Egypt’s January 6 partial Cabinet reshuffle was commissioned by President Mohamed Morsi in a bid to address the country’s ongoing economic woes. Double digit unemployment, high inflation, dwindling foreign reserves, and a sliding currency are among the long list of macroeconomic challenges that Prime Minister Hesham Qandil’s Cabinet has to tackle while keeping in check a sizeable budget deficit, projected at 11 percent of GDP. However, this latest ministerial shakeup fails to address a larger underlying problem, the unenviable paradox that Morsi is caught in – balancing long-term economic growth with short-term political ambitions.
On one hand Morsi has called on a technocrat-filled Cabinet to take the necessary measures to get the economy back on track, while at the same time he is being cornered into making populist decisions to help his political backers – the Muslim Brotherhood’s Freedom and Justice Party (FJP) – get (re-)elected to the People’s Assembly in upcoming elections, expected around March. Unfortunately for Morsi’s team, populist demands are not in sync with economic realities, and Morsi is walking a tightrope juggling the FJP’s political ambitions with the pressing need for economic reform.
State revenues cover only 60 percent of public spending. Last week, state media quoted recently ousted Minister of Finance Momtaz al-Saeed as saying: “The budget is an incurable disease.” Subsidies, government wages, and debt interest payments each account for around a quarter of government expenditure, far outstripping investment in social services such as healthcare and education. Morsi sought to form a government that could address the plagued system.
Upon taking office last July, the new president was prescient in calling on Qandil to form a Cabinet composed largely of apolitical technocrats. Among 34 ministries, only five minister positions were given to FJP cadres and the overwhelming majority of the top jobs were handed to independents. In fact, independents were appointed to head all of the seven economy-related ministries. While progress was made in formulating an economic program, the opposing forces of pragmatism and populism have resulted in considerable policy incoherence and inconsistency.
Party Interests Before Economic Prudence
Sweeping tax changes were announced in early December, making up part of the new economic program that Egypt had presented to the IMF for a $4.8 billion loan (a letter of intent was signed in November). However, on December 9, barely a day after the final details of the reform plan were revealed, Morsi cancelled the tax changes, citing the lack of public dialogue as the reason for this about-face. This sudden flip by Morsi left Qandil’s Cabinet surprised if not embarrassed. The timing could not have been worse, as the IMF was due to put the loan to a vote at its December 19 board meeting. The final decision on the loan has been deferred, at Egypt’s request. The new tax system would have carried significant economic benefit – to the tune of 20 billion Egyptian pounds in government revenues by the end of the current fiscal year. However, several FJP officers voiced concerns that this is not an “appropriate time” to raise taxes. Officially, the finance minister left his post this week for health reasons (denied by al-Saeed himself), but many believe that his tax plan was ultimately what brought about his early retirement. The tax proposal is now under public discussion and will be enacted by the new Shura Council, which has full legislative powers until the People’s Assembly elections. However, given that two thirds of the Shura Council members are Islamists, it is unlikely that they will rush to stoke the fire with any tax increases before the elections.
Party interests have also come before economic prudence regarding labor issues. In addition to demands for higher wages, strikes across the board have seen workers calling for better working conditions, a range of benefits, and rehiring workers who had been laid off since the privatizations of the 1990s. Prior to the revolution, all unions fell under a state umbrella known as the Egyptian Trade Union Federation, which in practice controlled workers rather than representing them. Since the revolution, however, hundreds of unofficial unions have sprung up, calling for 1,300 demonstrations in 2011 and around 3,300 in 2012, according to the Daily News Egypt. By comparison, in its 55-year history, the state union body only authorized two strikes. Morsi has made it a priority to address “balanced labor rights” – ensuring that both workers and employers are heard. In practice, however, the government has been actively working to thwart disruptions to business, given the dire economic impact of industrial action. Minister of International Cooperation Ahmed al-Araby said that strikes and protests will have caused 100 billion Egyptian pounds in economic loss in the current fiscal year. Labor groups have criticized the government and Manpower Minister Khaled al-Azhary for not being supportive of the independent union landscape. Indeed, on November 25, Morsi passed a presidential decree amending the labor law, making him free to appoint whomever he chooses to the government’s union federation. Again however, as elections approach, FJP parliamentary hopefuls are eager to make good on promises for social justice, and tend to favor decisions in favor of workers.
