SEARCH

Monthly Archives: February 2013

Regime Change at Egypt’s EFG Hermes

The chief executives of Egypt’s biggest investment bank, EFG Hermes, have been quietly replaced as the bank attempts to clean up its image ahead of a potential takeover from Qatari firm Qinvest, three sources close to the matter have said.

Hassan Heikal and Yasser El Mallawany, who were last year charged with alleged insider trading alongside the sons of the former Egyptian President Hosni Mubarak, are still “technically on board but have been removed from the executive function,” said one investment banker close to the bank. Mr Heikal and Mr El Mallawany are still getting a paycheck but remain in their positions only on paper, the banker said.

EFG Hermes denied any changes were made. The changes have not yet been officially announced and Mr Heikal and Mr El Mallawany are still employed as CEOs at EFG Hermes.

Yasser El Mallawany
Yasser El Mallawany

Karim Awad and Kashif Siddiqi, who were last year announced as the new co-CEOs as part of the Qinvest takeover, are now running the bank, a second banker said.  They were head of Investment Banking and head of Asset Management respectively.

Under Qinvest deal, Mr El Mallawany and Mr Heikal were to leave on completion of the transaction that would see Qinvest take control of the bank.  But the deal has stalled because of delays in getting government approval in some Arab countries, according to a statement from EFG in January.

Mr Heikal, who has been living in London for at least a year, is now “pursuing other opportunities” and is “definitely not involved in the running of EFG,” a third source said.

A registry form at the Dubai International Finance Centre in the United Arab Emirates, where EFG Hermes is also registered, lists Mr Awad and Mr Siddiqi as the new directors.  Mr Heikal and Mr El Mallawany are listed as former directors, ending their position in June 06 2013, just 7 days after the case of alleged insider trading was brought against them in Cairo.

In addition, EFG Hermes main website also suggests changes at the helm.  As of February 16, the website title Karim Awad as Co-chief executive of the investment bank, and lists him first in the ranking on the profiles page. But this change was made only a week ago, when the website had described him under the old title of  head of investment banking.

Hassan Heikal
Hassan Heikal

The change is subtle, but indicates a significant shift in the bank’s executive management.

EFG has seen a sharp drop in its market value since the turmoil of the 2011 uprising in Egypt, partly because of its association with Gamal Mubarak, son of the former Egyptian president who owned a stake in its private equity business.

A further shadow was cast over EFG when its two co-chief executives, Mr Heikal and Mr El Mallawany, were among the nine alleged to have made an illegal profit of more than 2 billion Egyptian pounds ($331 million) through corrupt stock exchange transactions last May. The case is ongoing.



Guest Post: Egypt’s New NGO Law Will Block Vital FDI

Rebel Economy spoke to Robert Becker, a political organiser based in Cairo who was charged in last year’s NGO crackdown.  He is a Senior Partner at WellsBecker, a global communications firm based in New York and Cairo. He blogs here

becker

  • 1) You are one of 43 Egyptian and Foreign NGO workers who has been on trial for more than a year, accused of receiving foreign funds illegally.  At what stage has the trial reached, and what has been your experience with the Egyptian judicial system?

“Delayed” would be the word. It has been well over a year since the synchronized, commando-style raid was conducted against 17 pro-democracy and human rights NGO offices throughout Egypt. The trial is due to resume on March 6th and this will be the fourth attempt to complete closing arguments.

Throughout the year, I have found the judges to be very straightforward and by-the-book. Personally, I think there should be reforms made to the “civil” lawyers provision allowing them to make (shout) arguments above and beyond that of the prosecutors. Berating the judges for weeks on end, demanding our case be leveraged with the United States for the release of the “Blind Sheikh”, Omar Abdel-Rahman, has added a great deal of time to our case, not withstanding the argument’s irrelevance.

Also, the accused should be afforded a few basic rights, like the ability to hear the proceedings, as the acoustics inside the cage are awful.

Finally, clean up! I have a great amount of respect for the rule-of-law, but when the courtrooms are absolutely filthy (as well as practically every government building) it is hard to maintain that respect. Simply mandating government offices be cleaned regularly will restore a large degree of confidence and respect between the people and their government.

  • 2) You were fired from your position at the US-headquartered National Democratic Institute when Egypt’s security services raided NDI’s offices along with dozens of other NGOs. What has been the US response to your arrest?  

