Monthly Archives: October 2012

Egypt and Its Confused Constitution

So after months of deliberating, this is what Egypt thinks about the economy.  This is Article 13, on the “national economy”, taken from an unofficial translation of Egypt’s draft constitution:

The national economy aims to achieve sustainable and balanced development, protect  production and increase income, ensure social justice, solidarity and welfare, safeguard the rights of workers, ensure a fair distribution of wealth, raise the standard of living, eradicate poverty and unemployment, increase employment opportunities, achieve a partnership between capital and labor in bearing the cost of development, ensure equitable sharing of the revenues, link pay to production, lessen the disparities between incomes by introducing a maximum wage and guaranteeing a minimum wage, all to ensure a decent life for every citizen.

With only about four references to the economy, the constitution by which Egypt will live by is a sorely disappointing read.

Perhaps Egypt should be forgiven for the above, considering it is only a draft constitution? But we don’t forgive easily.

The lack of ambition conveyed in the draft, even after months of discussions, is expected. The vagueness alone is worrying.

Apart from appearing quite muddled and using the same blurry rhetoric that bores us all to death (i.e. “social justice”, “solidarity” and “balanced development”), the above comes across as socialist in its economic approach.  

“Ensure equitable sharing of the revenues”? That line has socialism written all over it. What exactly does that mean for Egypt’s business community and international investors? Egypt must break away from state-run economics, or at least mixed state and free-market economics, and this kind of wording is sure to scare investors away.

Though Rebel Economy supports a radical re-thinking of economics, poorly planned populism is disastrous.

What’s more, the drafters seem to have merely stuck on a few extras onto the same article of the previous constitution written under former president Sadat in 1971:

The national economy shall be organised in accordance with a comprehensive development plan which ensures raising the national income, fair distribution, raising the standard of living, solving the problem of unemployment, increasing work opportunities, connecting wages with production, fixing a minimum and maximum limit for wages in a manner that guarantees lessening the disparities between incomes.

Here’s the key problem:  This draft shines a spotlight on the contradiction and lack of clarity in government.   While Egyptian officials insist they believe in democracy and “free markets” on one hand, deeply enshrined in the wording of this constitution are beliefs that seem against that. And one thing that’s clear about the business community, they don’t like uncertainty.

Breakfast Wrap: Labour Union Win Hits Centamin, A New Leftist Salafi Economic View

The power of North Africa’s union movement was partially felt yesterday after an Egyptian court said Gold producer Centamin’s right to operate the Sukari mine, its main asset, was invalid

The London-listed stock saw more than a third of its stockmarket value wiped out on Tuesday before trading was suspended.

Centamin later said that operations were continuing and that the Egyptian administrative court did not have jurisidiction over its mining rights, Reuters reported.  The ruling came a day after it hosted a site visited for analysts.

But the damage has been done and Centamin looks likely to be the latest company to join a long list that are being challenged by Egypt’s court.

Centamin has been subject to successive strikes over the last two years as workers demand better pay and re-instatement of laid off workers.  Two strikes this year alone affected production at the goldmine.

According to the FT, the case against Centamin has been brought by Hamdy al-Fakharany, “an engineer who rose to fame a few years ago after he mounted a successful legal challenge against the country’s largest real estate developer over the price of land it had bought from the state to build a new suburb.”

As Rebel Economy has pointed out before, the emboldened labour union movement, though positive for countries such as Tunisia and Egypt, could also be seen as a double-edged sword.  It only adds to investor worries at a time when government’s are trying to revive confidence in the economy.  

This ruling is likely to be appealed against in a higher court, but as Reuters reports “based on cases involving other Mubarak-era contracts, this court decision may herald a tortuous legal wrangle that could take many months or longer to resolve.”


Meanwhile, more company controversy for Egypt.

Dana Gas, the United Arab Emirates’ largest listed natural gas firm, hit by payment delays from Egypt and Iraq’s Kurdistan region, will not repay a $920 million convertible Islamic bond, or sukuk, when it matures today, Reuters reported.

That means it is set to become the first UAE company to fail to pay an Islamic bond on maturity, which can only point to the fragility of Sharia-compliant financing versus conventional financing.  If a default can happen in both cases, why bother trying to disguise it as permissive under Islamic law? Just because it makes you feel better?

