Egypt’s Old Newcomers

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. 



5 Comments


  • Sarah Rashid
    Posted July 23, 2013 at 12:39 pm | Permalink

    Hi Farah, thanks for the great post. Question: is the Gulf support more than $20bn, or is Egypt’s net international reserves more than $20 billion due to the support of the Gulf aid (which amounts to $12 bn)? Thanks.

    • Mohamed Bahrawi
      Posted July 23, 2013 at 4:00 pm | Permalink

      I’m pretty sure she means $20 billion of aid, (which includes the $8 billion from Qatar during Morsi’s tenure)

  • Waleed Elbadawi
    Posted July 23, 2013 at 6:25 pm | Permalink

    I’m not sure if it is mentioned elsewhere on your blog; but I was under the impression that the IMF loan was important not for its dollar value but for the confidence it instills in foreign investors.

  • NB
    Posted July 24, 2013 at 2:24 am | Permalink

    Qatar has given $8B in aid, added to the $12B post-coup makes $20B total of Gulf aid.

  • Farah Halime
    Posted July 24, 2013 at 8:20 am | Permalink

    Hi Waleed,

    Absolutely. The monetary value of the loan really takes second place to the vote of confidence it gives to Egypt. But arguably even more importantly is the technical assistance that the IMF could provide to right-side the budget, which is priceless.

    Farah



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