From Bad to Worse: Economic Woes May Compound Egypt’s Pain

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Khalil Hamra / AP

Skirmishes break out between protesters and security forces, unseen, near Tahrir Square, Cairo on Jan. 25, 2013.

The bad news for Egypt is that the deadly turmoil that has gripped the streets of some of the country’s main cities since last Friday threatens to grow worse in the months ahead. That’s because President Mohamed Morsi’s plans to save Egypt’s sinking economy hinge on a loan agreement with the International Monetary Fund requiring the imposition of tough austerity measures that will further erode the living standards of many of those already calling for his ouster.

The latest wave of clashes is fueled by multiple, overlapping political crises: a deep-seated mistrust in post-Mubarak institutions, particularly the judiciary and security services left over from the old regime; the repeated efforts by Morsi’s Islamists to use (sometimes narrow) victories at the polls as a basis to monopolize power; the inability of the secular opposition to reconcile themselves to the democratic verdict of the electorate and their apparent belief that they can topple Morsi like they did Hosni Mubarak — by protesting in Tahrir Square; and the violent nihilism of the tribal “ultras,” who follow the country’s various professional soccer teams, as well as that of the masked self-styled anarchists of the Black Bloc that announced itself last Friday in a hail of stones and Molotov cocktails on the fringes of Cairo demonstrations. Each element blames the others, of course, but history’s verdict may not be kind to a political class engaged in a zero-sum battle for the wheelhouse while the economy is listing badly.

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The key lifeline on offer — a $5 billion loan from the IMF — can be accessed only on the condition of implementing austerity measures that will bring a sharp spike in the economic pain suffered by millions of impoverished households. It’s the sort of package most governments would shy away from at the best of political times; Morsi’s would have to implement it amid a running battle for the streets in some of the cities where such measures will bite hardest and whose working-class residents pride themselves on their willingness to fight authorities they deem unjust. The Washington Post reports that many of those involved in clashes with security forces on the streets in Port Said on Monday said they’d voted for Morsi last summer but feel a bitter sense of betrayal at the government’s failure to ease their growing economic burden.

The economy was hardly in sustainable shape when President Morsi and his Islamist-led government took power. On the contrary, its poor performance over decades had helped kindle the revolt that swept away Mubarak. The economy may have been recording steady GDP growth, but those numbers, as they so often do, masked deepening inequality and impoverishment while a tiny elite pocketed most of the gains of IMF-ordered privatization. Youth unemployment, one of the key drivers of the revolutionary upsurge in 2011, continues to grow, with official figures revealing that 25% of economically active people ages 25 to 29, and 41% of those ages 19 to 24, are jobless.

Egypt imports some 40% of its total food intake and 60% of wheat, a key staple. Its main foreign-exchange earner is tourism, but tourist revenue has fallen 30% since the rebellion — hardly a healthy foundation, then, and even that has steadily eroded. Bloomberg recently estimated that balance of payments and budget deficits put the government’s immediate shortfall at about $14.5 billion.

The budget deficit is close to 10% of GDP, while Egypt’s national debt is closer to 80% of GDP. Up to one-third of the state budget is spent on subsidies of various sorts (the IMF is demanding Egypt make substantial cuts to bring public finances into order), while growth is now effectively stagnant. The economy is expanding at the same rate as the population, meaning it is unable to reduce unemployment. One in four Egyptians scrapes by on less than $1 a day; almost half the population live on less than $2 a day.

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But even before it tackles the deeper challenges of creating jobs and sustainable growth that reduces poverty, Egypt is seeking massive infusions of cash to simply stay afloat. Wealthy Qatar, a key regional ally of the Muslim Brotherhood, late last year provided some $2 billion and has committed a further $2.5 billion. And Morsi has also been traveling abroad since his election last summer, to Saudi Arabia, China and E.U. countries, seeking investment and economic assistance. But many governments appear to be waiting for Egypt to secure the IMF loan to give them the confidence to commit funds of their own.

Implementing the fund’s terms, however, is a massive political risk for Morsi. His government recognized as much last November, when it postponed the IMF deal amid turmoil over the new constitution that the Islamists had railroaded through. When a government’s legitimacy is already being challenged by angry crowds on the street, the last thing it wants to do is announce price hikes on basic commodities such as fuel, cooking oil and cigarettes. But Morsi’s Prime Minister Hisham Qandil announced in Davos last Thursday that an IMF delegation would visit Cairo within the next two weeks and that the loan deal would be concluded before they depart. The government is believed to want to conclude the agreement before parliamentary elections scheduled for next month.

While Morsi and the Muslim Brotherhood leadership are committed to free enterprise and a business-driven approach to managing the economy, a substantial section of the secular opposition leans to the left and has urged the government to steer clear of an IMF deal. Still, the turmoil of the past five days underscores the fact that challenges to the government’s legitimacy are, if anything, even more intense than they were last November, when anticonstitution protests drew on a narrower social base.

While distancing themselves from violence on the streets, opposition politicians show scant interest in sharing the burden of responsibility of governing with an Islamist government that has repeatedly used its electoral majorities to shut them out, meaning a political consensus for addressing the social and economic crises remains elusive. On Monday, the opposition refused to meet with Morsi about the crisis until he agreed to form a national unity government and withdraw the constitution under which he rules.

“Both the Islamist President and the secular liberal opposition appear deaf to the political rumblings on the street,” warns the Financial Times’ Borzou Daragahi. “Allies of Mohamed Morsi, President, blamed the weekend unrest on foreign powers, mysterious ‘hidden hands’ and paid thugs. The liberal-leftist National Salvation Front’s response has been almost worse. Instead of condemning the violence and calling for peace, the group issued a list of demands to win their participation in upcoming parliamentary elections in what was widely viewed as crass political opportunism.”

The absence of any post-Mubarak consensus over Egypt’s governance — a situation for which the military, the Islamists and the secular opposition all bear some measure of responsibility,  even if there may be considerable debate on how to apportion it — currently precludes even reaching an agreement on how to tackle mob violence on the streets. Agreeing on a package that sharpens economic pain to many millions seems a Herculean challenge.

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