I was fired by NDI on March 14, 2012, approximately one week after appearing in court in response to my legal summons to appear and in accordance to my bail arrangement (LE 2,000,000). Two weeks prior, I refused an order by NDI to board a private US government plane and flee Egypt and the charges.

To date, one year on, the US government has maintained a virtual strategy of silence and, other than NDI paying for our legal defense, we receive no other government support regarding the trial.

  • 3) You had a choice to leave Egypt, why didn’t you? 

Loyalty. Several of the Egyptians charged in this case worked directly for me. Their only “crime” was taking a good job with a well-established and legal organisation in a tough economy, aimed at improving democratic institutions and civil society in post-Mubarak Egypt.

After two decades working in the trenches of democracy around the world, I have learned that I am only as good as the people I work with. There was no question I had to stay with my co-workers, as they were family to me and loyalty and solidarity matters in life.

When you advocate and teach democracy and human rights, you also stay and fight when faced with “paperwork felonies”, clearly motivated by politics, and aimed at denying Egyptians the very rights you fight for. Staying and fighting these charges side-by-side with Rawda, Hafsa, Mohamed, Amgad and the other Egyptians charged, was the easiest decision I ever made.

  • 4) Is the new NGO law that is being drafted by government adequate to replace the old law in force? 

As the draft stands today, it is far worse. If this draft is passed democracy will cease to exist. In a democracy there are three pillars of power: those who have it (government); those who want it (political forces); and those who give it (the people).

If the people of Egypt are denied the right to organise, speak out and hold government accountable, then democracy fails. What the government draft misunderstands badly is the definition of an NGO: Nongovernmental Organisation… emphasis on the word non. Citizens should be able to, without fear of government persecution, organize themselves to hold their government accountable. If government can control NGOs, how then can a citizens group in Faiyum fight local government corruption? Or a national NGO advocate against police brutality or torture?

Egypt should scrap this draft all together and start with a premise that they should not fear their own citizens and institute a 21st century NGO law that encourages the right to free assembly and citizen participation in government.

  • 5) At a time when some Egyptians are wary of involvement from overseas organisations, what is the value of foreign NGOs in the country? 

Well, for starters I would ask, what is the International Monetary Fund? Could it be classified as a nongovernmental organization funded by numerous foreign governments? Egypt has been in long, critical negotiations with the IMF to allow for a large “intervention” from a foreign-funded organization worth $4.8 billion.

Bottom-line: What message does Egypt send when it actively seeks foreign investment to help the economy and simultaneously brags about denying close to LE100 million last year in foreign NGO funding?

Denying (and now trying to outright prohibit) foreign NGO funding cuts off access to much needed capital for citizen groups throughout Egypt who are working in various economic and societal fields like historical preservation (vital for tourism), microfinance (fueling small business growth), job training, education, technology, etc. It is a contradicting message from the Egyptian government that hurts Egypt’s fragile economy by hurting investor confidence.

Egypt’s economy has a long way to go recovering from three decades of neglect. It should welcome foreign investments from large-scale interventions to restore a crumbling infrastructure (creating jobs) to small infusions of capital to teach adult literacy in Beni Suef (also creating jobs).

Foreign NGOs can help fuel our economic recovery, teach valuable expertise, and help build solid democratic institutions. Egypt should welcome them.



Egypt’s Budget Deficit: Why No One Wants Cuts

While many people generally agree that governments faced with deficits must cut spending, most do not like cuts in specific programmes.

It’s the same everywhere, not least the US where a national survey found that for 18 of 19 programs tested, majorities want either to increase spending or maintain it at current levels.  The only exception where people wanted to see cuts was humanitarian foreign aid, which accounts for about half a percent of the US budget.  pewresearch1

However the long-term trend over the past quarter-century is, for the most part, away from spending growth.

The survey goes a little way to showing how society is happy for a government to make the cuts necessary to rightside a budget, but when areas that affect them are on the radar, the public will likely lobby against these cuts.

Now, if we snap back to Egypt, where public debt is about 80% of GDP at $220 billion versus the US where government debt is at $11.7 trillion (and 75% of GDP), it is like comparing apples to pears.

But the public perception is the same. 

Egyptians generally agree that there must be cuts to balance the budget, but it is difficult to convince the public that wages take up a huge chunk of government spending, and that spending on some welfare programmes, like the energy subsidy system need to be drastically reined in.

