We may not like it, but Egypt desperately needs Gulf money.
So why not change the way the Gulf lends money to Egypt to make it count. It won’t be just about wasting away cash to address a symptom without resolving the underlying problem.
Indeed, without Gulf aid, the government would have struggled to pay for vital imports and would have fallen far behind on its supply of fuel, prompting nationwide riots and unrest. The pound would have depreciated rapidly in the absence of sufficient central bank deposits and would have been worth closer to LE7.5 or LE8 to a dollar instead of LE6.89.
Egypt had no-one else to turn to.
International donors, including the likes of the International Monetary Fund, the World Bank and the African Development Fund, had too many strings attached for far less money to make it worth while for Egypt. These organisations also promised a whole lot of interference (or as they call it “technical expertise) into economic policy-making – another unpopular prospect for the foreign-wary Egyptians.
Meanwhile the Gulf was a perfect lender to Egypt. It has acted more like a generous Uncle, pouring money (and petroleum products) into Egypt’s coffers whenever needed and with few questions asked. As long as the Muslim Brotherhood are out, the Saudis are in.
But beyond throwing money at the problem, the Gulf has done little in the way of long-term restructuring in Egypt. They’re not interested in reforms and overhauling the tax system, but wielding control in the most populous Arab country and leverage over the Brotherhood.
Though the Gulf can afford to keep playing this game, Egypt can’t.
The government has been given too much free rein with more than $12 billion in cash and oil. None of that has gone towards supporting the budget deficit, or towards reforms that will benefit the lives of millions of Egyptians.
Adly Mansour’s government, or more likely the government that follows after elections, should consider making the most of connections with the Gulf by striking deals in infrastructure and energy.
Rather than just taking money to plug holes that will reappear in a few months time, Egypt would do well to get the same money siphoned off into long-term investment projects.
There are many avenues for joint ventures: Egypt’s factories, the bread and butter of the industrial sector, are shutting down because of difficulty securing loans in the credit market.
Low-income residential projects to house thousands of Egyptians living on-top of one another in Cairo has stalled as contractors struggle to find the funds to keep working.
Labour-intensive infrastructure projects, on roads, railways, water and sewage treatment plants, are in desperate need of investment.
Egypt’s interim government boasted about launching a $3.2 billion “economic stimulus plan” yet very little has been said about reinforcing ties with the Gulf, which is surely the easiest way to implement such a “stimulus plan”. The only mention of Gulf investment is a possible agreement with the United Arab Emirates to finance medical projects and 10 wheat silos.
But that is not enough. There should be a full-scale collaboration with Gulf countries, not only to benefit Egypt, but to show the international community that the money is working hard for the nation.
Nothing has damaged Egypt’s economy more than the threat to security and stability. The perception of risk is enough to derail an entire economy and it will continue to keep investors away. The killings of hundreds of innocent civilians in a bloody crackdown a few weeks ago only compounded this perception and made it reality.
The fear that a jihadist and extremist element may have been borne out of the military coup is materialising. An attack on a police station in central Cairo and plans for new mass protests by the Brotherhood on Tuesday shows how elusive stability is.
Though a state of emergency and a curfew has to some extent successfully shrunk the number and intensity of protests, the interim government has yet to show that it is in control (and not the army).
Security problems this week at the Suez Canal the waterway which handles about 8% of world trade, is among the only areas in Egypt that highlights just how damaging the new threats that are emerging after Islamist president Mohammed Morsi’s ouster.
Half our petroleum products are gifts from Arab countries, says authority – Egypt Independent
This would be funny if it wasn’t so damaging for Egypt’s deficit and the wider economy. The head of the state oil company, the Egyptian General Petroleum Corporation, admitted that 50% of the petroleum products that the authority needs to import come in the form of gifts from Arab countries as part of the aid they provide to help the Egyptian economy.
