since the revolution that toppled Hosni Mubarak two years ago.

The more this instability endures the more unlikely that tourists will come to Egypt and the more unlikely that investments come to Egypt,” said Yasser el-Shimy, an analyst in Cairo at the International Crisis Group, which compiles reports on conflicts. “This will make it always present in the mind of the world and Egyptians that things are not working out.”

Backed by $12 billion of aid pledges from Gulf nations and with a line-up of ministers including a former World Bank economist, El Beblawi’s first challenge is how to placate a population whose desire to improve living standards is matched only by divisions about how to do so.

Healing a divided nation is already complicated because Morsi’s backers refuse to recognize the new government and vow to remain on the streets until the ousted leader is reinstated.

High Expectations

For their part, investors have welcomed the political transition and the influx of aid pledges, which HSBC Holdings Plc says covers this year’s estimated current-account deficit and almost half of the budget shortfall.

The perceived risk of Egypt reneging on its debt has waned, with the cost of credit-default swaps plunging 225 basis points, or 2.25 percentage points, since Morsi’s ouster on July 3 to 675, according to data compiled by Bloomberg. The benchmark EGX 30 stock index has gained 7.8 percent in the same period.

“Expectations are sky-high,” said Samir Radwan, a former finance minister who was also approached for the premier’s job before the selection of El Beblawi, 77 this year. “The management of these expectations is part of this government.”

The new Cabinet was sworn in yesterday in Cairo, hours after pro-Morsi demonstrations degenerated into violence, leaving seven people dead and hundreds injured.

The army removed Morsi one year into his presidency after mass protests against record unemployment, security breakdown, fuel shortages and what opponents said was his attempt to tighten the grip of Islamists on power.

Elections

Interim President Adli Mansour, chief justice of the constitutional court, laid out a timeline for constitutional amendments, followed by parliamentary and presidential elections. The Muslim Brotherhood, from which Morsi hails, and other Islamists have spurned offers to join the Cabinet.

El Beblawi selected Ziad Bahaa-Eldin, a former lawmaker and regulator of financial markets, as deputy premier. Ahmed Galal, an 18-year veteran of the World Bank, was appointed finance minister while Ashraf El-Arabi was named planning minister, a post he held under Morsi.

Previous prime ministers failed to clip the wings of the interior ministry and assert control over the military, two institutions that had traditionally answered only to Mubarak, a former air force commander. A prolonged street mobilization by Islamists, the same tactics their opponents had used, risks more clashes with security forces, said El-Shimy.

Street Politics

El Beblawi likened being in government to a cage, according to a book on his time in office.

The last administration he served in failed because its “biggest concern became responding to street demands instead of leading it,” El Beblawi wrote. “The street is always concerned with its immediate needs, but the government’s responsibility should be ensuring the future as well as the present.”

The new government inherits a budget deficit that may widen to 12 percent of economic output this year, the highest in the Middle East, according to the estimates of 11 analysts on Bloomberg. Economic growth may slow to 2 percent, near the worst pace in two decades, while the rate of inflation, at 9.8 percent in June, is the highest in two years.

“The bottom line is that Egypt, even in a good year, can barely generate enough revenue to support the welfare state the population was told that it would receive,” said Crispin Hawes, head of the Middle East program at New York-based Eurasia Group. “El Beblawi, who is a competent economist, understands the extent of the problem. Ultimately, where we are today, is much worse than where we were two and a half years ago.”

Policy Changes

Policy will focus on attempts to restore security, ease political polarization, revive economic growth and “make gains in the issue of social justice,” Bahaa-Eldin, the deputy premier, said by phone July 15. It will leave “significant policy changes” to elected officials, he said.

Circumstances are not conducive to restart talks with the International Monetary Fund to conclude a $4.8 billion loan agreement, Planning Minister El-Arabi said. Talks with the IMF were stuck amid Morsi’s reluctance to impose measures such as raising taxes and cutting energy subsidies.

The aid package from Saudi Arabia, Kuwait and the United Arab Emirates leaves “very little incentive to introduce the necessary reforms,” according to Said Hirsh, a partner at London-based economic consultants Volterra Partners. As a result, Finance Minister Galal has little scope to trim the budget deficit, he said by e-mail.

Government’s Cage

During El Beblawi’s tenure in that job, he sought to restrain spending, reduce energy subsidies for the wealthy and set a cap for government wages. In the book on his four months in the “government’s cage,” he cast then-premier Essam Sharaf as “too polite” of a leader.

Galal, in a paper published two years ago, urged resisting the temptation to widen the budget deficit to placate protesters. He said the government can take short-term measures to create more jobs such as providing temporary holiday on payroll taxes to private employers.

Now in government against the backdrop of violence and economic hardship, El Beblawi and his team have little room for error, according to Radwan, the former finance chief.

“In a highly explosive situation, you don’t pour oil on the fire,” he said by telephone. “You have to be extremely careful. People are tired.”

Source:Bloomberg