Fragile Egypt Economy Overshadows Morsi’s Vote Win

Egyptian President Mohamed Morsi will have little time to savor victory in pushing through a new constitution as it may have cost the Islamist leader broader support for urgent austerity measures needed to fix the creaking economy.

By fast-tracking the constitution through to a referendum that the opposition said was divisive, he may have squandered any chance of building a consensus on tax rises and spending cuts that are essential to rein in a crushing budget deficit.

Unofficial tallies from Morsi’s Muslim Brotherhood showed the charter was approved by a 64 percent majority. But opponents said he lost the vote in much of the capital, while across the nation he alienated liberals, Christians and others worried by the text that was drafted by an Islamist-dominated assembly.

Opponents say such divisions will fuel more unrest in a nation whose economy has been pummeled by turbulence since Hosni Mubarak was overthrown almost two years ago, scaring off investors and tourists that are both vital sources of capital.

Without broad support, Mursi’s government will find it harder to implement reforms needed to secure a $4.8 billion loan from the International Monetary Fund. The Muslim Brotherhood’s party, which propelled Morsi to office, may also face a tougher fight in a parliamentary election expected in about two months.

“For austerity measures to be made at a time when the political system is being opened and millions of people are being enfranchised, you need political consensus within the political class,” said Amr Adly, an expert on the economy.

Yet, even though there is broad acceptance of the urgency of fixing the battered economy, Adly said Mursi’s approach in pushing through a constitution that angered opponents would encourage his rivals to capitalize on any public backlash against austerity rather than help sell reforms to the nation.

“His political rivals are already dealing with these problems on a very opportunistic basis,” said Adly, head of the social and economic justice unit at the Egyptian Initiative for Personal Rights. “There won’t be any prospect of ending … violence in the streets or very deep political divisions.”

UNITED

Egypt’s fractured opposition, defeated at the ballot box by Islamists in each poll since Mubarak was overthrown in February 2011, unified their ranks after Mursi expanded his powers in a decree on November 22 to push through the constitution.

“What Morsi did has united us,” said Ahmed Said, head of the liberal Free Egyptians Party and a leading member of the National Salvation Front coalition, adding he expected a unified approach to the upcoming parliamentary election.

That would give the opposition a much better chance in parliamentary polls against disciplined Islamists, who have built a broad grass-roots network across the nation over decades that liberals and other non-Islamists cannot yet match.

Though Said agreed steps were needed to fix Egypt’s economy, he said Mursi had made no effort to discuss it with his rivals although they were a national concern. The IMF has long said a broad political consensus to reforms was needed for a loan.

“Who wouldn’t agree with economic reforms?” Said asked, but added: “We have not been consulted at all with regard to supporting such policies or not, we are not sure what is going on in the country.”

Morsi now faces the prospect of having an opposition seeking to score political points from any tax rises and measures to reduce spending, particularly steps to rein in fuel subsidies in a nation where rich and poor have become used to cheap energy.

That could make it more of a challenge for Islamists to win votes in the parliamentary election.

Though the opposition have drawn tens of thousands of Egyptians to the streets on occasion, Islamists have done so with greater regularity and also have a strong record of getting out the vote in the more local politics of a parliamentary poll.

But nation’s political divisions have already taken their toll on the president’s initial economic reforms.

Shortly before the referendum, Mursi introduced increases on the sales tax on goods and services that ranged from alcoholic beverages, cigarettes and mobile phone calls to automobile licenses and quarrying permits. He withdrew them within hours under criticism from his opponents and the media.

An immediate result of Morsi’s policy U-turn was a delay in approving the IMF loan. The IMF said it would postpone its meeting in mid-December to approve the loan. Egypt’s government said it might now be approved in January.

Farid Ismail, a senior official in the Brotherhood’s Freedom and Justice Party, said Egypt could not be described as divided when two-thirds of those who voted backed the constitution but said all sides needed to discuss the economic issues ahead.

“We have an economic and social challenge and this is the time for people to present initiatives and engage in a national dialogue,” he said, adding that passing the constitution meant one major hurdle to stabilizing the nation had been overcome.

EXPECTATIONS

Yet expectations run high in a nation where demands for social justice and a better standard of living helped drive the 2011 uprising as much as calls for political freedoms.

“We had a revolution to make life easier and prices lower, not higher,” said 19-year-old student Sally Ahmed Kotb referring to Morsi’s tax plans as she went to the polls on Saturday to vote “no”. “This will lead to a hunger revolution.”

Once a darling of emerging market investors, Egypt’s economy has taken a hammering. The budget deficit surged to a crippling 11 percent of gross domestic product in the financial year that ended in June 2012 and is forecast to exceed 10 percent this year.

Without swift action, it could hit 13 percent, said Adly.

Among belt-tightening measures in the pipeline are steps to reduce how much subsidized gasoline drivers can buy, which is bound to be unpopular.

In the meantime, Egypt has been bleeding foreign reserves at a rate of about $600 million a month, cutting them to about $15 billion, less than half their level before Mubarak’s fall.

Some Egyptians are still ready to give Mursi a chance. Many of those who voted “yes” in the referendum backed the charter as a vote for “stability”, even if they had some reservations. But, even from supporters, Mursi may have limited leeway.

“Just as people rose against Mubarak, they can rise against Mursi,” said Mohamed Mohsen, a civil servant and Islamist backer who voted “yes” in the referendum. “Let’s give him two, three, four or five months to solve our problems then we can see.”

The government says it is already engaged in a “national dialogue” with political forces, unions and others to win public support for an economic plan it insists will not hurt the poor.

“Passage of the new constitution is unlikely to ease recent discord, but it nevertheless marks a significant step forward in Egypt’s labored political transition,” Simon Williams, HSBC economist in Dubai, wrote in a note after the constitution was approved in the first of the two-stage referendum.

He said progress on the IMF program could now resume swiftly, but added: “The temptation to avoid pressing ahead with unpopular policy measures may also prove ever harder to resist, particularly ahead of the parliamentary polls.”

Reuters