I’ve said it before and will say it again: Rather than depend on the GCC for plugging a gap that will always reappear, Egypt should try to renegotiate real investment from these countries and seek technical expertise on how to restructure energy subsidies. The welfare on energy is the biggest drain on the budget and will continue to be so until the price of fuel is raised for those who can afford it.
Speaking of which:
UAE to shower Egypt with additional $2 billion – Ahram Online
Syrian government backtracks on plans to charge customers for plastic bags for bread– Syria News (Arabic)
Probably wise considering Syrians are struggling to buy bread in the first place. The government was going to charge consumers 4 Syrian pounds a bag after bakeries and manufacturing plants financial losses mounted.
The price of most products has increased as the currency depreciates against the dollar.
Tenders for food commodities fail to draw interest – Reuters
Syria has cancelled two tenders for food commodities in recent weeks, Reuters has reported, threatening food supplies to the population.
Libya imports fuel to keep power on – World Bulletin
Libya has begun importing diesel and fuel oil to keep power plants operating after protests closed most of the gas fields in its eastern region which usually supply them, the World Bulletin reports.
Analysts told me last week that protests around oil fields have caused a 30% drop in production this year, a massive amount for a country that owes its post-revolution revival on oil.
In the meantime:
Under the agreement, Libya will supply energy products to Malta at preferential rates. That will include crude and refined oil, jet fuel and LPG, the Libya Herald reports. In return, Malta will be aid Libya in transport and civil aviation.
However, the agreement won’t be in place until Libya resumes normal production. Considering the country is struggling with its own oil exports and supply (Oil exports are down to 160,000 barrels a day), this doesn’t seem like it will happen for some time.
And another critical part of the arrangement is for Libyan oil and gas workers to learn English in Malta.
1) Egypt and Turkey – Bloomberg
It’s amazing how fickle Egypt’s government can be when it drops an old friend.
Egypt’s new government has made it clear it is not prepared to cooperate with Turkey, an ally and donor of the Muslim Brotherhood. Tensions have grown between the two countries since the army toppled Islamist president Mohammed Morsi and Turkey is suffering for it, with exports dropping as much as 30% since July 3, the day of the coup.
The Federation of the Egyptian Chambers of Commerce this week announced they will suspend all official trade relations with the Turkey after Turkish Prime Minister Recep Tayyip Erdogan described Morsi’s ouster as an “unacceptable military coup”.
But with the volume of trade between the two countries estimated at about $5 billion, excluding tourism and joint investment projects, Egypt will also end up paying a price for its bad diplomacy.
Not so much an economic story, but one that alludes to the growing influence of Egypt’s “old guard”, symbolically represented by the release of Hosni Mubarak.
The evidence is clear: the army has marshalled support from Egyptians as the country becomes exhausted by two and a half years of turmoil. Investigations against the January 25 killings and politically corrupt individuals during the Mubarak era have been put on hold. Censorship is back, with propaganda infiltrating most TV channels and even some state-run newspapers calling the January 25 revolution a “setback”.
This story makes very clear that Egypt has turned a worrying corner in the quest for democracy and therefore equality, which is really what the revolution was all about.
3) Apache – Wall Street Journal
The oil and gas company, Apache has agreed to sell 33% of its Egypt business to China’s Sinopec Group. It will continue to be an operator on the projects.
Though this story may, on first reading, look like Egypt’s oil sector is vulnerable to asset sales because of increasing debt to oil companies and mismanagement on the part of the Egyptian government, it’s not that simple.
The operations are located in the Western Desert, far from any political unrest that would impact exploration. In fact, this transaction reflects more of Apache’s goal to use the proceeds to reduce debt, buy back shares and fund the company’s capital spending.
What it does highlight is the value of Egypt’s oil and gas sector, which will always be attractive to companies, even despite such political risk.
4) Egyptian government temporarily halts IMF negotiations – Egypt Independent
This story is misleading for a number of reasons. Egypt didn’t halt IMF negotiations, rather the IMF stopped communicating with Egypt partly because of the way the Brotherhood have been almost banished from not just the political sphere but from daily life in Egypt. Most Brotherhood members are in hiding now.
