Among the first reactors to the Arab Spring back in January 2011 were the oil markets. The oil price, already volatile in the aftermath of the global financial crisis, became even more unstable as concerns that the oil supply would be choked off if the political problems of the Middle East affected global oil production.
Now, the world is dependant on a few Gulf countries, namely Saudi Arabia, to fill the supply gap. But should the Arab Spring countries, the majority of whom are not big oil producers, be a primary concern for unstable oil markets? Indeed, sometimes the oil market can be wrong, like it was on Egypt. Sometimes the oil market can prepare for the worst case scenario as it did on Syria.
Rebel Economy asked Justin Dargin, an energy and Middle East scholar at the University of Oxford, to break down the misconceptions we have about the oil market and its relation to Arab countries in transition.
Dargin has advised some of the largest oil companies in the world and worked in the legal department at the Organization of Petroleum Exporting Countries also advising on multilateral initiatives.
The oil market has been at one of its most unstable points since World War Two. Many have linked the risks from the countries of the Arab Spring to this tumultuous period. Is this a fair assumption?
There was a chain reaction in the global economy. After the protests began in Tunisia and spread to other MENA countries, for a period of time, investors speculated that the instability would reach the major oil producing Arab countries. The trepidation that the major Arab oil producing countries were at risk for sustained political unrest caused the global oil market to react.
But, what is problematic for the global economy is not elevated oil prices, per se, rather it is that the oil market is much more volatile because of the tenuous political situation in the MENA region. Additionally, the Arab Spring began at an already delicate time for the global economy that was still reeling from the global financial crisis.
Much of the fluctuation in the global oil market is driven by what is known as the “fear premium.”
The fear premium is basically a rise in the price of a commodity, such as oil, that is based on the expectation that a certain event will happen that would significantly impact the market in a negative way. This relates to the Arab Spring as there was a fear that several events could potentially happen. Global investors speculated that in the beginning months of the Arab Spring, there could be oil production disruption in the oil producing Gulf countries.
There was also the fear that perhaps several important sea-lanes and canals, such as the Strait of Hormuz or the Suez Canal, could be blocked. Furthermore, a bit later on during the Arab Spring, terrorism fears grew and it was thought that the regional power vacuum could encourage militant groups to launch attacks on MENA energy infrastructure.
While these fears have largely subsided (although not completely), the international price of oil still remains extremely unstable because of this uncertainty.
So when we examine global energy price instability because of political instability in the MENA region, we must realize that this is “political risk” premium that keeps oil prices artificially high.
The oil market fundamentals are relatively sound at the moment, with increased oil and natural gas production occurring in North America due to the shale oil production boom and increased production in Iraq and other areas around the world.
Nonetheless, when we assess the actual impact of the Arab Spring, the oil producing country of note that had notable disruption was Libya. And, when viewed in context, Libya supplies a minor amount of the global oil supply, while Syria, Egypt, Yemen and other Arab countries that had their own “Arab Springs” are not major oil producers of any note.
The fear premium is based on the fear that the major oil producing Arab countries of Algeria and the Gulf (and perhaps Iraq) will have their production disrupted which would significantly reduce available oil on the market.
But the perception that the oil supply could be affected, even if it is incorrect, can still make more impact than real pressures. What is the long-term impact of this on oil markets?
The oil market is uniquely vulnerable to fluctuation based on fears, whether justifiable or not. This is because most oil exports hail from regions whereby state formation occurred relatively recently and nation-state legitimacy is still being constructed.
Because many of the nation-states in the MENA region are relatively recent creations, political stability is still evolving. The primary perception in most commodity markets especially that of oil, is that the region is prone to wars, coups, terrorism and civil disturbances in ways that can definitively disrupt production of the lifeblood of the global economy.
Ultimately, the long-term impact of investor perception in the oil market, or in other words, the fear premium, is that the oil price will become increasingly divorced from the supply fundamentals thereby leading to a much more volatile market. And, as commodity markets in general become more computerized and investors are able to make split second decisions regarding investments, this problem will be exacerbated.
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.
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.
Take a look at this chart, which the Central Bank has been proudly parading this month:
It shows how the pound’s official price, controlled by the central bank, has been appreciating slowly since the overthrow of Islamist president Mohammed Morsi.
If we were to take this graph at face value, we might conclude that the pound has strengthened as the interim government (and military) took over, and billions of dollars worth of Gulf aid is helping the country’s currency stabilise.