Dana will have some time to work out a deal with bondholders, the Reuters story said, but the key issue is here:

Although indebted firms in the Gulf Arab state have extended maturities on billions of dollars in bank loans since the onset of the financial crisis in 2008-09, no sukuk have been restructured or unpaid on maturity.

So this could be a first for Abu Dhabi, that unfortunately has proved to be notoriously difficult in countries such as Saudi Arabia and Kuwait.

That’s not the only problem Dana has to deal with.  It has been unfortunate enough to be one of a long list of companies to have problems getting paid for exploration in Egypt from the state-run oil company.  Dana was owed $198.5 million by Egypt as of June 30, according to its half-year results. The company received $117.3 million from Egypt during the first six months of the year.

This, along with similar issues in Iraq’s Kurdistan region, has contributed to Dana’s financial woes today.


Final bit of company news.

Orascom Telecom Holding sent out a statement yesterday saying it was considering the sale of all or part of its interests in central and southern Africa as part of a review of operations in the region.

Russia’s Vimpelcom took control of the Egyptian company last year in a deal worth around $6 billion.


An interesting read in the Atlantic’s EgyptSource blog about the various economic ideologies of Islamist parties, and the subtle dynamics between the parties.

“The recent establishment of a new Salafi political party, al-Sha’ab (the People’s Party), which espouses a novel blend of economic populism and religious fundamentalism, reflects increasing diversity in the economic ideologies of Islamist parties,” writes Mara Revkin in EgyptSource.

Al-Sha’ab, which is apparently Left-leaning, has not yet released an official platform, Revkin writes, but “party officials have sketched out vague proposals for a vast social safety net that is a striking departure from the pro-market economic policies historically associated with the Brotherhood and other moderate Islamist groups.”

For instance, while the Brotherhood said it would focus on “social justice” and “bread”, it has increasingly turned back to the economic policies that were used under the Mubarak regime.

One surprising convergence between the economic policies of the Brotherhood and Salafis is “in their increasingly hostile approach to organized labor,” she writes. 

Here’s what happened:

In recent weeks, Brotherhood leaders have cracked down on workers’ strikes. On October 26, former FJP MP Sobhi Saleh told a crowd in Alexandria’s Ramla Square that those who participate in strikes and sit-ins are “enemies of the people.” Salafi Sheikh Ahmed Mahalawy echoed the same sentiment in a sermon for Eid al-Adha, where he urged President Morsi to stop “pampering the people” and take a stand against strikes.

Now labour movements don’t do a good job of helping the economy with their strikes, but a dialogue must be opened up so that we don’t get a case of Centamin.


How about introducing some shared-wins, like better shift hours, health care benefits or family benefits?

A Leftist Salafi Political Party sounds very much like an oxymoron, but actually this party is exploiting the weakness in the Brotherhood’s Freedom and Justice Party and Salafi Al Nour, where objectives that once seemed plausible are now being ignored in favour of the easier economic framework that was already put in place by the former regime.

The turnaround in the thinking on the IMF loan, for instance, fits in with Revkin’s thesis.  Islamist parties were fully against the loan until just a few months ago, but are now calling it Sharia-compliant.  The problem is, the loan structure has not changed and it still has about a 1.1% interest rate, which is a forgiving rate but still not sharia-compliant.

Are these Islamist parties attempting to convince voters the loan is structured in a way that is permissive under Islamic law, when it is not the case?

Are these Islamists discovering that it is hard to blend religious beliefs with a modern economic framework and back-tracking on past announcements?

Rebel Economy’s answer would be yes.

Breakfast Wrap: Human VS Machine, IMF in Cairo, Interest Payments on Egypt Debt

And it underlined the indispensable role humans still play in a market dominated by machines

That’s a sentence from this Wall Street Journal story on the closure of the New York Stock Exchange because of Hurricane Sandy, and how people are critical to its successful operation (and equally to its demise).

It also reminds me of this brilliant speech from Charlie Chaplin in The Great Dictator, which all of you must watch if you haven’t already.  An excerpt from the speech:

Soldiers! Don’t give yourselves to brutes, men who despise you, enslave you; who regiment your lives, tell you what to do, what to think and what to feel!