The story also refers to the Gulf as a kind of saviour that will tackle the deficit, but none of the $12 billion will be used to cut the deficit. It will be used to keep the pound afloat and imports flowing. In other words, it’s a running tap that is wasting cash that could be used more shrewdly.
What about making a deal with Saudi Arabia to invest in projects in Egypt? Wouldn’t that be more helpful than throwing billions of dollars into the Central Bank to support a currency that many consider is overvalued?
5) Libya oil – Economist
One of the biggest issues standing in the way of Libya’s economic success is the government’s control over key sectors, especially oil. Now a port that allows the trade of Libyan oil has been shut off and its closure is representative of the power the state wields over the energy sector.
Basically the state believes that a large amount of oil is being “smuggled” out of Egypt. But the party responsible for the potential sale, the Petroleum Facilities Guard, say it is a valid transaction.
The stand-off is part of a bigger political agenda between various factions in Libya, but as this Economist article concludes, if the state-owned “National Oil Company cannot keep its legal monopoly on oil exports it will be taken as yet another sign of the increasing level of political risk in Libya”.
This report, from the Atlantic Council’s Rafik Hariri Center, evaluates the Libyan economy and progress since popular uprisings in February 2011 and the eventual ouster of the Muammar Qaddafi regime.
On the surface, it appears Libya’s economy is back to pre-revolution levels with oil production and GDP at comfortable levels. But this report sets out how the government has failed to come up with a single economic plan.
In this useful read, three main priorities are laid out for Libya’s government including diversifying the economy away from oil, reducing youth unemployment and modernising the financial system.
After several months hiatus (and readers saying they are having sleepless nights without it) the daily wrap is back!
I’ll be linking to a handful of the most important economic stories from the transitioning countries of the Arab world, namely Egypt, Syria and Libya, and to a lesser extent Tunisia, Yemen, Jordan and Morocco. (The Gulf is there in the background too, but only because of its connections to these countries).
1) Energy groups rethink commitment to Egypt – Financial Times
This story has become evergreen for Egypt and it seems like every couple of months a new story crops up to remind us that debts to oil companies are not going to disappear anytime soon.
The story repeats much of what has already been reported, mentioning companies owed millions of dollars including BG group, ENI and the Dana Gas. However the premise of the story may be unfounded. Although oil companies may be acting cautiously at the moment, and holding off any expansion plans, it’s very unlikely that these companies will pull out of Egypt altogether. Not only would this prove costly for these companies to pull out their equipment and human resources, but those firms would miss out on costs they are making at the moment. Because, as the FT story says:
Egypt’s oil and gasfields continued to produce as if nothing had happened.
Reading this story made my blood boil.
The government has already introduced some stimulus measures including lowering interest rates (and more controversially printing money, though that’s more rumour than fact). But increasing spending at a time when the budget is reeling from over-expenditure on wasteful subsidies (for both energy and food) masks a difficult truth: the government doesn’t actually want to make any cuts, or raise taxes to keep its own reputation in tact and avoid any public backlash. Essentially, it’s a cowardly move that will mostly benefit the current interim government who has so far been completely ineffective after the killings of hundreds of Egyptians.
And that perception that $12 billion of Gulf money will save Egypt is very naive. That money is not being targeted at the budget. At best it may be used for some investments, but really it will be used to keep the pound afloat and the country’s imports flowing.
Capital Economics, the London-based consultancy elaborates. This is their bottom line:
Egypt’s newly-announced stimulus package stands a chance of boosting the beleaguered economy in the near-term. But with the package being funded by Gulf aid, over the longer-term, it could actually take the country further away from making much-needed reforms to improve the business environment.
3) Energy stocks rise over Syria – Reuters
I will be writing on the economic impacts of US intervention in Syria later but for now, there are some gems hidden in this stock market story. Capital markets have been responding wildly to this. Gulf stock markets suffered record losses. Though it’s not clear that any escalation of the Syrian civil war would have a pronounced effect on Gulf economies, these same countries have been supporting Syrian rebels for some time.
