x Abu Dhabi, UAESaturday 22 July 2017

After the fall of a regime comes the budget crisis

After the euphoria of regime change comes the headache of balancing the books. Making the economy work right, and the government's budget balance, is no small chore after wrenching change.

In the euphoria generated by the downfall of dictators in Tunisia and Egypt, it is easy to lose sight of the importance of the economic issues facing the new leaderships in these countries.

With an entire region's political landscape being reshaped, the relevance of the "dismal science" is perhaps not too obvious. For all those who risked their lives to get rid of autocratic leaders, it surely follows axiomatically that the new order should offer them better economic conditions - regardless of what constraints and uncertainties the new regimes might face.

For seasoned observers, past trends do not seem to offer good insight into the region's future: in the last decade, under dictators, Tunisia, Libya and Egypt achieved respectable real growth rates averaging 4.5 to 5 per cent a year. But the hoped-for trickle-down effect did not calm widespread and growing disillusionment and unrest.

As the dust begins to settle and the incoming ministers of finance begin to take the reins, the enormity of the task ahead is only just beginning to dawn.

True, direct disruptions and closures caused by revolutionary turmoil can be left behind quickly, as most were in Tunisia and Egypt. But the same cannot be said of the explosion in popular expectations that typically accompanies such regime changes.

In a country like Egypt, where living standards have been eroded by double-digit inflation in recent years and where food inflation is currently more than 20 per cent and rising, the new government will find it hard to turn a blind eye to the plight of low-income groups (40 per cent of Egyptians are said to live in poverty). Last February's 15 per cent increase in public-service wages will cost the government about 7 billion Egyptian pounds (Dh4.4 bn). Egypt is now a net oil importer and fuel subsidies alone add up to about $16.6 billion (Dh61 billion) annually - a fifth of all government spending.

In all, government expenditure in this financial year will rise by a quarter from last year.

Revolutionary upheavals are notorious for economic disruption. Iran's 1979 revolution ended a prolonged period of 9 per cent average annual growth under the Shah; in the first decade after the revolution, Iran's real GDP shrank by just under 1.5 per cent per annum.

True, some of this was caused by the devastating eight-year war with Iraq and the collapse of the international oil prices, but important internal factors were at work too: expropriations, capital flight and policy contradictions among them.

Egypt now faces some of the same problems. Tourism, which employs two million people and in 2010 generated 5.3 per cent of GDP, fell by almost half in the first quarter of 2011.

Egypt has also relied on a large volume of remittances from its temporary workers in Libya and oil-rich GCC states. A downwards trend in these has further dented the country's foreign reserves (which have fallen from $36 billion in January to $28 billion in May).

Another risk to the short-term outlook comes from the well-known tendency for savings to rise when uncertainty and economic insecurity lead to cutbacks in private consumption.

The consequences have been dire: Egypt's economy is projected to shrink by 3 per cent this year; factories are reportedly working at half of capacity; unemployment has now officially risen by 12 per cent and the budget deficit is expected to worsen too (from 8.6 per cent of GDP to around 11 per cent).

Such rapidly shrinking "fiscal space" has, it is no surprise to learn, left Egypt's finance minister, Samir Radwan, in search of short-term fixes.

The International Monetary Fund's recent agreement to provide a standby loan of $3 billion to help with the fiscal deficit may provide short-term solace, but the spectre of the loan's conditions - still to be revealed - is hardly comforting for Egyptians. Despite official assurances by Mr Radwan that Egypt shall not be "accepting any conditionality - none whatsoever", the experience of other countries which have resorted to the IMF suggests otherwise.

Indeed, the communiqué from the G8 leaders who announced a $20 billion commitment to assist with long-term development in Tunisia and Egypt candidly linked the assistance to the emergence of "democratic and tolerant societies" in these countries.

Whether any generosity from the Gulf states will be free from strings is also doubtful since an occasion to assist an ally also opens up new opportunities for widening regional influence for any governments with spare cash to hand out.

Short-term difficulties should not, however, be exaggerated, just as realism about current challenges cannot be taken as negating the exciting and long overdue transformation options that might be available to the region.

Ultimately, the new governments will be judged by their ability or inability to bring about lasting transformations in the livelihoods of ordinary people.

In this regard neither of the extreme scenarios - populism (stressing redistribution at the expense of growth) or neoliberalism (putting growth before equity and redistribution) - is likely to bear the desired results.

On the contrary, the real challenge will be to adopt inclusive development strategies that can address the specific needs of each country's population.

This in turn will require finding the right balance between satisfying some of the legitimate and persistent aspirations for social justice at home and maintaining independence from external pressures and influences.

In Chile and Brazil, as in Turkey, yesterday's autocracies have become today's democracies, and what we can learn from them is that achieving such a balance is not impossible.

All the same, for some time to come it is apparent that the new republics in the Middle East will be choosing between a rock and a hard place.

 

Hassan Hakimian is the director of the London Middle East Institute at SOAS, University of London