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Egypt's economy is collapsing, and no one is stopping it

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« on: July 15, 2013, 02:00:54 am »

Egypt’s Real Disaster: Away From Political Turmoil, an Economy in Free Fall

As interim Egyptian Prime Minister Hazem al-Beblawy works to fill out his fledgling Cabinet and return the country to something resembling stability, one of his most immediate challenges will be a task he, in theory, should be ably qualified to handle.

Al-Beblawy, a career economist and former Finance Minister, has assumed the reins of a country in economic free fall. The value of the Egyptian pound has plummeted to record lows, foreign-currency reserves have dropped to less than half of the $36 billion held by the regime of former dictator Hosni Mubarak before he was ousted in February 2011. The budget deficit has climbed to more than 11% of the country’s GDP. Tourism, one of the anchors of Egypt’s foreign-currency cash flow, has never truly recovered from the 2011 revolution. Early signs from the beginning of 2013 showed a steady increase in the number of tourists over the previous two years. But many of those have been attracted by bargains offered by hotels slashing their prices to maintain occupancy numbers. And each new round of political unrest scares away another month or two of visitors.

The situation may actually be even worse than the metrics that define it. Former Supply Minister Bassem Ouda, a Muslim Brotherhood member who resigned when former President Mohamed Morsi, a longtime Brotherhood official, was ousted by the military on July 3, warned last week that Egypt has less than two months’ supply of imported wheat left in its stocks — raising the prospect of a serious disruption in Egypt’s vital subsidized-food structure.

The prospect of a wheat shortage is particularly disturbing. Egypt is the world’s largest net importer of wheat, and a steady supply of affordable subsidized bread is a mainstay of the local diet. In the 1970s the late President Anwar Sadat attempted to raise the prices of subsidized bread; the result was several days of unprecedented protests and unrest that are now referred to as the bread riots.

Into this economic maelstrom steps al-Beblawy, 76; his appointment last week was almost universally praised by the international economic community.

“He’s very well known and well respected. And he’s a wise man,” said Ragui Assaad, an Egyptian-born professor of public policy at the University of Minnesota’s Humphrey School of Public Affairs. Assaad briefly worked alongside al-Beblawy at the Economic Research Forum, an Egyptian economic think tank, and the ERF’s managing director Ahmed Galal is currently one of the main contenders for the job of Finance Minister in the new government. “This could be one of the best Cabinets we’ve seen in terms of the economic team in years. But obviously it’s not going to be a Cabinet with a long-term mandate,” Assaad said.

Al-Beblawy served briefly as Finance Minister in 2011 when the country was run by the Supreme Council of the Armed Forces. But he resigned in October of that year after just four months on the job in protest over a violent clash with the military that left 26 protesters — mostly Coptic Christians — dead. Al-Beblawy, a Muslim, said at the time that responsibility for the deaths “lies, ultimately, with the government.”

During his short tenure, al-Beblawy was primarily charged with negotiating with the International Monetary Fund over a $4.8 billion emergency-aid package — a deal that still remains uncompleted two years later. Each new wave of political unrest has seemingly delayed the negotiations further and in December 2012 — in the midst of a national crisis over the constitution — Morsi’s government announced and then abruptly repealed a package of tax increases designed to appease the IMF.

Angus Blair, president of the Cairo-based economic think tank the Signet Institute, said he was originally skeptical of al-Beblawy two years ago but was quickly won over. “He’s a bit of a tiger. He’s young at heart, he knows Egypt’s problems, and he’s got the will to tackle them,” Blair says.

Much of al-Beblawy’s most immediate workload has centered on filling out his cabinet — a process that will likely involve as just as much speculation, leaks and rumors as the process that preceded his own appointment. Mohamed ElBaradei — who was himself poised to become Prime Minister before a sudden 11th-hour reversal last week — was sworn in Sunday as interim Vice President for International Affairs. Most of the rest of the cabinet lineup remains in flux, although Nabil Fahmy, former Egyptian ambassador to the U.S., did officially accept the post of Foreign Minister on Sunday.

Al-Beblawy appears to be beginning his tenure on a wave of goodwill — some of it is based on his personal reputation and some just for the fact that he represents a fresh start after Morsi’s disastrous and divisive one-year reign.

“There’s already a positive vibe in some circles … but we do need to see some positive actions,” said Mohamed Abu Basha, an economist at the Egyptian investment bank EFG-Hermes. “In the very short term there’s little the government can do to change things. What they can quickly do is regain that [investor] confidence a little.”

Even before al-Beblawy was named Prime Minister, Egypt received a much-needed boost in the form of a combined $12 billion in loans and gifts from Saudi Arabia, Kuwait and the United Arab Emirates — all of them are eager to replace Qatar as Egypt’s primary petropatron. But Abu Basha said the IMF loan still remains a critical goal because it represents a crucial international green light for Western governments and investors to pump in further aid and investment.

While easing the sense of economic emergency and buying al-Beblawy some room to maneuver, the new wave of Gulf money represents a temporary reprieve, not a long-term solution. Abu Basha estimated that Egypt would require as much as $35 billion to stay afloat over the next two years. “It’s a decent amount of money, but it’s maybe a third of what Egypt will need,” he said.

Al-Beblawy is going to be counting on all of that goodwill and confidence going forward since one of the first items on his economic agenda involves some painful steps that successive Egyptian governments — dating back to Mubarak — have consistently avoided. For years economists have pointed to Egypt’s massive public-subsides budget — for both cheap fuel and basic food staples — as a mountain that simply had to be climbed in order to modernize the Egyptian economy. Assaad estimated that the government spends up to $15 billion per year on providing gasoline to its citizens at well below international prices.

“That’s just insane when you have this level of budget deficit,” he said. “There’s no way they’re going to solve the budget without tackling energy subsides. But that requires a somewhat credible Cabinet and government to do that
.” Such potentially unpopular austerity measure requires broad political consensus as a cover. Morsi never managed to create this kind of consensus — his critics deride his tenure as one in which he sought to consolidate Islamist political power rather than build national unity.

Ironically, by alienating vast swaths of the country during a single year in office, Morsi, who remains detained by the military in an undisclosed location, might have paved the way for a new regime to institute galvanizing reforms. But with Egypt’s economic and political life still tied to its volatile street, the hard work has just begun.
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