Egypt's Economy Stumbles

Shortages of foreign exchange and limited growth make things precarious.

Egypt is desperate for change, but whatever changes are made will bring pain to someone. Fired by the revolution that many saw as the cure for the political, social, and economic ills, many are not prepared to suffer any more.

When Mohammed Morsi ran for president in June 2012, he pledged that in one hundred days he would solve the problems of the provision of bread, a stable energy supply, safe streets, trash clearance and better traffic flows. His impossible pledge and his membership in the Muslim Brotherhood helped to convince 48.3 percent of the electorate to choose his opponent, Ahmed Shafiq, the last prime minister from the Mubarak administration.

At the end of the hundred days, nothing had changed and the criticism grew. He will have to do far better with broader areas of the economy than he did after his first hundred days—and quickly.

The constitutional referendum that was held in December revealed the weakness of the Muslim Brotherhood’s hold. The new constitution passed with the approval of only 20 percent of the potential electorate, while eighty percent either voted against it or didn’t vote. Those who did support the new law come mainly from the poorest regions of the country and are at the lowest income level.

Politics had been given a priority for the first six months of the Morsi administration. Once the referendum was over, attention turned to a practical matter: the economy.

The collapsing Egyptian pound demands immediate action. It had fallen by six percent by the end of December, a level against the U.S. dollar not seen since 2004. In spite of an emergency loan from Qatar, it continues to weaken with no bottom in sight.

Egypt is being hit by three blows that are depressing the value of the currency. The demonstrations in Tahrir Square and the increasing crime directed against tourists is driving down the number of visitors. Tourism in 2010 earned 12.5 billion dollars for the economy, but that has fallen to 8.8 billion with no upturn in sight. Tourism accounted for 6.7 percent of the GDP and at its peak made up 26 percent of foreign exchange.

In 2009, the transfer of funds from Egyptians abroad amounted to eight billion dollars, nearly six percent of the GDP and one third of the value of exports. But economic troubles in North America and Europe as well as the revolution in Libya (where 1.5 million Egyptians were employed before fleeing and expanding the unemployment rolls at home) have combined to decrease remittances. The funds are needed to offset the trade imbalance, a chronic problem. Egypt imports double what it exports; and exports have been impacted by the slowing global economy and the labor disorders that have accompanied the political protests.

The Egyptian Central Bank has opted to support the managed peg that has kept the Egyptian pound fixed against the U.S. dollar. Half the foreign reserves have been consumed in what is proving to be a futile effort.

At the end of December, capital outflows forced the government to impose restrictions on the amount of money that could be remove from the country. The exchange rate was breaking and the reserves had fallen to fifteen billion dollars or three months of what will be needed to finance imports. The country imports half of its food, which makes the maintenance of reserves vital.

The Central Bank could allow the pound to fall to conserve dwindling foreign reserves. That, however, would raise the cost of imports and add to the 4.1 percent inflation rate.

More government subsidies would be required to keep food prices from rising. That would expand the budget deficit beyond the present ten percent level and push the national debt above the current 76 percent of the GDP.

Subsidies account for thirty percent of the budget and are a focus of the IMF. A 4.8 billion dollar IMF loan depends upon Egypt reducing the subsidies and raising taxes.

A credit rating downgrade from “B” to “B minus” in December by Standard and Poor’s brought Egypt’s standing to the same level as Greece. The lowered credit rating makes the IMF loan vital. Only if Egypt can acquire the loan that was delayed in December will it be possible for loans from the European Union or the African Development Bank to be arranged.

After a year of negotiation with the IMF, the Morsi government had agreed to cut subsidies for butane, gasoline and food. These subsidies are viewed by the IMF as encouraging wasteful consumption, and are of greater value to upper-income Egyptians, who can afford higher prices. When the time came to act, the government retrenched on its program to cut the subsidies and, to avoid more disorders, raised taxes on capital gains, incomes and some consumer items.

The government has been forced to borrow to carry through what is hoped will be a temporary rough period. Qatar has come to the rescue by doubling its pledge to a four billion dollar loan as well as eighteen billion in future investments. Qatar National bank has bought a 77 percent interest in the French Societe Generale Egyptian unit for 1.97 billion dollars. This will give Qatar a foothold in the Egyptian financial market to support future investments.