Egypt’s new president faces lengthy economic agenda
Cairo, Egypt David Rosenberg (The Medi – Egypt’s new president, Mohamed Morsi, could take some pleasure in seeing the Egyptian Stock Exchange rise in the days after the news of his election victory became known. The Egyptian Stock Exchange posted a power rally, with its EGX 30 index tacking on 11 percent Sunday and Monday.
But it is unlikely Morsi will be hearing much more encouraging news from the economy anytime in the foreseeable future. By almost every measure, Egypt is in deep trouble: economic growth has stagnated, foreign currency reserves are down to dangerous levels, the government has a yawning budget deficit and political uncertainty remains overwhelming.
“The rally is mainly a sign of relief. If Ahmed Shafik had won it would have been worse, with riots and violence,” Said Hirsh, Middle East economist at London-based Capital Economics, told The Media Line.
Egypt has manifold political problems, not the least because the army has suspended parliament, the country has no constitution and parts of the country have become lawless, most notably the Sinai Peninsula. But economists say the new government has no more than a few months to get its economic house in order before facing a full-fledged financial crisis.
“Unless military backs down or something happens on the parliamentary front, he [Morsi] won’t be able to do anything except the day-to-day running of the government,” said Hirsh. “You can’t expect to see any major reforms enacted. The coming months will be clashes between the military and the president.”
But Egypt’s economy is in urgent need of treatment. Mass protests, disorder and fleeing tourists in the early days of the revolution caused Egypt’s economy to contract 4.3 percent in the first quarter of 2011. Since then it has stagnated. Growth will slow to less than 2 percent this year, less than 2011′s 2.5 percent, central bank governor Farouk El-Okdah said last week. That is far less than the economy requires to increase incomes and create jobs.
The current account deficit widened to $11 billion in the first nine months of its 2011/12 fiscal year, more than double levels a year ago, as foreign investment has dried up. Although they have edged up in the past two months, the country’s foreign reserves have plunged by half since the revolution to $15.5 billion, equal to less than three months’ worth of imports.
The Egyptian pound has depreciated from 5.87 to the dollar in February last year to 6.055 on Sunday, its lowest level in seven years.
Underscoring the economy’s problems, the credit-rating agency Fitch last Friday downgraded Egypt’s sovereign credit rating to B-plus from BB-minus to junk status, saying the country’s murky political outlook was likely to delay the structural reforms needed to kick start recovery. Fitch assigned Egypt a “negative” outlook, meaning more downgrades are likely to be in store. The government’s latest effort at borrowing, a four-billion-pound ($661 million) sale of Treasury bills, came up short on Sunday.
On the positive side, in May the government raised $1 billion in dollar-denominated treasury bills to local banks followed by $1.5 billion in budget support from Saudi Arabia. Egypt is expected this month to get $1 billion to $2 billion from the sale of local mobile telephone operator Mobinil to France Telecom. All of that will provide some relief while Morsi tries to grapple with the economy.
Omar Ashour, a visiting scholar at the Brookings Doha Center and now in Cairo, said he Morsi government should be empowered by a coalition with leftists and others who are all opposed to the military’s attempt to retain power. He said righting the economy is important to Morsi and his followers, who are ascending to power for first time in the movement’s 80-year history.
“I think it’s a priority,” said Ashor, who is director of Middle East Studies at Britain’s University of Exeter. “He wants to show the voters the Muslim Brotherhood is capable of giving them results.”
But how he will do that is anyone’s guess.
The economic platform of his Freedom and Justice Party (FJP) calls for reviving economic growth through good governance and cracking down on corruption. But Ibrahim Saif, and Muhammad Abu Rumman in a paper for the Carnegie Endowment for International Peace, note that the program contains both few details and many contradictions, like calling for increased government spending while containing the budget deficit.
The Muslim Brotherhood’s leadership circles have little expertise in economic policy, they said.
“It is likely that hesitation on the part of investors will continue until fuller political stability is restored, with FJP rhetoric underlining the state’s right to interfere in many areas under the banner of ‘social justice’ further worrying investors who might be considering putting their money into Egypt,” they said.
The first test of the new government will be negotiating terms for a $3.2 billion the International Monetary Fund and World Bank have offered, which Egypt badly needs to stave off a financial crisis. In parliament, the FJP opposed taking the loan for technical reasons, but during the presidential campaign, it vowed to reach a deal quickly and even hinted it might seek a bigger loan.
But the IMF’s terms are stiff. It wants Egypt to first implement austerity measures to get its budget deficit under control, line up billions of dollars in finance from foreign donors and get broad domestic political support.
Analysts said that without a sitting parliament, Morsi will have trouble showing he has political backing. Hirsh suggested that if he brings enough other parties into his cabinet, Morsi may be able to present his coalition as wide enough to meet the IMF standards.