This is what happens when Egypt decides to increase wages and continue to feed its addiction to energy subsidies: 

Dcode
Dcode

Dcode, a consultancy that specialises in “Dcoding” the Egyptian economy, explains that the reason the budget deficit widened during July and December of the current fiscal year to stand at LE91.5 billion (5.3% of GDP), up from LE74 billion a year earlier (4.8% of GDP) is a simple financing problem: Expenditures grew at a faster rate than revenues.

Even though government revenues from taxes grew, it was not enough to make up for the “debt service payments, higher subsidies and wages to accommodate popular demands and high international commodity prices.”

This is where a seasoned politician usually comes in to explain to the public that this is unsustainable and that spending on public sector wages (26 percent of the state budget is currently spent on paying the wages of almost one third of the total labour force) and energy subsidies (20 percent of government spending) must slow down. This can be done by actually going ahead with energy subsidy reforms, and redirecting funding to the private sector where jobs are more lucrative and dynamic and the government does not have to support millions of wages.

But, as we have come to realise, there are no experienced politicians in Egypt, just airheads who bump heads rather than engage in a real dialogue.

Why not take time to compile a diagram that shows the real impact of tax increases, subsidy reform and public sector cuts on Egypt’s neediest? If correctly enforced (and that’s a big If), Egypt’s struggling households will find restructuring the budget will by and large give them better access to bread and fuel (at cheaper rates than today), and will exempt them from paying taxes.



Original Sin: Where Did Arab Economies Go Wrong?

Arab economies have become addicted to “unearned income streams” including fuel exports, foreign aid, and remittances. This fragile social contract has led countries across the Middle East and North Africa to increase subsidies on fuel and food at times of social unrest.

This is their ”original sin” and is fast becoming a liability, say economists Adeel Malik and Bassem Awadallah in this important paper for the World Development journal recently made available to the public.

“External revenues—whether derived from oil, aid, or remittances—profoundly shape the region’s political economy” which only serves to “stifle economic and political incentives, turning economies away from production to patronage”.  

So as a result, on a per capita basis, the Middle East and North Africa received the highest overseas development assistance in 2008 ($73 compared to $49 in sub-Saharan Africa), the paper says. North Africa has consistently been the largest recipient of net aid per capita since 1960s (see table). These aid flows are largely driven by geo-political considerations.

graph11

The authors point out that despite the differences in cultures, economies and geographies across the Middle East and North Africa (Algeria to Syria for example), there are “at least five common denominators that cut across commonly recognized conceptual boundaries—for example, whether an Arab state is a monarchy or a republic, labor-scarce or labor abundant, resource-rich or resource-poor”.  One of these is the dependance on exports and aid. They spell out the other connecting factors:

First, all across the Arab world both economic and political power is concentrated in the hands of a few.

Second, the typical Arab state can be characterized as a security state; its coercive apparatus is both fierce and extensive.

Third, the broad contours of demographic change and the resulting youth bulges are fairly common across the region.

Fourth, Arab countries are mostly centralized states with a dominant public sector and, with few exceptions, weak private enterprise.

So what went wrong?

Malik and Awadallah go back to the Ottoman empire where centralized bureaucratic rule worked hard to prevent the emergence of autonomous social groups, and therefore valuable and profitable connections across the region and a strong private sector:

The Arab world has inherited an unfavorable and divisive legacy. The roots of a weak private sector run deep in history. Merchants were politically weak under the Ottomans.

A robust private sector was more feared than favored. When business thrived, it remained effectively in the hands of foreign merchants and local minorities. This was politically expedient: foreign merchants benefited from the economic privileges granted by rulers, but
seldom challenged their authority.

The break-up of the Ottoman Empire into a multitude of independent states created new political boundaries, but, over time, these became permanent economic boundaries.

The consequence of this divide meant that when globalisation was unavoidable, Arab economies did not integrate with one another but only with global structures of trade and finance.  It’s no surprise then that trade agreements in the Mena region are well below the global average.

graph22

The key concluding questions is: can the region harness its natural geographic strengths to build a future based on trade and production, or does it fall back on the geography of rents and patronage?  Access to the coast, Europe and a large labour force are attractive opportunities that emerging markets would jump at. So why has the Arab world failed to integrate?

Revolutions across the region are an “apt reminder that the prevailing model has reach its expiry date”, they say.

“This model built on oil and aid fortunes—and a leviathan state—is fast becoming a liability.”