As a result, investor rushed to the safest commodity around (well it was safe until a few months ago when the gold price plunged…). Gold prices rose to three and a half month highs above $1,430 per ounce as Syria tensions raised its appeal as a safe-haven asset.
Egypt’s army has put the country on a path to economic destruction.
Not only will foreign investors stay away from Egypt for at least a year, but the cabinet is going to fall apart and aid will be hard to come by.
The nation, now more vulnerable than at any time since Hosni Mubarak was deposed two and a half years ago, is on its own.
Promises of aid from the EU and US may now be delayed indefinitely. No one wants to be seen as supporting an illegitimate government that has sat back quietly as hundreds of Egyptians are massacred.
Of course, on one level, foreign aid is less important now given the $12 billion the interim government has been able to solicit from Saudi Arabia, Abu Dhabi and Kuwait. Western diplomats told Reuters that it would last less than a year, buying time for officials to iron out political issues.
But the events of the last 24 hours have destroyed any chance of political reconciliation and with another impending huge hit on tourism and foreign investment, Gulf money will run out fast.
The Gulf is not going to keep funding Egypt’s ballooning deficit, especially as the country keeps spending foreign currency at a rate of $1.5 billion a month.
Egypt’s so-called high-powered economic dream team are being weakened with every death on the street.
Not only has the resignation of Mohammed El Baradei totally undermined the government, but there are already rumours of others following in Baradei’s path, including the government’s chief economist and deputy prime minister, Ziad Bahaa ElDin.
So when Egypt inevitably runs out of cash in less than a year (if not a matter of months), there is only one place government officials will be looking to attract aid and that is from the same international donors, including the International Monetary Fund, African Development Bank and World Bank, it has ignored and asked to stay out of Egypt’s affairs.
Except this time, the negotiations for a loan will be tougher. Stricter conditions may be enforced for Egypt to prove it has what it takes to use aid to benefit the poorest Egyptians. No government has managed to prove that since Mubarak was overthrown in 2011.
Besides, the real reason Egyptian officials have avoided intense negotiations with foreign donors is because the government does not care about working in the best interests of the people. Meeting the conditions for those loans would entail too much politically contentious work. And what politician in their right mind would implement these controversial reforms? (No leader in 60 years of Egyptian history).
So maybe this time international donors should take heed of this request and leave Egypt to fail economically (there is already pressure on the US to cut military aid to Egypt – read Marc Lynch in Foreign Policy, the FT’s editorial, and the New York Times’ editorial for why).
Egypt is completely off track where it started off two and a half years ago. Maybe taking Egypt’s politicians, and particularly the army, off life support is just the shock the country needs after decades of dependence.
Egypt’s energy bill, already a whopping $17 billion, is probably much higher than official figures suggest.
The country is losing billions in petrodollars because it isn’t taking advantage of the international market where oil can be sold at much higher prices, nor is it closing up channels that breed corruption and allow hidden subsidy costs to take hold.
Officially, energy subsidies account for 20% of Egypt’s budget, costing the government $17 billion every year, but it is likely the government actually spends much more on subsidies every year.
1. Missing out on “opportunity costs”
If the government would account for the opportunity costs (sometimes also referred to as economic costs) of energy subsidies, it’s subsidy bill would be at least 50% higher than the official figure.
This is the money the Egyptian government loses by not selling fuel at the international market price, but at far cheaper rates.
That means the state-owned oil company, the Egyptian General Petroleum Corporation, provides energy at a cheaper price for the domestic market, when it could be taking advantage of the lucrative international oil market.
The difference between the profit that the EGPC could have made from selling the fuel internationally and the oil it sells domestically at a subsidised price is the “opportunity cost”.
In order to capture this opportunity costs, economists use the so-called price gap approach.