However, traders on the black market tell a very different story, and say the Central Bank is ensuring the pound strengthens just to give the impression that the economy is stable and improving despite the turmoil.
Here, where the pound is traded illegally, the domestic currency has actually weakened to LE7.20 (from LE7.10 a few days earlier, according to Reuters) reflecting Egypt’s volatile economic and political situation.
The pound actually fell as low as around LE8 per dollar at one point earlier this year on the black market, prompting the central bank to turn to a few different measures to reduce pressure on the currency and revive the economy:
But none of that is working. This graph puts the currency’s performance in context, showing how the pound has rapidly fallen in value this year:
And as the pound depreciates further, the more foreign currency reserves are drained and the less the central bank can support the official rate for the currency. This is why the country is spending foreign currency at a rate of about $1.5 billion a month.
Add to that, the few foreign investors left are moving to withdrawals but currency controls are making it difficult to convert Egyptian pounds to dollars. Earlier this month, Emad Mostaque, a strategist at Noah Capital Markets in London told me around half a billion dollars worth of investment is trying to leave Egypt at the moment.
So the picture isn’t as rosy as the interim government may want you to think.
In fact, the volatility we see on Egypt’s currency cycle will be another black mark to add to the nation’s problematic currency history, marked by the Central Bank’s repeated efforts to keep the pound’s value elevated, sometimes at the expense of the country’s precious foreign reserves.
The people at Dcode, an Egyptian business consultancy, put together a comprehensive graph detailing just how volatile the Egyptian pound has fared in the last three decades:
As long as the central bank and government refuse to accept that massive political turmoil and violence on the streets alarmed investors and traders, the pound will continue to fall, foreign reserves will bleed faster and the Gulf will have even more power over Cairo as it comes to the rescue once more with billions of cash.
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.
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 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.
Ignore the economy at your peril. That is the lesson Arab leaders of transitional countries should learn from the Egyptian military’s removal of Mohammed Morsi from power, but one that continues to fall on deaf ears.
Rather than embrace the economic demands of protesters from across the “Arab Spring” countries in 2011, the new governments of Egypt, Tunisia and Libya have failed to address the key economic problems that brought people out to the streets in the first place.
Instead, they’ve done something much more uninspiring, which is to plaster over the status quo, and present it as a new package.
The result is angrier, more frustrated citizens and Arab economies that are just as unsustainable as those in 2010.
In Tunisia, the country’s chronically high unemployment, high prices and slow economic growth has triggered a touch of nostalgia among some for the reign of Ben Ali. Meanwhile in Libya, despite impressive economic growth numbers, the country continues to face a fragmented political landscape and tribal power struggles, which the IMF says “complicate efforts to reestablish security and the rule of law”, and make for a vulnerable oil price.
Egypt is the most worrying of all.
The huge numbers of people appear to have embraced the military, believing the generals are acting in the national interest. Nothing could be further from the truth.
Successive governments have repeatedly crafted messages intended to tug on the patriotic heartstrings of the people, ignoring the real economic challenges for as long as they can and until someone else takes over.
Islamist president Mohammed Morsi presided over almost two sets of ministers after just one year in power, as political tensions alienated large sections of Egypt and led to mass resignations. And his plans for an “economic Renaissance” were exposed for what they were: a mirage. He did not have any control over the economy and instead, wasted his presidency trying to please his Islamist base.
But in the aftermath of his downfall, egos have quashed rational thinking and a naive optimism that Egypt is now saved by the army has blinded some of the best Egyptian economic thinkers.
PIMCO’s Mohammed El Erian, writing in the Financial Times, talks of the main factors that will drive “Egypt’s eventual recovery” (Rebel Economy’s own comments in square brackets):
First, Egypt has several economic growth, income and employment engines that can be easily restarted once calm is restored. [Egypt isn't going to be "calm" for a long time, and do not convince yourself tourists will think any different]
Second, the country’s internal finances, while messy, are not beyond repair. [He partly means subsidy reform, which no one has been able to touch for 60 years...]
Third, Egypt can alleviate immediate foreign reserve and currency pressures through emergency financing on highly attractive terms. [How convenient! Enter the sugar daddies, Saudi Arabia, the United Arab Emirates and Kuwait. Because pumping billions of dollars into Egypt's coffers really helped last year too.]