Who drill you, diet you, treat you like cattle, use you as cannon fodder. Don’t give yourselves to these unnatural men – machine men with machine minds and machine hearts! You are not machines, you are not cattle, you are men!


An International Monetary Fund delegation has arrived in Cairo, and maybe this time Egypt can present an economic plan that is worthy of almost $5 billion.

It has been a long drawn-out road of failed negotiations that have stalled for various reasons (initially Egypt turned its back on the IMF saying it didn’t need the loan, then Egypt’s political parties couldn’t agree, and then Egypt asked for more money).

Rebel Economy put together a timeline of Egypt’s interaction with the IMF, with historical details of the Egypt-IMF talks back in the 1980s.

This morning Ahram Online also published an interview with the IMF’s Middle East director Masood Ahmed.


The biggest problem Egypt will have is to convince the IMF that it is doing a good job of reforming energy subsidies, or at least that it has a good plan in place.  Unfortunately contradictory news reports on how reforms would take place and repeated comments from the prime minister Hisham Qandil that energy subsidies will be banished are not helpful unless people see action on the ground.

What is clear is that along with subsidies, the government budget must be restructured to reallocate state cash where it is needed (i.e. health and education).  Meanwhile, Egypt is struggling to pay off interest payments on government debt (i.e. bonds and bills that the government sells every week to try to plug its deficit).

One London-based economist working at an international organisation told me that high interest payments make up around 15% or 16% of the budget – a huge drain on the government’s finances. 


A detailed Reuters story on how Egypt has secured oil supplies for the rest of the year, despite fears about its ability to make payments, from a small number of Western suppliers who have agreed to deliver unusual grades of crude for hefty premiums

Obviously this is at a cost.  But more so, it reflects Egypt’s narrowing customer base.  Fewer and fewer are willing to supply Egypt.  This is an unsustainable cycle which will end sooner or later.

In case you weren’t convinced, Egypt’s petroleum minister himself said delays in energy subsidy reform is costing Egypt 10 billion Egyptian pounds (or $1.6 billion) every three months.

That’s on top of allocations already made for the energy subsidy.  Phew.


Egypt’s foreign reserves probably rose $300-400 million in October thanks to loans from Qatar and Turkey, Reuters reported, quoting a newspaper report from state-run al-Gomhuria newspaper.

Reserves at the end of October will probably be $15.4 billion or $15.5 billion, up from $15.04 billion at the end of September, al-Gomhuria said.

Usually when this type of story is leaked, it’s normally true but don’t let that comfort you.

The trickle of funding that is coming straight to the central bank only serves to stabilise the currency or for subsidies (see how energy subsidies seem to get into every part of Egypt?), rather than the economy.  It appears like Egypt’s central bank is operating hand-to-mouth rather than coming up with a sustainable solution, like perhaps devaluing the currency.

Qatar lent Egypt $500 million in October, its second such loan in the last three months, and Turkey lent the country another $500 million, Reuters said.

Egypt drew $600 million from reserves to pay for petroleum imports and $100 million to repay foreign loans, the report said.

Breakfast Wrap: Egypt’s Oil Curse – Part Two

This morning’s Breakfast Wrap will be dedicated to Egypt’s energy crisis and part two to yesterday’s “Oil Curse”.

That’s because two significant calendar events are in store for us this week:

1) From Thursday, shops will close by 10pm and restaurants without tourist licences will close by midnight, hours earlier than usual
2) A delegation from the International Monetary Fund will arrive this week to re-start negotiations over Egypt’s request for a $4.8 billion loan.

Both of these events are inherently related to energy subsidies.  Simply Egypt’s energy shortages because of its wastage and misdirected spending has meant the government is cutting consumption where it can and as quickly as possible.  In addition, the delayed reforms of energy subsidies may cost Egypt almost $5 billion unless the government can show it has a long-term plan in place.

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The Oil Curse Explained

This is the final instalment of the “Eid Holiday Reading Special” to mark the last day of the Islamic holiday of Eid Al-Adha, and before we are back to work tomorrow.

Why does oil wealth so often become a curse for developing states?  In the developing world, oil-producing states are fifty percent more likely to be ruled by autocrats, and more than twice as likely to have civil wars, as non-oil states. They are also more secretive, more financially volatile, and provide women with fewer economic and political opportunities.  For the last thirty years, good geology has led to bad politics.

