As the first anniversary of President Mohammed Morsi’s term approaches on June 30, it is clearly evident that Egypt’s first democratically elected president has so far failed to tackle the core economic issues which fueled the popular uprising in January 2011.
President Morsi inherited an economy that was already floundering. Economic growth had fallen to 1.8 percent in 2011, inflation had jumped to over 11 percent, the official unemployment rate had crossed 12 percent, and the external current account was in deficit to the tune of $6.1 billion, or 3.6 percent of GDP. Moreover, the country had lost over $20 billion of its foreign exchange reserves in defending the stability of the Egyptian Pound.
Perhaps more importantly, the Egyptian economy had major structural weaknesses, such as deteriorating public finances, a distorted financial system that was not small business friendly, large and widening income and wealth inequalities, and a rigid labor market that constrained the private sector in creating jobs.
Tackling the immediate and long-term problems would have tested any government. For the Muslim Brotherhood, with no experience in running the country and its economy, it was an overwhelming challenge. The Freedom and Justice Party’s Nahda (Renaissance) Project, a 20 year social and economic blueprint was designed to be an alternative to the Mubarak crony capitalist system and serve as a guide for economic policy.
Morsi adopted the Nahda economic vision and ran his political campaign on promises and commitments to liberalize and transform the Egyptian economy to generate economic growth that would benefit a wider portion of the population and simultaneously ease the economic problems that beset the country during the transition period. His economic platform called for achieving a growth rate of 6.5-7 percent by 2016, reducing the unemployment rate to 7 percent, cutting inflation down to 4 percent, and lowering the fiscal deficit to around 6 percent of GDP.
What was unclear during the presidential election campaign, and in fact well into Morsi’s presidency, was what the government was going to do in the short-run to address the current economic problems the country was facing and to lay the foundation for achieving the longer-term objective outlined by Morsi in the campaign and in the Nahda Project. The government was totally absorbed in trying to handle the myriad political problems that arose and economic issues were put on the back burner.
As such, it took the Egyptian government some nine months from when Morsi took office to come up with an economic plan to address the more immediate problems. This economic plan, announced by Prime Minister Hisham Qandil in November, blended populist economic policies, such as higher taxes on the rich and increases in spending on social programs, with more traditional fiscal and monetary policies to reduce the fiscal deficit and improve the external accounts. A key component of this plan was the rationalization of the extensive subsidy system, which, even the Mubarak regime found too politically sensitive to address.
This economic plan was accepted by the IMF for Egypt to qualify for a $4.8 billion loan, financing that the country urgently needed. Unfortunately, it was jettisoned in December 2012 just as the IMF was about to grant its formal approval for a program. The continuing political turmoil in the aftermath of a number of Morsi’s decrees and the ongoing referendum on the constitution were important factors in Egypt’s decision not to proceed with the economic plan that it had presented to the IMF. But more specifically, the government realized that the increases of sales taxes on consumer items, an important measure in reducing the fiscal deficit, was not going to be accepted by the public in the politically-charged environment at that time.
In the absence of the implementation of a meaningful economic plan, the economy continued to drift and in some cases registered an even worse performance than in the SCAF regime. Growth in 2012 was still only about 2 percent, unemployment rose to 13 percent, inflation remained high at near 9 percent, and the Egyptian Pound continued to weaken. Foreign exchange reserves stayed low and would have been sharply depleted had it not been for the financing provided by some wealthy Arab countries.
From an economic standpoint, it would not be an overly harsh judgment to say that 2012 was a wasted year. Very few, if any, of the promises that Morsi made to the Egyptian public at the beginning of his presidency, were kept. The complete collapse of the economy was averted by the financial support from Egypt’s friends in the Middle East, but this generosity is a temporary solution and unsustainable in the long-run.
Egypt’s continuing economic malaise, if not crisis, is undermining Morsi’s credibility and hurting millions of struggling Egyptians. The protests scheduled for June 30 are a clear signal that Morsi’s first year in power has not improved the lives of Egyptians desperate for change. In the second year of his presidency, Morsi must shift his priority to improving the economy and thus avoid mass protests of the kind that toppled Mubarak.
What should Morsi do in 2013? First of all, his government has to complete negotiations with the IMF and implement an agreed economic program to send a message to investors and the international community that the government has got its economic act together. Second, he has to specify a longer term economic plan to realize the objectives laid out in the Nahda Project to meet the needs and aspirations of the Egyptian population. Even in his June 26 speech, Morsi did not present such a plan, and members of the opposition, in particular Amr Moussa, criticized him for not doing so. Unless Morsi is able to follow through on these two objectives, 2013 may also turn out to be another wasted year. And it is very doubtful that the Egyptian public will remain patient and endure another year of disappointment and disillusion, not to say real hardship.
Photo: Egypt Presidency