2. Lending between ministries has opened up channels for corruption and hidden subsidy costs
The government has made it almost impossible to track the true costs of energy subsidies.
That’s because of poorly recorded budgets and unnecessarily complex bureaucracy between the oil, electricity and finance ministry.
Samir Radwan, a former Egyptian finance minister explained how this internal bureaucracy works:
“When the EGPC provides fuel to the Ministry of Electricity, its sells it at the subsidised price. The Ministry of Electricity, in turn, collects revenues from electricity sales and pays them to the Ministry of Finance which issues a bond to the Ministry of Electricity.
But the subsidies are recorded as an expenditure at EGPC. It would be more correct, however, if EGPC would sell fuel at the international market price to other entities and then account for the subsidies as a loss.”
Intra-governmental funding has made it even more difficult to track how much subsidies are costing the nation and an “amazing labyrinth of connections between different ministries and different entities of the government,” Radwan says.
This only serves to undermine official figures.
But more worrying still is that the convoluted internal financing mechanism is masking an accumulation of intra-governmental debt. The Ministry of Electricity not only owes money to the EGPC and the Ministry of Finance (according to estimates, the Ministry of Electricity pays about 200 million Egyptian pounds a month to the EGPC), but is also owed funds and debts by other ministries and entities.
The question now is: how will the government undertake any energy subsidy reform, if it is not even able to track its own subsidy records?
As the months drag on and the prospect of a recovery for Egypt’s economy seem to slip further away, the key question on most investors’ minds is whether the government can push through reforms.
But while it is clear that successive governments have failed to ease hardship, it’s worth addressing whether Egyptians are ready for reforms.
The loudest opposition to the International Monetary Fund loan, energy subsidy reforms and higher taxes was from Egyptian citizens. That’s not surprising considering Egypt’s rocky history with the IMF and the (inaccurate) perception that reforms will make life worse for the poorest.
But perhaps its time for an attitude change. Indeed, it is the very real fear of a popular backlash to reforms that has so far stopped any government imposing anything too harsh.
But as Rebel Economy argued earlier this week, a dose of austerity with some stimulus is better than no austerity at all.
Take Latvia, which has provided “a rare boost to champions of the proposition that pain pays”, where it is perceived as shameful for people who earn any salary, no matter how small, to go on strike, New York Times reporter Andrew Higgins writes:
When a credit-fueled economic boom turned to bust in this tiny Baltic nation in 2008, Didzis Krumins, who ran a small architectural company, fired his staff one by one and then shut down the business. He watched in dismay as Latvia’s misery deepened under a harsh austerity drive that scythed wages, jobs and state financing for schools and hospitals.
Then there was light:
But instead of taking to the streets to protest the cuts, Mr. Krumins, whose newborn child, in the meantime, needed major surgery, bought a tractor and began hauling wood to heating plants that needed fuel. Then, as Latvia’s economy began to pull out of its nose-dive, he returned to architecture and today employs 15 people — five more than he had before. “We have a different mentality here,” he said.
Does Egypt need to change its mentality? Rather than protest dislikes (which is all too easy) what about focusing energy into lobbying organisations to work harder for job creation and inclusive growth?
It worked for Latvia.
The Baltic tiger’s economy grew by 50% during 2004 and 2007, but the global financial crisis of 2008-09 hit the country hard and it endured one of the worst recessions of the European Union. Deep public spending cuts introduced by the new government led to discontent and protests at home, but impressed international lenders enough to earn Latvia an IMF/European Union $10 billion bailout.
Rather than cause uproar, the cuts (including slashed wages, wide-scale sackings of public sector workers and reduced welfare) calmed fears in the international markets and rather than throw the government out of office, Prime Minister Valdis Dombrovskis, who presided over the austerity, was re-elected.
Of course it would be short-sighted to suggest that if there were no protests then life would improve for the neediest. Demonstrations have been a key tool for Egyptians to communicate their grievances. However, persistent political instability, labour strikes and violent street confrontations are only delaying a recovery.