Some court verdicts have ordered the rehiring of workers to factories. For example, in September Mexican cement maker Cemex was ordered to rehire some 2,000 workers that the company shed since it bought Assiut Cement in its 1999 privatization. While such a move certainly caters to populist demands, it also sends a very negative signal to current and potential investors. Cemex today has around 1,000 workers left, and tripling the workforce would be tantamount to returning to functioning as an inefficient public sector company; no private business would accept this verdict. While cases are being adjudicated in the courts on a legal basis, the way in which companies are targeted has been likened to a witch hunt.
A Brotherhood Takeover
As the legal framework is becoming increasingly Muslim Brotherhood-dominated, businesses and investors are worried that Morsi may be seeking to replace a Mubarak-appointed judiciary with a Muslim Brotherhood one. Despite the president’s pledges to strengthen the independence of the judiciary, his November 22 Constitutional Declaration put himself above the judiciary (although he subsequently stepped back in his December 8 reversal).
Looking at the background of the 10 new ministers that were sworn in Sunday, the big question is whether the new Cabinet is perceived as having a chance at economic revival or rather a consolidation of FJP power. Four of the newcomers are from the Muslim Brotherhood, increasing the count of Islamists in the Cabinet to seven. While some are relieved that the new Minister of Finance, El Morsi Hegazy, is not an FJP member and is a technocrat replacing outgoing al-Saeed, some have expressed concerns that he hails from the Muslim Brotherhood as well, and is a professor of Islamic finance. Critics also argue that Hegazy has no background as a macroeconomic manager, and view his selection as a stark reflection of the increased polarization of Egyptian politics, with the Islamists versus the rest. Opposition figures are united in the belief that Morsi is choosing political gains above economic interests. Indeed, few believe he has a choice: Morsi, who was nominated by the FJP to run for the presidency, cannot risk alienating himself by making decisions against his former party. The announcement of eight new governors this week – all Islamists – signals further amalgamation of power.
Primary among the consequences of Morsi’s delicate balancing act is the delay of the much needed $4.8 billion IMF loan. While the loan has been on the table for 20 months, the urgency has never been greater. Since the revolution, foreign reserves have plunged from $36 billion to $15 billion. According to a statement by Deputy Central Bank Governor Rania El Mashat this week, the Central Bank’s post-revolution policy of propping up the Egyptian pound came at a great cost to foreign reserves, and has failed. A new currency auction system launched on December 30 signaled that the Central Bank could no longer defend the currency using reserves. In a series of five such auctions in the last 10 days, the pound has slipped to 6.5 to the dollar, losing 6 percent of its value. Egypt’s foreign reserves are hovering dangerously close to the minimum recommended limit of three months of imports cover, and if the IMF loan does not materialize soon, the only alternative is to let the currency slide further. As Egypt is a net importer, purchasing power of Egyptians will be hurt by the currency decline, and poor Egyptians are already feeling the pinch of increased prices for basic goods.
While the $4.8 billion sum will itself only cover a month and change of imports, it will provide some much needed budgetary relief and also serve as a signal to international donors and lenders. Since the revolution, more than $50 billion has been pledged to support Egypt, but little has or will come through until the Egyptian government launches a viable economic program in earnest.
Despite an apparently productive IMF dialogue in Cairo this week, it is very difficult to see any final loan agreement until after the parliamentary elections. Time is running out, and this week’s cosmetic Cabinet makeover was another failed attempt at addressing deep seeded economic problems, serving instead to beef up Morsi’s political support. To prevent financial collapse, Morsi must resolve the tug-of-war of polarized politics and make some unpopular decisions even if he risks loosening his grip on power.
Mustansir Barma is a political economist and is presently the Senior Economic Researcher with the American Chamber of Commerce in Egypt. He is a regular contributor to Business Monthly.
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