Egypt’s Economic Dilemma Requires a Combination of Economic and Political Reforms

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Since the January 25th Revolution, Egypt has suffered from a major economic crisis, in which the pace of economic growth during the past two years has fallen from the high rates achieved by the Mubarak regime (and confirmed by a number of international financial and economic organizations).  The average citizen, however, did not benefit from those high rates, serving as one of the many motivations for the uprising.  Since the victory of the Muslim Brotherhood candidate, Mohamed Morsi, who assumed the presidency in late June of last year, the economic situation of Egypt has grown worse by the day.  The official rate of growth during the past three months did not exceed 2.2%, while the rate of inflation reached 8.7% in February, the highest since 2010.  This is not to mention the unemployment rate, which rose to 13% during the last quarter of 2012, as compared with 9.8% during the same period of 2010.  This has been accompanied by a sharp decline in the foreign currency reserves, which fell from $37 billion prior to the revolution to $13.5 billion today.  The value of the Egyptian pound on the black market has also sunk to a rate of more than 8 pounds to the dollar, sometimes higher, while the official rate is slightly less than 7 pounds to the dollar.  It is the former rate, however, that reflects the actual value of Egypt’s national currency. 

The worsening of the economic crisis in the past several months is due to two main causes.  The first is political instability and the lack of consensus among the various political forces as to how to manage the transitional period.  The struggle between political forces and the Muslim Brotherhood has moved from conference rooms to the Egyptian street, where political tension and strife have begun to take increasingly violent forms.

This lack of consensus has had an effect on the political capital of the current Egyptian regime, subjecting it to a host of pressures from both donor nations and international financial and economic institutions.  This is not to mention the effect that the lack of security and political instability have had on the size of foreign and domestic investments, as many projects have relocated to more stable regions.  The current political and security situation in Egypt has repelled both local and international sources of income, leading to a halt in many investment projects, along with closures of factories in the face of increasing protests and violence.

The second and more essential factor in Egypt’s economic failure is represented in the actions of Hisham Qandil’s government.  Given the upcoming (albeit recently postponed) parliamentary elections, the government has been under pressure from the Muslim Brotherhood to come up with temporary solutions to chronic economic problems, problems which cannot be solved with such stopgap measures.  The government fears that if it were to embark on a program of austerity during this period of economic crisis, current Brotherhood supporters will turn elsewhere in the next elections.  This is particularly true given the recent increase in food and energy prices, a significant development in a country which is fundamentally dependent importing both, and which is currently suffering from the devaluation of its national currency against the dollar. 

The Qandil government is currently relying on loans from domestic sources, from foreign governments such as the Gulf States, Europe and the USA, and from international financial organizations such as the IMF.  Negotiations with the latter, in order to secure a US$4.8 billion loan that it would use to ease budget constraints, are currently in progress.  It has also tried to deal with the deficit through increased revenue, imposing new taxes on a number of goods.  The burden of these taxes will not be borne by the rich, as they represent an indirect tax on monopolized goods, the manufacturers of which will simply pass the value of the tax onto the impoverished consumer.  The Mubarak regime came to depend on similar strategies, which did little to reform the Egyptian economy and solve its long-term problems.  They represent nothing but temporary, stopgap measures, which the Muslim Brotherhood is using in order to preserve its political capital on the Egyptian street in the face of parliamentary elections, and which effectively impose the economic crisis on coming generations. 

The government’s failing economic and financial program will lead to a disastrous scenario in which the pound will fall still further against the dollar.  This in turn will have a profound, direct effect on the lives of Egyptians, whose food is heavily import-dependant.  In addition, a large portion of the energy used in Egypt is imported from abroad, which will in turn affect the transportation and production sectors.  The situation will lead to increased protests, given that the government will have dealt with economic and social issues exactly as its predecessor did.  Ultimately, this will affect the popularity of the Brotherhood regime on the Egyptian street, as continued economic crises lead to increased protests and demonstrations.  A real improvement in economic conditions, however, will require a serious solution, which gets at the root of economic problems, as opposed to superficial reactions and temporary palliatives.

If Egypt is to find its way out of the current crisis, which will have a huge effect on the course of the transitional period and on Egyptian security, the solutions should not be limited to temporary economic stopgaps, but rather should address the long-term financial situation.

Such a solution will not be merely economic, but also fundamentally political.  President Morsi and his government must deal with the economic crisis from a political standpoint, in that they must first work to achieve the (currently absent) societal consensus concerning the administration’s priorities during this period of economic transition.  An agreement must be reached as to the financial steps to be taken, so that Egypt may begin to back away from the economic precipice on which it is currently perched.  If such an agreement is not reached, the situation will only worsen, as the President will not possess the political and social capital he needs in order to successfully lead the country out of the present crisis.  If an agreement is achieved, it will improve President Morsi’s chances in his negotiations with donor nations and international financial institutions, as opposed to the pressures and concessions he would be forced to accept in the current climate.  Finally, President Morsi, his government, and the Brotherhood must realise that a solution to this political and economic crisis will not come in the form of temporary palliatives. 

To conclude, no economic reform pursued by the Egyptian government will succeed if it is not accompanied by an equivalent political reform.  The two must be balanced if all sections of Egyptian society are to come out successful, and it goes without saying that a societal consensus is a precondition for any policy, economic or political.

Amr Abd El-Aaty is an Associate Editor at the Journal of International Politics (Al Siyassa Al Dawliya), a publication of Al-Ahram Foundation in Cairo, and is a political science researcher at the Regional Center for Strategic Studies. 

Photo: Scott D. Haddow

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