The Arabian Dream: Abu Dhabi’s Mercenaries

Late one night in November 2010, a plane carrying dozens of Colombian men touched down in this glittering seaside capital [Abu Dhabi]. Whisked through customs by an Emirati intelligence officer, the group boarded an unmarked bus and drove roughly 20 miles to a windswept military complex in the desert sand.

The Colombians had entered the United Arab Emirates posing as construction workers. In fact, they were soldiers for a secret American-led mercenary army being built by Erik Prince, the billionaire founder of Blackwater Worldwide, with $529 million from the oil-soaked sheikdom.

By Mark Mazzetti and Emily B. Hager for The New York Times, Secret Desert Force Set Up by Blackwater, May 2011

For any expatriate who has spent time in the United Arab Emirates, the luxury lifestyle soon gives way to a seedy underworld, which is only a paradise for fugitives on the run.

Times News Service
Erik Prince

The UAE, after all, is “an autocracy with the sheen of a progressive, modern state”, according to the New York Times’ reporters who exposed Erik Prince, the founder of Blackwater, and his secret army.

But for the Colombians he recruited for the battalion intended to beef up the UAE’s military presence, Abu Dhabi is the “Arabian Dream” offering a better quality of life. 

Prince, who had already been a driving force in the boom in wartime contracting that began after the September 11, 2001, attacks, was hired by the crown prince of Abu Dhabi, Sheikh Mohamed bin Zayed al-Nahyan, to put together a squad of foreign troops for the UAE.

He outsourced critical parts of the UAE’s defense to mercenaries from countries including Colombia and South Africa, in a plan said to have been drafted months before the so-called Arab Spring revolts that many experts believe are unlikely to spread to the UAE. But Iran was a particular concern.

The mercenaries live in a training camp, located on an Emirati base called Zayed Military City:

It is hidden behind concrete walls laced with barbed wire. Photographs show rows of identical yellow temporary buildings, used for barracks and mess halls, and a motor pool, which houses Humvees and fuel trucks.

Secret Desert Force Set Up by Blackwater, May 2011

It does not sound like much, but for these imported soldiers, joining the operation was an opportunity to earn a lot of money and see a new part of the world.

This week, Columbia’s daily newspaper EL TIEMPO, gained exclusive access to some of the Colombian paramilitaries who spoke of the “Arabian Dream” in the UAE. 

For the 1,400 Colombian troops in Abu Dhabi, the UAE offers “not just a medal, but a proper paycheck”, according to a translation of the Spanish article.

“Why did we decide to leave? That’s what people ask us. The response is easy: Quality of life,” they [the troops] say.
Colombianos en busca del sueño árabe, El Tiempo, February 2013

One officer describes the stark difference in quality of life. In Columbia, he received a bonus of 800,000 pesos ($448.8). In Abu Dhabi, he has a salary of $3,000, receives housing, food and healthcare free. He has also learnt English, and in the evenings, he and his colleagues travel in buses into the city centre, where they can buy food and supplies. They get weekends off.

The long weeks of combat, sleepless nights, patrolling and watching for landmines were left behind, the officers told EL TIEMPO.

UAE training camp where foreign troops are stationed, courtesy of New York Times
UAE training camp where foreign troops are stationed, courtesy of New York Times

Reflex Responses, a company known as R2 and contracted by the UAE government to train and recruit the troops, spends roughly $9 million per month maintaining the battalion, which includes expenditures for employee salaries, ammunition and wages for dozens of domestic workers who cook meals, wash clothes and clean the camp,  according to the NYT report.

The Colombians “never wanted for anything”, said Calixto Rincón, a 13-year veteran of Colombia’s National Police force who is now back in Colombia after serving as a mercenary in the UAE.

The UAE and American leaders even arranged to have a chef travel from Colombia to make traditional soups.

Unsurprisingly, the secrecy of the project and the clash of cultures between the Catholic Colombians and the Muslim Emiratis has made some things uncomfortable:
“Here, you can’t look at the women like in Colombia, because you can end up in jail,” one officer told EL TIEMPO. “A wrong glance can create offense, which gets reported to the police”.
Meanwhile another told the New York Times: “We didn’t have permission to even look through the door. We were only allowed outside for our morning jog, and all we could see was sand everywhere.”

But even this grievance was addressed by the American trainers.