To be sure, economists have estimated that the military’s overthrow of Islamist president Mohammed Morsi led to losses of around $3 billion to $5 billion. That mostly reflects a sharp fall in foreign investment, declining production as factories and production facilities stopped working and a major reduction in tourism revenue as security concerns mount.
But is it naive to consider Latvia’s recovery, dubbed a “neo-liberal success story”, a model for Egypt, a country that recoils at the mere mention of “neo-liberal”?
Not necessarily. The reason why the military was so welcomed in its power-grab last month was partly because Egyptians want a return to normality. Few people want Mubarak to return but they are viewing his regime a little softer and moaning that life has gotten worse since the 2011 revolution.
At one point, Egyptians will have to recognise that there must be hardship to reach the desired result. Not everyone will get what they want, but protesting every time you don’t get it won’t make any difference either.
Of course, Latvia and Egypt are hardly comparable. While Latvia was reeling from the global recession, Egypt experienced one of the fastest growth rates in the Middle East under reforms that began in 2004 to increase trade, promote growth and facilitate doing business. But as wealth accumulated, this did not trickle down to the poorest and soon stirred the discontent that ultimately led to the 2011 uprising.
Though the January 25 revolution was the harbinger of growth for Egypt, that day cannot be replicated as we have seen with Morsi’s rule and now the military’s caretaker government.
Egyptians must accept reforms and approach these with the mentality that the country won’t recover unless people are willing to try to fulfil their ambitions for a better future, rather than undermine their opponents or protect their own interests at whatever cost.
CORRECTION: This article originally linked to a story by Middle East Monitor that suggested Egypt was hit by losses of $17.1 billion after the military overthrew the former Islamist President Mohammed Morsi. The article has been corrected to reflect losses of around $3 to $5 billion, according to economists Rebel Economy consulted.
The Egyptian government’s tactic to avoid major austerity measures and instead try to stimulate the economy by pumping in new funds may be popular among Egyptians but risks delaying the country’s economic recovery.
Egypt’s new minister of finance, the sixth since Mubarak stepped down in early 2011, said “one of the important tools to deal with the budget deficit is stimulating the economy”.
“We will seek to pump more new funds into the economy and not follow austerity measures,” Ahmed Galal told Reuters.
“We do not want to lower spending in a way that will slow a revival of the economy,” he said, adding that improving security was also key to a better business climate.
But there’s a difference between a “stimulus programme” (technically defined as substantial reductions in debt-financed government spending) and spending until you have no money left.
The government is counting on increased tax revenues to cut the 11% deficit, yet does not want to increase taxes sharply, Mr Galal told Reuters. And that’s even if taxes are increased at all, he said.
We can only assume that the government plans to overhaul the tax collection system so that those who do owe taxes do not fall through loopholes. But the government has not specified how it will reform one of the most bureaucratic systems in the country.
Mr Galal made the usual vague references about the need to implement reforms without providing any details. That’s probably because reforms usually mean cuts and that would undermine his stimulus speech.
Of course, anything that adds to the burden on the poor risks provoking a backlash and further destabilising a society where heightened discontent regularly boils over into protests.
But its hard to imagine how Egypt can spend its way out of the economic malaise when energy subsidy expenditure and debt service payments swallow around half of the budget. That has only forced the government to make short-term deals with the Gulf for energy imports, with worries about the next energy bill hovering in the background.
Egypt’s stimulus rhetoric also implies that the bloated public sector, where the government employs at least 6 million on meagre salaries, will not be touched. The country has long used salaries as a way to keep people content and off the streets, but it has left Egypt with a severely under-performing public sector workforce and a drowned-out private sector.
Plus, talk of “stimulus” is nothing new.
Mubarak refused to make the cuts that were needed to rein in the subsidy system and right-side the budget, and instead spent money on still unfinished mega-cities that were meant to ease population pressures in the capital.
Morsi and his aides also talked about “stimulating the economy” so it’s not like this idea is confined to our new cabinet.