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Holiday Reading: China Backdoor For Iran, Mubarak’s Corruption, US policy on Egypt

Happy holidays everyone. (It is the Islamic holiday of Eid Al-Adha, for those that don’t follow the Middle East too closely).

Here are some interesting reads.

Iranian sanctions 

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Breakfast Wrap: Egypt Must Stop Crying Wolf, Hussein Salem’s Seedy World

I was on a conference call with several Arab (some of them Egyptian) economists and analysts based in New York yesterday, and they told what their biggest concern is regarding Egypt’s transition to democracy.

It wasn’t the confusion over writing a constitution, nor the risk of violence from protests. It wasn’t even nationwide subsidies that have bled the country dry for the past few years.

The analysts’ biggest worry was the credibility of news announcements that come out of Egypt almost on a daily basis.  For example, do we believe the government’s statement that they will secure an IMF loan by November when they’ve been repeating this statement for months?

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GUEST POST: Egypt and Azerbaijan, A new foreign policy

Guest post by Islam Abdel-Rahman, a member of the foreign affairs unit at the Muslim Brotherhood’s Freedom and Justice Party 

Egypt’s foreign policy approach before the revolution was one based mainly on the interests of the president.  Diplomatic ties were used to serve the goals of the president rather than the main interests of the state itself which hurt Egypt’s regional and international position.

While the nation retained ties with many countries, it paid attention to few of them missing out on many economic opportunities.

A case in point is Azerbaijan.

Egypt was among the first countries in the world to recognize the new post-Soviet state in 1991.  It initiated a diplomatic mission in Baku and has signed countless accords, yet the product of this work amounts to nothing more than a lot of paperwork.  No real progress has been made on the  ground.

Now is the time to make the Egyptian-Azeri relations beneficial for both countries.

For Egypt, Azerbaijan can help plug the country’s increasing demand for energy and can become a good source for imports of oil and natural gas.  Azerbaijan’s economy has benefited from a surge in oil prices and increased oil and natural gas production.  Egypt can tap into that prosperity.

In political terms, Azerbaijan is a model country for Egypt’s ambitions.

Namely, good relations with Azerbaijan can help offer an example of peaceful ties between the two main sects of Islam, Sunni and Shiite.  While Egypt is majority Sunni, Azerbaijan is a Muslim country that is majority Shiite.

Another factor on the political map is Iran’s attempt to wield its influence in the Middle East in countries such as Bahrain, Syria, Lebanon, Iraq and Yemen.

Strong bilateral relations between Egypt and Azerbaijan can present a balance for such political maneuvering especially amid rising tensions between Iran and Azerbaijan because of territorial conflict on the Caspian sea.

For Azerbaijan, having Egypt on its side is an equally important and strategic move.

Cairo can offer a bridge for Baku into the African and Islamic world, and a strategic hub into the Mediterranean and the rest of Europe.

Baku can benefit from the nation’s tourism and agricultural industries to support its non-oil economy, helping to indirectly boost trade ties between the countries.

Both countries already share many connections in terms of religion, geography and cultural traditions.  But it is time to move past superficial foreign relations and create real strategic ties that can reap rewards for both Egypt and Azerbaijan.

Breakfast Wrap: Egypt Debt Default, Algeria Life Line, Abu Dhabi Debt Clampdown

While Egypt’s government deliberates over what economic plan they will present to the IMF to show they deserve almost $5 billion, the North African nation’s level of economic risk remains high.

Egypt is among 10 countries likely to default on its sovereign debt within five years, data from CMA shows.

Credit default swap (CDS) spreads, or the cost of insuring Egypt’s debt against default, is among the highest in the world.  Even so, CDS spreads in Egypt stabilised following a volatile election in the second quarter, with spreads coming in nearly 29% to close at 438 basis points from 617 basis points.

Again in English?

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Lebanon’s Economic Fragility

The scars of civil war still run deep in Lebanon after prolonged battles from 1975 to 1990.  

Beirut become synonymous with carnage and street fighting ruined large parts of the city.

Since then, huge reconstruction programmes have brought the country back to life and Lebanon has enjoyed periods of economic prosperity as a trading, financial and tourist hub.

But that is all threatened once again with recent events.

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