What Next For Egypt’s Economy?

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.


  • Posted August 15, 2013 at 6:13 pm | Permalink

    I’m glad to see you made it through the massacre. It saddens me greatly that it’s come to this point. Do you think the military et al would really start true reforms even if they lose their aid?

  • Waleed Elbadawi
    Posted August 15, 2013 at 8:53 pm | Permalink

    Love your blog. Do you have a sense that there might be a correlation between the Mursi government’s attempt at more rigorous tax enforcement against the likes of Mohammed Al-Amin (CBC), the Sawiris family, and Ahmad Bahgat (Dream) and the coup. Is there any indication as to the amount Naguib Sawiris contributed to the Tamarod movement. And, now that a new government has taken the reins of power what is the status of the aforementioned tax cases.

  • NB
    Posted August 16, 2013 at 5:55 pm | Permalink

    Egypt has been dependent economically on foreigners since Ismail Pasha. Breaking that dependence would be the greatest shock to Egyptian society and economy in over a century, if not the greatest ever. If it is done suddenly and without proper management, it would have catastrophic consequences which we cannot truly anticipate. Think Shock Therapy in Russia and the harmful consequences it had to economy and society there.

    Unfortunately, given the political and economic realities, an unmanaged sudden transition seems most likely. But we should have our eyes open and understand the Pandora’s box that will open up.

  • nadine
    Posted August 18, 2013 at 12:03 pm | Permalink

    I love this blog, you are the voice of economic reason.

  • Farah Halime
    Posted August 20, 2013 at 10:54 am | Permalink

    Thanks for all your comments. Tried to answer to some extent below:

    Matt – The military’s main interests, economically speaking, is to keep its factories and various business interests running smoothly. But for the military, reform is a word synonymous with selling the state and the national assets (some of which they own). The military has been wary about introducing reforms before and in fact stopped the IMF loan coming to fruition when it was first being negotiated in 2011. They may talk about protecting Egyptian companies for the national interest, but they are really talking about protecting their own companies. Most reform measures – even the cancellation of energy subsidies (which would make running these factories more expensive) threatens the livelihood of the military and their sprawling economic interests.

    Waleed – With regards to OCI’s tax position, they have not commented on this yet (I asked them personally). It is also unclear how much impact Naguib Sawiris had on the success of the Tamarod movement. Of course Morsi didn’t make things easy for these companies and rather than some kind of full-on conspiracy, I believe what is much more likely is the pressure from business elites, like the Sawiris family and the other businessmen you mention, on the military to intervene and overthrow Morsi.

    There is no doubt the unanimous support from the business community when Morsi left, but unfortunately their plan has backfired and Egypt’s economic situation is at its worst level since the start of the revolution in 2011.

    NB – Absolutely, you bring up a very important point. As much as we may think Egypt will benefit in the long run, cutting all lifelines would be disastrous. And I doubt donors will just want to abandon Egypt completely. But to pull out some aid, for example the 1 billion euros the EU is suggesting it pull out, may actually make Egypt think twice about slaughtering the Brotherhood in the name of what they believe is “Democracy”.

    Nadine – thanks, glad you find the blog useful!

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