Aside from coming across as grossly misinformed about the ability of Egypt’s new interim leaders to tackle problems that would be difficult to implement even without the backdrop of a military-led coup, this type of thinking comes down to plain, old gloating.
And nobody likes someone who dwells on another’s misfortune with smugness.
For example, Egyptian billionaire Naguib Sawiris, whose family is the richest in Egypt, says he will invest in Egypt “like never before”. But this says more about the blurred lines between Egypt’s biggest business empires and the ruling government, than an endorsement for a popular new leader.
The last years of the Mubarak era were marked by increased public resentment against the perceived growing influence of businessmen on government, and not something the new interim administration should repeat.
And take this highly-politicised investor note from Pharos Holding, a Cairo-based brokerage firm, which describes the new prime minister [Hazem el Beblawi], his advisor [Ziad Bahaa El Din], the finance minister [Ahmed Galal] and the planning minister [Ashraf al-Arabi] as the “fantastic four”:
It is day 17 and the light at the end of tunnel is getting brighter, despite sporadic incidences of violence. Egyptians are no longer willing to see their lives put on hold. It has already been put on hold for almost two years and a half.
Now that the final structure of the interim government is almost complete, we view the economic team as significantly more coherent and competent than all the teams appointed post the Jan 2011 revolution.
The fact that they are well-qualified doesn’t overshadow the very real polarisation in Egypt.
How can these economists enact their ideas if the streets are awash with blood and Muslim Brotherhood leaders are locked up without charges? Morsi’s failure was not being able to bring disparate groups together to focus on rebuilding Egypt. What sign is there that a new government will do any better, considering the dramatic exclusion of the Brotherhood and their allies?
In fact, the planning minister, Mr Al Arabi, has already made it clear there is no need for an International Monetary Fund loan now.
That may seem like a very good move, considering Egypt has just received $12 billion in loans, deposits and oil from the Gulf, but that money is sure to run out in a few months, and then Egypt will be asking for more money from its sugar daddies.
Let’s be clear about Mr Al Arabi’s motives. He is playing a political game, and not working in the best interest of the country.
The IMF loan is highly unpopular but one of the few chances Egypt will get to rightside its budget and seriously sort out its deficit by implementing energy subsidy reform, correcting the tax collection system and raising taxes for the middle class and wealthy.
The effect of IMF-mandated reforms is not to make Egyptians poorer, but give the government room to spend its revenues in the right place. Healthcare and education are being neglected so that Egyptians, rich and poor, can have cheap fuel. Cutting that subsidy will hurt but it will also make life better for Egyptian children who face the very real prospect of no jobs when they graduate from substandard universities and high schools.
Some economists argue that Egypt may need to negotiate a larger loan now given its fiscal needs.
It’s also politically advantageous for the interim government to hold off on any contentious talks until elections in February. Why would the temporary government do anything to push through reforms if they have the option of passing the buck?
And what happens when people rise up against another government that fails to improve daily life? Will they call for the military to rid Egypt of the same government they ushered in?
The outright refusal of an IMF loan sets a worrying precedent for economic recovery in Egypt. Mubarak, too, was not keen on the IMF loan, and instead appeased the masses by pouring money into the public sector and systemic reforms.
It’s becoming increasingly clear that Mubarak-style economic policies are likely to return, minus the big businessmen of the past like Ahmed Ezz. That might be good for the Sawiris’ of Egypt, but it won’t be for the ordinary Egyptian. Mubarak’s neo-liberal policies helped increase gross domestic product to $145 billion but only widened the gap between rich and poor.
Some are relying on the idea that the trained economists appointed to a technocratic government will have a methodological approach to the economy, without politics playing a role. But this is very hard to believe.
As Avi Asher-Schapiro writes in the Jacobin blog:
Technocrats, of course, are not above or outside of ideology and they do not operate apart from politics. They preside over a system that distributes resources and divides political power. By their very nature technocrats are antithetical to revolutionary politics; they grease the gears of the machines that revolutionaries seek to dismantle.
The developments of the last fortnight are emblematic of Egypt’s struggle to impose any alternative economic plan.
With the budget deficit expected to hit 12% and economic growth still stagnant, jobs are hard to come by and the country is turning to the Gulf for a “quick-fix” to its energy and hard currency shortages.
Instead of just accepting whoever is made minister, prime minister and president, Egyptians (including high-profile members of the business community) should hold the interim government to account.
Mr Beblawi and his team should be grilled for answers and a plan, not adorned with praise.