One evening, the NYT reporters wrote, “after months stationed in the desert, [the troops] boarded an unmarked bus and were driven to hotels in central Dubai. There, some R2 executives had arranged for them to spend the evening with prostitutes.”



Egypt Runs Out of Cash for Diesel Subsidies

A disturbing, but unsurprising leak from an unnamed official in Egypt’s finance ministry reveals that funds allocated by the government for diesel fuel subsidies have run out for the current year, with the Cabinet scrambling to find a solution, according to Egypt Independent:

An official source within the ministry has said that meetings are being held with Ministry of Petroleum officials to solve the crisis, adding that the government’s subsidies for diesel fuel are estimated at LE50 billion.

The two ministries are considering opening an additional source of credit for diesel subsidies through a law giving the finance minister the power to approve additional credits.

Rebel Economy has repeatedly called for a swift overhaul of the energy subsidy system. Read here for a round-up of why.

But in a nutshell, and according to industry sources, in 2002, EGPC’s total debt stood at half a billion Egyptian pounds.  In 2012, that debt pile has jumped to 200 billion pounds.

The organisation has also maxed out financing to fund oil and gas exploration from banks including National Bank of Egypt and Morgan Stanley.  

Sources say the magnitude of Egypt’s debt is such that at BP’s global board meeting, Egypt’s debt repayment plan is brought up as a topic of discussion.

The finance ministry has already been effectively paying the oil ministry to buy its domestic energy needs either from foreign partners exploring in Egypt, or by importing it from countries including Algeria and Saudi Arabia.  That was part of the reason foreign reserves fell so much.

The problem is based in the fact Egypt buys hydrocarbons at a high price, and sells at subsidised prices making it a costly system that wastes more cash than the country can afford.  The energy subsidy system, which already swallows up to 20% of government spending, is also fundamentally flawed, and shortages have lead to a parallel black market.

An Egyptian radio station over the weekend revealed the cost of butane cylinders used by many Egyptians at home has now gone up to about LE70 and LE80 on the black market.  A cylinder used to cost anywhere between LE8 and LE50 at the most.

Something has to give, but with further delays on implementing key subsidy reforms, it is not clear what this will be.

Funnily enough, the only official quoted in Egypt Independent’s story was Sherif Haddara, the new head of Egypt’s state-run oil company, the Egyptian General Petroleum Corporation. He quietly replaced Hani Dahi as the chairman of EGPC earlier this year, as Rebel Economy first reported this in November 2012.

Mr Haddara faces the country’s biggest challenge in managing the finances of the most indebted ministry in Egypt.



How The US Ambassador Cut Egypt Down to Size

A number of you may have already read the speech from the US Ambassador to Egypt, Anne Patterson, on Egypt’s political and economic woes.

What she said was not particularly surprising or profound – much of it has already been argued by economists, analysts and journalists. But Ambassador Patterson’s speech eloquently and authoritatively wraps up Egypt’s complex issues in a neat package everyone can understand.

It is difficult to find another example of this from an official outside Egypt, including from Patterson herself.

This time, she clearly spelled out what has gone wrong within the Morsi administration and what must change.  Unsurprisingly, that mostly involves addressing economic problems:

The most catastrophic path is for the government and the political leadership of the country – whether in power or in opposition – to avoid decisions, to show no leadership, to ignore the economic situation of the country. 

When management of the economy is treated as a by-product of political disputes instead of a core function of political leadership, the business community is left trying to protect itself instead of investing and growing.

So what path should Egypt take? Here are her top three priorities:

  • 1) Egypt needs to conclude a credible agreement with the IMF.  Reaching agreement will unlock IMF funds and financing from other sources, including the U.S. Government, and more importantly will send a strong signal to the investment community that Egypt is committed to reforming its economy.  The IMF agreement’s biggest impact will be as a catalyst, encouraging additional lending, and sparking interest from short-term portfolio investors, then perhaps longer-term portfolio investors, and then eventually a return of badly-needed Foreign Direct Investment.
  • 2) Egypt needs to fix its energy sector, fundamentally overhauling a simply unsustainable subsidy program that costs billions of dollars every year.  The money saved can repay its arrears and once again secure the credit terms it needs for imports.  And in the longer term, Egypt will be able to make critical infrastructure improvements, expansions, and modernizations that will lead to greater efficiency and cost-savings while ensuring the country can meet the energy needs of a growing population.
  • 3) Egypt needs to make peace with its past.  It needs to provide clear public assurances that investors are safe from arbitrary acts.  Contracts no matter when signed or under what circumstances will be honored except when they are found illegal by a due process of law in an impartial judicial system.  A framework of law must be in place making clear that contracts will behonored.  Those who invested in Egypt in the past cannot be threatened with jail or severe financial penalties years later because that forces investors to invest elsewhere.  When investors are confident they will be treated fairly, they will return to the opportunities Egypt presents in droves.  New investment is the foundation for economic growth; it must be nurtured, not disciplined.

