Street violence masks threat of economic collapse

Debt mountain grows as street chaos dries up sources of revenue

By Jonathan Eyal, The Straits Times, 20 Aug 2013

LONDON - Defying the grave internal security situation, Mr Hisham Ramez, the governor of Egypt's central bank, has ordered all Egyptian financial institutions to reopen their doors for business.

For the moment, banks and the Cairo stock exchange will operate for only a few hours daily. Nevertheless, Mr Ramez hopes this gesture will persuade international investors of Egypt's resolve to regain control over its finances. For otherwise the country's economy risks falling apart, condemning ordinary Egyptians to decades of future hardship.

Egypt's experience is a reminder that revolutions are never good for business. Hosni Mubarak, who ruled for more than three decades until he was overthrown in a popular rebellion in 2011, is accused of presiding over the creation of a corruption-ridden economy that widened the rich-poor gap.

But the fact remains that under him, Egypt's economy grew at an annual average rate of 7 per cent; since 2011, the economy has flat-lined. As a result, unemployment shot up from 9 per cent of the labour force under Mubarak to 14 per cent today. Tourism receipts, which earlier this decade stood at US$13 billion (S$16.5 billion) yearly, are now running at half that level; foreign investment went down by over two-thirds.

And the inept policies of the Muslim Brotherhood government headed by ousted president Mohamed Mursi made matters far worse. His decision to appoint as Egypt's finance minister Mr Fayyad Abdel Moneim, an academic who made his name researching subjects such as "economic functionaries in the Islamic state at the time of the Prophet", exasperated businessmen.

Mr Mursi also rejected an offer of a large loan from the International Monetary Fund, fearing this would dent his image as a defender of Egypt's independence. Instead, he dipped into Egypt's foreign currency reserves: These dwindled from the Mubarak administration's US$30 billion to only US$10 billion, and even this figure was flattered by an emergency cash donation worth US$5 billion from oil-rich Qatar.

The military that overthrew the Brotherhood last month wanted to prove they are aware of the need to halt the economic decline.

The new interim prime minister, Mr Hazem el-Beblawi, is just the man for the job: He ran Egypt's Export Development Bank for 12 years and worked in regional economic agencies throughout the Middle East. And the new finance minister is Mr Ahmed Galal, managing director of the Cairo-based Economic Research Forum since 2007 and for 18 years a researcher at the World Bank.

For the moment, however, the outburst of political violence has given Egypt's military-backed government a justification to do nothing: Its only economic achievement was to negotiate a US$12 billion credit line from Saudi Arabia, Kuwait and the United Arab Emirates, countries that seem prepared to pay any price to ensure the Muslim Brotherhood never returns to power.

This may seem like a big achievement, but it represents only a drop in Egypt's debt ocean: The country needs to borrow US$3.2 billion a month just to stand still, so barring some drastic measures, the new cash will soon be exhausted, and the Egyptian government will again have to pass the begging bowl to its Gulf backers by the end of this year.

The obvious solution - to entice foreign investors and increase tourism revenues - requires political stability which will take years to accomplish. And the only other alternative that can rectify Egypt's finances will also guarantee a social explosion.

To alleviate the worst manifestations of poverty, successive Egyptian governments introduced subsidies on staple household items such as bread and diesel. Yet this has now turned into a financial monster: An astonishing one-quarter of all government expenditure goes to these subsidies.

Mr el-Beblawi knows this cannot continue, but he prefers to issue oblique warnings. "The revolution's success did not mean it was time to distribute the spoils but, rather, it meant that there was more work to be done," he told the Daily News Egypt newspaper.

The reticence is understandable: Of Egypt's 84 million people, 60 million rely on some food subsidies, and any cut in these subsidies is bound to result in food riots, the last thing any Egyptian politician needs.

So, like all its predecessors, the current Egyptian government appears to have decided that the best course is to pass the hard work to its successors.

Either way, whoever ends up ruling Egypt will have to grapple with an economic crisis every bit as daunting as the current violence in the streets.