Egypt At A Crossroads: 2013


Once upon a time, Mohammed Morsi’s election as President of Egypt invoked nationwide pride, celebration and relief that finally stability might be on its way. Many may not have voted for him, but at least they could rest easy that the military generals were out of power and the democratic process was underway.

“I have no rights, only responsibilities,” Morsi said to cheering crowds chanting, “God is great”.

“If I do not deliver, do not obey me.”

Half a year later and his words have come back to haunt him. The economy has deteriorated so much that even the Central Bank has warned of a critically low level of foreign reserves. People are panicking and rushing to trade their pounds for dollars.

To the detriment of the population, today’s Egypt is not dissimilar to the country ruled under former president Hosni Mubarak.  The Morsi administration, like Mubarak’s regime, is struggling to win legitimacy from the people and contradictions on the path ahead have confused the international community.

Mubarak began his presidency in much the same way as Morsi. He won the support of the nation by releasing prominent political prisoners and removing some restrictions on the media.

He also took the step of inviting the country’s most prominent economists to a conference to discuss the deteriorating condition of the Egyptian economy and displayed genuine will for economic reform. (Morsi is soon planning a “National Dialogue” on the economy).

Sadat had left behind a heavy burden of high levels of foreign debt and high inflation. Egypt’s economic structure was askew.

And in Mubarak, who appeared less domineering and egotistical than his predecessor, there was hope in the hearts of Egyptians that change was coming. But it was clear within a year of his inauguration that it was not meant to be. The emergency law was renewed and reforms slowed to a glacial pace.

“Sure enough”, wrote Galal Amin in the introduction of Egypt in the Era of Hosni Mubarak, 1981-2011 “the sky began to darken and little by little we began to despair of any real political or economic change occurring”.

The honeymoon was over and Egypt seemed forever destined to be a “Soft state”, or:

“A state that passes laws but does not enforce them. When the state is weak, taxes are not collected, people are left to break the law, they lose respect for the police, traffic laws are flouted, and security is lax,” wrote Amin.

Arabist John Waterbury saw the soft state as increasingly ingrained into the fabric of Egypt. In The “Soft State” and the Open Door, he wrote:

“Egypt, whether under Nasser or Sadat, has been a soft state. Neither leader felt it was necessary or desirable to sweat significant segments of the citizenry for the sustained savings that might have made relatively autonomous growth possible.”

This sad situation has repeated itself with Mubarak, and now it seems with Morsi.

Egypt’s only hope now is for the president to begin to reform the creaking bureaucracy and ease an unsustainable subsidy regime, while attracting investment and creating new jobs to lessen the blow. It won’t be easy, but it is the burden of a president to do what must be done even if it hurts the reputation of his political party.

That should be the theme of 2013. But the lack of a clear economic vision is worrying, as Nadine Marroushi, a Cairo-based reporter for Bloomberg, and I will explore through themes that cover the long-winded negotiations with the International Monetary Fund, the costly addiction to energy subsidies and the rise of the labour movement.

Happy New Year.
Editor, Rebel Economy


Egypt’s government has said it will focus on boosting flagging economic growth to 3.5% this financial year and 4.5% in 2013/2014.

That is a scaled down version of a previous forecast for growth of between 4% to 4.5% for 2012/2013.

The economy, riven with political and economic strife, has struggled to grow as the uprising that toppled Hosni Mubarak in February 2011 chased away tourists and investors.

Still, the economy grew by an annual 2.6% in the third quarter of 2012, President Mohamed Morsi said in a televised speech this week.

In the year that ended June 30, gross domestic product grew by a lacklustre 2.2%, up from 1.8% in the 2010/11 financial year, according to statistics published by the Finance Ministry.

This compares with annual growth rates of 5% and higher before the regime of Hosni Mubarak was overthrown in 2011.

Rebel Economy surveyed seven economists and two financial analysts that on average said the economy would be hard pressed to grow above 2% in the next financial year.

Most have pencilled in growth of between 2% and 2.5% in the next financial year.  There are anomalies however in forecasts, with one chief economist at a Cairo-based investment firm saying the nation could experience “significant” growth of 6% or 7% next year if the IMF loan is signed. The agreement would unlock at least $14 billion of financing in other loan packages and would provide the stimulus needed for growth, he said.