As I said, it’s not something we haven’t heard before. However, if we heard this speech from Mohammed Morsi or his prime minister Hisham Qandil, it would be a complete breakthrough.

Quite simply, Ambassador Patterson showed Egypt how to deliver difficult news with the hope for change and reform. 

The Morsi administration’s track record for communicating these issues with the public is abysmal.  Either the Muslim Brotherhood enrol themselves in some public speech lessons quickly, or they can be more inclusive and relax their tight circle to allow experts with experience to help lead the way to recovery.



Restructuring Egypt’s Police Sector

Yesterday, when news broke out that Egypt’s new Central Bank Governor, Hisham Ramez, was robbed at gunpoint, it confirmed people’s worst fears about the rising crime rate in Cairo.

The governor’s car was stolen and his security guard killed, but Mr Ramez tried to reassure the public by saying the assault was a robbery rather than a targeted assassination attempt.

With sporadic violence on the streets of Cairo now the norm, an uptick in reported sexual harassment cases and a general feeling of insecurity in Egypt, the Twittersphere was less than optimistic:

https://twitter.com/BillSpindle/status/301630242752196608

https://twitter.com/TarekFatah/status/301854221379174400

https://twitter.com/NahlahAyed/status/301634367355252738

It is in stark contrast to life in the Mubarak police state, when violent street crime was a relative rarity and few feared to walk alone at night, the New York Times’s David Kirkpatrick wrote back in May 2011 when the exchange of gunfire, tear gas and rubber bullets was still a novelty.

“Now it is like New York,” Hisham Fahmy, head of the American Chamber of Commerce, told Kirkpatrick.

The truth is, Egypt is nothing like New York in terms of violent crime (and many other reasons).

New York’s violent crime rate has not been particularly high in recent years thanks to better policing measures, but Cairo’s violent crime rate still pales in comparison.

Of the 66 most populous cities in the world, Cairo ranks 60th on an index of homicide rates, while New York is 24th, according to figures compiled by the United Nations Office on Drugs and Crime featured in the Guardian.

That means, for every 100,000 people, there are 5.6 murders per year in New York in a country notorious for its gun crime, compared to just 0.6 murders a year in Cairo. 

It’s only when you get to Central America where drug violence brings a new dimension to homicide rates. In Mexico City, out of every 100,000 people, 8.4 are murdered per year.  And even Mexico City appears a safe haven compared to Venezuela’s capital Caracas where the homicide rate is 122 per 100,000, the highest in the world.

That’s not to downplay the increasing sense of unease in Cairo, especially at a time when the police lack legitimacy and the country appears lawless. The figures cited also only register murders, rather than muggings, sexual harassment and robbery, which is on the rise in Cairo, and doesn’t even begin to register the other major set of offences, that of economic crime which is still so prevalent in Egypt.

But what the UN data does show is that Cairo’s violent crime rate would have to increase at an exponential rate for it to become a serious problem.

The real problem, as spelled out in this policy brief for the One World Foundation, is the failure to restructure the police sector: 

The police sector is associated with its general lack of respect for human rights when dealing with citizens. Moreover, state security officials and high ranking police officers have often disregarded their duty as service providers and have instead relied on fear tactics to intimidate the public.

The authors of the paper, Sally Roshdy and Wessal Montasser, point out that while “Egypt’s last parliament had discussed several draft laws regarding police reform, the only one that passed exclusively dealt with the living conditions of police officials and affirmed their rights, without addressing the critical issue of improving police-citizen relations”. 

Add to that the fact that Egypt spends more on its police force than health and education combined, reforming the security sector is paramount to Egypt’s transition to democracy.

Some Egyptian officers have become suspicious of the government, who they say blame them for the deaths of more than 50 civilians in the last three weeks. Hundreds of police officers retaliated in a rare instance of open dissent by protesting against what they called political exploitation by the government of President Morsi.