Abdallah Shehatta, who was an economic advisor to Mohammed Morsi, said the key was to “invest more in order to convince people of any type of reform.
“We need a stimulus package that is at least 1% of gross domestic product with spending on key sectors such as construction and infrastructure,” he told me in an interview last year.
Like Mr Galal, Mr Shehatta also seemed to disregard the impact of an IMF loan agreement on shoring up new investments.
Instead, in Egypt, where most Egypians are already tired of hardship, the word stimulus has become another way of appeasing people in the short-term and not commit to any of the drastic economic reforms that will surely be passed onto the next government.
The cabinet won’t be in power longer than seven months and without the support of the Muslim Brotherhood, major measures to rein in the deficit are unlikely to gain consensus and succeed.
If the government wants foreign investors to take the country seriously, Egypt has to change its attitude about reforms and bite the bullet.
Stimulus alone will not lead Egypt out of recovery and neither will austerity. The country needs a very specific plan to trim excess expenditures and raise revenues through taxes.
As the US’s stimulus package and Europe’s austerity programme have shown, economics is not a precise science and countries cannot solve their problems by applying a one-size fits all remedy.
If tomorrow, Egypt began a system of cash transfers to the poorest so they could fulfil their fuel and bread needs, but simultaneously raised fuel prices and removed subsidies for the wealthiest, the country would be far better off than today.
A dose of austerity with some stimulus is better than no austerity at all.
The US sent a strong message to Egypt yesterday.
Under the Senate’s proposal, funds sent to Egypt will be kept at current levels, but military aid will be divided into four parts with conditions set on it. A key condition is that the Egyptian government holds democratic elections.
While $1.55 billion a year is very little compared to the Gulf’s $12 billion splurge earlier this month, and considering Egypt needs roughly $11 billion to $12 billion a year to keep its deficit under control, politically, the aid retains a strong tie to Egypt’s army. It also prevents the risk of further unrest.
Washington is questioning how to handle the funds it sends since the military ousted elected Islamist President Mohamed Mursi early this month, and US law dictates that aid is cut off to a country where there has been a military coup.
So far, Egypt seems to have got away with what its military-led transition, which says a lot about what the US are willing to put with (i.e., pretty much anything as long as it keeps its hand in with Egypt).
But at what cost will this be for Egypt?
Stricter conditions from the US are likely to come from other lenders too. The US has already in the last hour that it will delay a planned sale of four F-16 fighter jets to Egypt in light of the military overthrow.
The ultimatum is: Hold an election or else we will make you work for your money, or in the worse case scenario we will cut off aid.
Major lenders including the World Bank and International Monetary Fund are already wary of Egypt and need reassurance that the country will not descend into more violence as shrill speeches calling for protests are given by military men.
In reality, Egyptians and financiers are looking for one thing: calm.
Calm brings clarity, clarity brings focus and that brings a plan.
In the meantime, as the army wastes its energy rallying the masses to fight each other rather than unite the nation, there are practical conversations taking place between ministers and different economic organisations who hope to work out a plan for Egypt.
Ziad Bahaa El Din, for instance, the new minister for planning and international cooperation (the ministerial position which predominantly deals with international lenders) is now meeting many of these banks and resuming talks to gauge what direction Egypt will go in.
Egypt is now equipped with full bank of Gulf money. But now is the time to make moves toward reassuring donors that Egypt is serious about its transition. The fact that the National Reconciliation initiative, which is formed by interim president Adli Mansour, was launched today but only included groups that need no reconciling, and not the Brotherhood, is already a sign of the struggle for consensus, which lenders sorely need.
Unless the interim government is willing to accelerate its vague plans for economic reform, or call early elections (or both), these lenders, who can give more than just billions of cash to plug holes, will apply stricter conditions making it more difficult for Egypt to overcome its economic crisis.
Some familiar faces are back (trying) to run Egypt.
In fact, eleven out of 34 cabinet ministers are veterans of Mubarak’s regime.
