x Abu Dhabi, UAEMonday 24 July 2017

Egypt faces the real test as pound falls

Egypt's leaders must turn their attention from fighting over the constitution to building essential consensus on rescuing the reeling economy.

Egypt's contentious constitutional debate distracted attention from a gathering economic storm. Now that the constitution has been approved, for better or worse, the focus is shifting to a crisis that, if mishandled, could eclipse the earlier turmoil.

President Mohammed Morsi, his ministers and legislative allies are in a poor position to take the unpopular actions that the crisis demands. The Muslim Brotherhood's failure to compromise on the constitution has polarised the country and energised the opposition. After refusing to compromise on the constitution, he cannot plausibly call for quick national consensus on anything else.

And yet consensus is vital in the face of economic problems both immense and urgent. In 2010, when Hosni Mubarak ruled, Egypt's 84 million people shared a GDP averaging the equivalent of Dh23,500 per person, a cheerless 137th in the world's rankings. The figures are no doubt worse after two years of dwindling tourism and foreign investment.

And deterioration is quickly turning to crisis: as the government deficit soars, Egypt's pound has hit a record low against the dollar, even though the central bank has burnt through over half of its reserves to support the pound. There's a run on US dollars; currency controls have been imposed. Standard & Poor's has downgraded Egypt's credit rating. The government's borrowing costs are rising steeply.

This is not just a crisis for bankers and bureaucrats. To win a much-needed $4.8 billion (Dh17.6 billion) loan from the International Monetary Fund, Mr Morsi had to promise to reduce consumer price subsidies, and to increase revenue. In the face of street protests over the constitution, he suspended those measures. The IMF loan was promptly stalled; before long, the cuts will have to be reintroduced.

In an era of crippling sovereign debt, leaders in many countries have struggled - or lost office - in the effort to balance budgets. Mr Morsi, burdened with high expectations and having spent much of his political capital on his constitution, must now convince Egyptians that reduced subsidies and higher prices are essential. His many opponents, however, must remember that the president's failure on economic policy would hurt everyone. Now, if ever, is the time to work together.

With parliamentary elections scheduled in two months, it is hard to believe that Mr Morsi can summon up the political courage to deliver that message. But if he does not, how will Egypt's problems be solved?