Egypt on the brink of economic collapse
CAIRO // Egypt may be on the verge of economic disaster, financial analysts cautioned yesterday.
An injection of US$2.5 billion (Dh9.1bn) in loans and grants from Qatar is a stopgap solution that delays what Egypt needs - a politically unpopular austerity package to cut the budget deficit and set the stage for growth, economists said.
"Getting new loans won't do anything but slow the problems down," said Tarek El Ghamrawy of the Egyptian Centre for Economic Studies. "The fundamental problems won't be solved without real changes to the laws and a vast increase in investment. We need factories and projects, not more debts."
Most worrying to economists and former government officials is the possibility that the government will not able to gain a consensus on austerity measures needed to get the country on track after two years of instability, rising unemployment and lower tourism revenues.
Such measures would also help to secure a $4.8 billion loan from the International Monetary Fund, talks on which were suspended last month by the president, Mohammed Morsi, because of the political crisis surrounding the constitution.
The IMF loan would provide a quick, cheap source of funds but, more importantly, send a signal to international donors and investors that Egypt is on the path to a sustainable economy.
But since the country was polarised in December because of Mr Morsi's attempts to consolidate power and rush through a constitution that was loudly rejected by a coalition of liberals, secularists and other groups, the government has suffered a crisis in confidence.
Amid the furore, Mr Morsi "froze" planned tax increases just after they were announced in what critics said was a blatant political move to secure approval of the constitution in a referendum and avoid discontent from spreading over the faltering economy.
The new taxes were part of Egypt's economic programme created in consultation with the IMF, which would increase revenue by widening the tax base and decrease spending by cutting some energy subsidies. Soon after freezing the taxes, Mr Morsi announced he was delaying the signing of the IMF loan deal.
Christine Lagarde, the head of the IMF, said during a visit to the Ivory Coast on Tuesday that "the IMF needs to have the commitment of the political authorities that can actually endorse the programme, own it and propose it to the population as theirs".
Without easing the tensions in Egypt and building a consensus across the political spectrum on an economic plan, that may be impossible, said one leading opposition politician.
"What worries me more than the negative indicators on the economy is the current political set-up," said Ziad Bahaa Eldin, a former member of parliament for the liberal Egyptian Social Democratic Party.
"To me the failure to reach a consensus over the constitution will have repercussions on reaching a consensus on economic matters. The political situation does not let us, as a nation, tackle problems in the right way. And the more the decisions are delayed, the more serious the eventual cost will be for Egypt."
Those costs, he said, could come as early as next summer when Egypt will face a huge challenge in providing enough electricity because of gas shortages and rising oil debts.
The country is already having difficulty keeping up with current demand for crude oil because of the depreciation of the Egyptian pound. The state-owned Egyptian General Petroleum Corporation has been unable to receive some deliveries of crude because it could not obtain letters of credit.
The pound fell to 6.45 to the US dollar this week, a drop of about 10 per cent since before the January 2011 uprising that toppled Hosni Mubarak. Egyptians have been converting their pounds to dollars in fear of an even greater depreciation, which would increase the cost of food and other imports.
Mr Bahaa Eldin, who has held positions as a board member of Egypt's Central Bank, chairman of the Egyptian Financial Supervisory Authority and chairman of the General Authority for Investment and Free Zones, said he was also worried about the government's "capacity for implementing changes".
"The president's decision to freeze a simple set of tax increases doesn't bode well," he said. "It was signed and agreed weeks beforehand. Then the president announced early in the morning that they would not be enacted after all. It shows their weakness."
Mr Morsi has declared the revival of the economy to be his primary focus now that the constitution has been approved.
In a speech on December 27 he promised that "the coming days will witness, God willing, the launch of new projects … and a package of incentives for investors to support the Egyptian market and the economy". He also promised to hold national dialogue sessions about the economy to create the framework for a "renaissance".
On Sunday, he presided over a shake-up of the cabinet, replacing 10 ministers and increasing the number of Muslim Brotherhood ministers to eight from three.
The appointment of Elmorsy Hegazy, a professor at Alexandria University who specialises in Islamic finance, as the new minister of finance raised questions about whether the president was more interested in expanding the use of Sharia-compliant financial instruments than balancing the budget. Samir Radwan, a former minister of finance, described Mr Hegazy as a "complete unknown".
But even the cabinet changes may be temporary. Mr Bahaa Eldin expects another shake-up after parliamentary elections in the spring. If the Brotherhood's Freedom and Justice Party manages to win a majority, it may finally try to create a government made up of party members.
"By not putting their members into all the top ministries positions now, the Brotherhood can have someone to blame if anything goes wrong between now and the elections," he said. "After the elections, I expect we will see the first government from Freedom and Justice Party."
* Additional reporting by Reuters
Updated: January 10, 2013 04:00 AM