If it’s not just the general public but the police force who are unhappy, who does that suggest is making a mistake?



Stranded Ship On Suez Canal Shrouded in Mystery

In case Egypt needed yet another strange event shrouded in mystery, one of the largest cargo ships ever built has been stranded on the Suez Canal for weeks after damage to the propellor caused a severe leakage.

The Emma Maersk, from Denmark, had to be towed to Port Said to be unloaded and repaired earlier this month.  The damage was so bad that the marooned ship is likely to be out of action for several more months, said Palle Laursen, Head of Ship Management for Maersk Line. For now, a temporary replacement has been found and cargo is being transferred to the new ship.

At 397 meters long, 75 meters wide and the capacity to carry about 10 thousand containers, the Emma Maersk is one of the world’s largest container ships ever built.

Netherlands Ambassador to Cairo, Gerard Steeghs, tweeted a photo of the stranded vessel earlier today from Port Said:

Maersk

A live ships map from Google shows the position of the ship on the Suez Canal:

maersk

Now for the mystery. 

It is still unclear what caused the damage, but Mr Laursen ruled out any human error by the crew.

“The crew handled the situation very well and did exactly what they should at all stages,” he said.

That leads to one of only two reasons for the damage: the ship experienced technical difficulties with navigation, or someone sabotaged the ship.

The 192-km Suez Canal is the quickest sea route between Asia and Europe, saving an estimated 15 days of journey time on average, but recent unrest in Port Said and the surrounding cities has caused unease and growing concerns about the security of the canal itself.

Protesters have threatened to block the Suez Canal, which earns Egypt about $5 billion in foreign currency a year.  Acknowledging that this is one the last remaining reliable sources of foreign currency to Egypt, government officials recently raise fees by between 2% and 5% starting on May 1.

Though the military is guarding the Canal, a state of emergency remains in force in three cities nearby, which are likely to be the scene of protests once again.

The story of the stranded ship, buried under the other ongoing confusion in Egypt, could signal a worrying escalation in Egypt’s political turmoil. 



Guest Post: “Sharia Law Is Out of Date”

Rebel Economy spoke to Timur Kuran, a Turkish economist and professor of Islamic studies at Duke University, on the role of Sharia law in the Middle East and North Africa. He is the author of The Long DivergenceHow Islamic Law Held Back the Middle East.

  • 1. Egypt’s new government is dominated by the Muslim Brotherhood, who have suggested an increased use of Islamic finance and Islamic economic principles as one of their solutions to the country’s economic woes. Considering what you know of the state of Islamic finance in the world today, do you think this is a valuable option? What could be gained from such a shift?
Duke University
Duke University

Timur Kuran: What are now known as “Islamic economic principles” were first articulated in the 1940s by Indian Muslims trying to define a unique Indo-Muslim identity. It is then that the absence of interest came to be viewed, through the writings of Islamists, as the sine qua non of a properly Islamic economy. Within a generation there emerged banks meant to accept deposits and make loans on an interest-free basis. These banks were to make funds available to cash-starved small businesses that lack political connections and to promising entrepreneurs without a track record. They were also to serve as instruments of economic Islamization.

Whether the Qur’an bans all forms of interest, or specifically its exploitative forms, was a matter of controversy in the early decades of Islam. It still remains in doubt. What is crystal clear is that what passes as Islamic finance is anything but interest-free. Almost all of the Islamic banks in existence, including those in Egypt, charge their borrowers what any economist would call interest; they also pay their depositors interest as a matter of course. This is not surprising, for interest continues to provide tangible benefits to both lenders and depositors.

For these reasons, I would not expect the spread of Islamic finance in Egypt to have significant economic consequences. Tripling the share of deposits in Islamic banks would not change how Egyptian entrepreneurs finance their activities. Those without connections would continue to find it enormously difficult to obtain capital. The main effect of giving priority to Islamic finance would be to polarize Egyptian society further. Secular and non-Muslim Egyptians, including those who realize that the differences between conventional and Islamic banks are symbolic, would view the growing emphasis on Islamic finance as a sign of creeping Islamization.

Having suggested that in its present form Islamic banking would not solve any of Egypt’s pressing economic problems, let me acknowledge that Islamic banks might bring benefits by abiding by their stated mode of operation. The charters of Islamic banks instruct them  to lend on the basis of “profit and loss sharing” rather than for a fixed return. They are to operate like the venture capital companies that have financed the global high-tech industry. Venture capital firms lend to promising entrepreneurs, for a share of any profits, without regard to collateral, track record, or connections. They take genuine risks, losing money when investments that they finance fail.