That was good news for many businessmen considering many of the newcomers have a solid background in economics and finance and are seasoned politicians. A far cry from Morsi’s ministers, who included little-known professors of Islamic finance and loyal Brotherhood allies.
But what most analysts forget is that this is an interim government backed by the military. No matter how many “All Stars” are now in charge of the economic file of Egypt, the cabinet is physically handicapped at making reforms because it is not democratically elected. It will find it difficult to push through serious reforms or get the backing of international lenders until elections take place in February (or so we hope).
The military-led political transition has raised questions over large loans pledged by the International Monetary Fund, the World Bank and the African Development Bank. Bankers say every major institution is re-evaluating its position in Egypt.
Egypt’s new investment minister Ashraf al-Arabi may have signalled there is no need for an IMF loan now, but the reality is that the IMF may be in the driving seat and decided that until elections take place, there cannot be consensus on the $4.8 billion loan.
What is more, is that the optimistic sentiment that the cabinet will solve Egypt’s economy overlooks the tragedy of the situation: the former Islamist president Mohammed Morsi was unable to convince the same people to his government in the last year when they were needed the most.
Of course, that’s a failure on Morsi’s part for running such a shoddy administration, but it’s also a weakness on behalf of some our new cabinet members, who refused an important job because of their political affiliations.
Now, with these highly-rated economists and technocrats in power Egypt’s economy is perilously close to collapse. A year has gone by and Egypt’s budget deficit is costing the nation a whopping $3.2 billion a month, according to Reuters’ calculations.
Despite the Gulf support (which now amounts to more than $20 billion), there is scepticism among foreign investors, as Raza Agha, chief economist for MENA at VTB Capital points out in this important memo:
1. One, a high level of support from the GCC donors is perhaps helping facilitate the exclusion of the Muslim Brotherhood (MB). If the MB were a small group which could be ignored, this would not be such a big problem. But former president Mursi was still polling 30-40% support in the lead-up to his exit. With cash in the bank, the army-backed interim administration seems intent on pushing through the transition, with or without the MB.
2. Secondly, while the large support helps Egypt meet its external financing needs ($19.5 billion over the next 12 months), it also means that the urgency to reform is postponed. Now if Mr Mursi came in facing high expectations, the new government that will take office around March 2014 will have even greater expectations and a fairly exhausted donor community. This implies they may have to reform deeper and quicker than what may have been the case otherwise. Deeper fiscal reforms could well have social consequences, given that inequality, poverty and unemployment have underpinned some of the reasons behind the pro-democracy movement.
The signs so far show that interim cabinet is fully aware of the political consequences of pushing through contentious reforms and is backing away.
After all, what interim government, which has a shelf-life of around 6 months, would make any unpalatable decisions that could lead to a nationwide backlash?
If anything, the cabinet is playing the populist hand (a favourite tactic of Mubarak which ultimately led to his demise) by spending more on areas that really need targeted cuts.
This example speaks volumes: Egypt’s new minister of supplies has pledged to ensure that supplies of a strategic good like wheat do not reach the critically low levels they did during Morsi’s year in office. Mohamed Abu Shadi told Reuters he aims to increase total stocks to between 5 million and 6.5 million tonnes by the end of Egypt’s current fiscal year next June.
Well that’s very gracious of Mr Abu Shadi, but he didn’t mention that Egypt is in the grip of nationwide fuel and bread shortages that are rooted in a mismanaged subsidy system. What about steps to reform to limit wastage, corruption at bakeries and queues outside bread kiosks? Isn’t the subsidy system, which is notorious for being abused, itself a problem?
“Criminals,” he said. That is who is to blame…
The new cabinet may be mentally equipped for reforms, but they are politically very weak and will struggle to do anything meaningful.
The best hope for Egypt is that the new elected president decides to keep some of these interim cabinet members so they can actually make a difference and have the political clout and the votes to re-write laws and communicate deeper reforms to Egyptians.