Middle East economists and analysts have tried and often failed to answer Egypt’s million dollar question: Will the country’s economy collapse and, if so, when?
Finally, someone has crunched the numbers to give us an answer.
London-based economist Ziad Daoud pored over Central Bank data and reckons the scare-mongering (of which the media is to blame of course…) of Egypt’s imminent economic collapse is largely unwarranted.
Egypt needs to raise $11.7 billion in the next 12 months, according to International Monetary Fund estimates.
The task seems “formidable,” Daoud writes in his blog post, “especially without the help of the central bank’s foreign currency reserves which are near their minimum safety level.”
But a careful look at the numbers goes a long way to explaining how Egypt has muddled along for so long and why the situation is not so bad. Daoud writes:
According to the Central Bank of Egypt (CBE), of the $6.7 billion of external debt maturing this year, $4 billion are Qatari deposits which are unlikely to be paid back anytime soon.
On top of that, Egypt has recently managed to borrow $2 billion from Libya and an additional $3 billion from Qatar. With a further $1 billion transfer from Turkey and a potential loan from Russia, the Egyptian government seems to have secured most of its external financing needs for the next few months.
Daoud’s excellent table below can be viewed in conjunction with Rebel Economy’s own data for a rounded picture of the majority of loans and deposits raised:[caption id="attachment_1593" align="aligncenter" width="580"] Source: Ziad Daoud[/caption]
So Egypt is out of the woods. Not quite.
Daoud argues that the government’s strategy is vulnerable to four main risks:
1) It could unravel if the financing needs increased unexpectedly as a result of energy or food price shock.
2) The second risk is that of a speculative attack on the Egyptian pound, especially with the CBE unwilling and unable to fend them off.
3) The over-reliance on Qatari funds to keep the Egyptian economy on its feet may raise questions about the political price being paid.
4) Even if this tactic proves successful, it is at best a short-term fix rather than a long-term solution.
So we return to the original question. Will Egypt go bankrupt and will its economy collapse as it turns to one short-term solution after another?
Technically, Egypt is scraping by and has not yet fallen prey to any of the risks listed above.
But Egypt is walking a fine line. This is not a victory for the government and not an economic plan worthy of long-term buy-in from Egyptian people, the opposition, or international donors.
Loans are never free and Egypt will face increasingly difficult conditions from its Arab allies (Qatar most recently asked for a 3.5% interest on $3 billion bonds it will buy from Egypt) as the political and economic risk grows.
So the most dangerous economic scenario is now clear and forces us to reassess the idea of Egypt as “Too Big To Fail“.
Egypt may not be facing the horrific consequences of total economic failure – i.e., through hyperinflation (where a loaf of bread costs $40), a run on the pound and a completely dollarised market, but the economy is slowly grinding to a stop, and in many ways this is more dangerous.
There are not enough dollars in the market to sustain imports, leading to shortages in major and minor goods (almost all imports including for fuel, wheat, pharmaceutical drugs and fish has been impacted and small and medium sized import businesses are struggling to sustain themselves). Unemployment, particularly for those under 25 years of age, is rising steadily, and economic growth has stalled to about 2% and is not expected to do much better next year.
If Egypt is allowed to continue muddling through, no immediate economic reforms can be made to address decades-long inefficiency and the country will be stuck in a vicious cycle of stagnant growth.
Egypt’s successive governments, and now Mohammed Morsi’s government, have for too long fallen back on the mantra that any dramatic reforms are bad and that the country will survive because it is too geo-politically important.
And historically, this mindset has meant contentious reforms always begged the question of whether a leader had enough political clout to carry out unpopular reforms.
Usually, that leader did not have the courage to go through with it (i.e. Anwar Sadat’s 1977 Bread Riots, Mubarak’s 1990s privatisation policies, and now Morsi’s 2013 “Do Nothing and Nothing Bad Will Happen” policy), but Egypt’s economy has ticked along.
It’s not just about the political mandate to follow through with reforms but the delivery of information. Leaders have often communicated their vision badly to Egyptians. Anwar Sadat abruptly announced there was an end to food subsidies (including for flour and cooking oil), with no alternative placed on the table. Hosni Mubarak’s raison d’etre has been as a backseat driver, never really caring enough to get too involved and allowing others to make decisions that had detrimental impacts.
Mohammed Morsi today has done very little out of cowardice perhaps, and fear for his own political reputation. The IMF loan is already casting him as another Mubarak, yet he has done little to prove that this is not the case.
Plus, this time Egypt is different. The economy is much more vulnerable to global food and energy price shocks, and has more debt than ever. People are tired and impatient and the frustration shows.
Morsi’s reliance on funding from Arab allies won’t work unless he changes the system and brings about an immediate reform of energy subsidies, coupled with compensation, overhauls the tax system so Egyptians who owe tax are actually paying it, and streamlines the bureaucracy so Egypt is not stuck with 36 ministries who, despite their size, do the same work as one efficient ministry.
The one sure way out is for the Egyptians to take matters into their own hands and not wait for assistance, or at least motivate the right kind of assistance. The Egyptian identity crisis is not mere teenage angst, it is a serious business with real consequences to the Egyptians.