With its young population and high unemployment, Egypt desperately needs more venture capital. That is why genuine Islamic finance could bring major benefits to Egypt. Alas, there are no signs that the Muslim Brotherhood intends to establish banks prepared to engage in profit and loss sharing. It will probably promote more interest-based banking in Islamic garb. Interest-based banking does not do harm. But giving it an Islamic veneer will not improve the Egyptian economy in any measurable way.

A better alternative to more Islamic finance would be to improve the rule of law and open Egypt up to global venture capital industry.

  • 2. The Long Divergence, your recent book, goes into a lot of the historical detail of how the countries of the Middle East and North Africa failed to keep up with the innovations in finance and business over the centuries. What is your assessment of the situation in modern times? Have these structural issues related to Sharia’s lack of modernization abated at all or are they still a major obstacle to economic growth?

Timur Kuran: By the 1850s, leaders of the Middle East and North Africa realized that the region’s traditional commercial and financial institutions had become a handicap in the rapidly evolving global economy. It was not possible to form large and perpetual companies through Islamic partnerships that had not changed form since the Middle Ages. Accordingly, the region’s peoples could not take part in the emerging industrial sectors, or in the modern financial sector, except by operating under the legal system of a European power. Another serious problem is that public services were provided through the traditional waqf, which was meant to be an inflexible organization. The vast resources of established waqfs could not be used to provide modern municipal services.

The response, beginning in Egypt and Turkey, was to adopt French commercial law, to establish secular commercial courts, and to start providing public services primarily through European-style municipalities established as corporations. These reforms drew only the mildest objections at the time; no one made it an issue that the corporation, which is absent from Islamic law, became a key element of Muslim economic life. To this day not even Salafists object to the Western-inspired organizational forms introduced the region since the 19th century.

The Middle East and North Africa has thus managed, quite smoothly, to overcome the organizational disadvantages that left the region behind. Hence, there remain no legal obstacles to forming a giant firm in Egypt, or to supplying water to Egyptian cities through the latest technologies. The Sharia no longer keeps the region behind directly, for the simple reason that in the present, economic life is regulated by laws developed outside the restrictive framework of the Sharia.

However, it matters enormously that the Egyptian economy was governed, until recently, under the Sharia. This history delayed Egypt’s transition to democracy by keeping its civil society chronically weak. Democracy is a system that involves more than fair elections held periodically. It involves limits on the governing coalition. The powers of government are limited partly through private organizations, including unions, professional associations, independent media, and political advocacy groups. Together, such private organizations form civil society. A strong civil society emerges under a market economy served by perpetual autonomous organizations. Hence, the long delay in the Middle East’s economic modernization set back its political development. This delay allowed autocratic leaders to gain power and then rule for decades on end. These leaders used their powers partly to keep civil society from developing.

If Egypt remains politically unstable in spite of having a democratically chosen government, a key reason is that its civil society remains weak. Precisely because of this weakness, Egyptians fear a return to autocracy. This situation is among the delayed consequences of the Sharia.

  • 3. In all countries of the Arab Spring, there is talk of a “renaissance” founded in Islamic principles. Do you believe that such a renaissance is possible? Where do Islamist thinkers, including Islamic economists, need to focus their efforts to bring Sharia up to date?

Timur Kuran: Although a renaissance is possible, it is unlikely to be founded on Islamic principles. On the contrary, it is likely to arrive when a critical mass of Muslims recognize that to make the Arab world and the wider Muslim world economically competitive, intellectually vibrant, and well governed, it is necessary to abandon the fixation of looking for all answers within the confines of the Sharia.

It has been almost two centuries since the Sharia played an important role in any major economic system. It was out of date, then. That is why, outside a few domains involving family matters, it was effectively abandoned in country after country, with general agreement. To make the Sharia useful in economic and political life of the twenty-first century, it would have to be altered so extensively that it would cease to be recognizable as such.

Sooner or later Islamists will start debating, in earnest, the limits of the Sharia. Intellectual life in the Middle East and North Africa will then start flourishing once again. Solutions to many economic and political problems will emerge through free discourse, as opposed to discourse sterilized by concerns of what is properly Islamic.