All those interviewed agreed that the IMF loan is the cheapest and most effective catalyst for an economic revival. The relatively easy 1.1% interest attached is far more  favourable than expensive government bonds and bills the state has sold to try to narrow the deficit.  These have been sold at yields as high as 16%. Now, the interest payments on Egyptian government bond yields are increasing at a faster rate than spending on subsidies and wages.  Economists say these payments now make up around 15% of government spending.

The heavy burden on banks to buy these securities has also diverted cash that would have been spent in the private sector on narrowing the budget deficit.

Due to the significance of the IMF loan for an economic recovery, Rebel Economy has laid out three potential scenarios based on the negotiations giving some indication of what could happen in the months to come and the impact on elements of the economy including the currency.


SCENARIO 1: IMF loan is passed in early 2013 (Jan or Feb)

The most favourable of all scenarios would see the IMF agreement officially signed in January.  Under this scenario, the one month delay would have little impact on Egypt’s economic framework presented to the IMF which includes a package of measures to cut wasteful spending and earn revenue. In a reassuring sign, Egypt’s prime minister Hisham Qandil latest statements indicate that negotiations will resume in January.  Qandil told reporters there won’t be any fundamental changes in their economic plan with the IMF.

This would mean that Egypt would immediately have to go ahead with a package of reforms it has proposed to appease the IMF, including tax hikes and subsidy reforms before or as soon as the loan agreement was signed.

These unpopular economic reforms will be difficult to implement two months before the parliamentary elections when the Muslim Brotherhood hopes for significant support. Reforms will be particularly hard to implement because of the president’s slim mandate.  Morsi’s decision to rush ahead with a vote on the constitution despite calls from the opposition to delay it left him with a polarised country.

However, if the government implements these reforms in the right way – by communicating the “Hows” and “Whys” – the loan will go some way to relieving pressure on the currency and foreign reserves. The steady depreciation of the pound will be stemmed and the rush to swap pounds to dollars will also ease off as the public sees a light at the end of the tunnel.

Economists at Beltone have forecast an additional drop in reserves to about $14 billion in December, or the equivalent of 2.8 months of imports, well below the “safe” level.

Therefore, an injection of almost $5 billion would instantly provide a buffer to the Central Bank and the budget. More importantly, the IMF loan will act as a catalyst for the release of other loans that are contingent on this agreement being signed. Economists say that this additional support amounts to about $14.5 billion. Finally, a final agreement on the loan would end almost two years of negotiations and would draw a line under the uncertainty that has stopped foreign investors from returning to Egypt.  The loan, more symbolic than financially helpful, would signal a new start for the nation.

SCENARIO 2: Loan delayed again, forecast for resuming negotiations

Given that increasing taxes on goods and services is a prerequisite for signing the final agreements on the IMF loan, it is a possibility that the government will attempt to further delay unpopular measures until after the parliamentary elections, which are due around February.

This could initially put pressure on the pound and budget deficit.

With tourism and foreign direct investment down, two of Egypt’s main sources of foreign currency, its ability to continue propping up the pound through foreign reserves will come under further pressure.

The central bank already appears to be letting the pound slip gradually. It not only hit a near eight-year low on December 26, but its value has been declining faster than usual in December. The pound has been stable and traded at around 6 pounds to the dollar for the first half of the year, only to start falling after Egypt signed a preliminary IMF loan agreement in mid-November.

Money to support the budget deficit from the EU and African Development Bank will also continue to be delayed so long as Egypt delays the IMF loan, and investor confidence will continue to be low.

This paves the way for Egypt to receive financial support from other actors, such as the Gulf states or the army — as it has done over the last two years — at least until parliamentary elections.

Though, with the politically charged atmosphere created by the constitution, the reinstatement of Parliament is no guarantee that the government will be any more likely to pass its planned austerity measures.

SCENARIO 3: Loan delayed with no forecast for resuming negotiations

Under this scenario, Egypt’s economy is most fragile.  Domestic and foreign investors (individual and institutional – i.e. large companies) are likely to exit the debt markets and swap their pounds for dollars.  The government will lose support from international donors who have waited for the IMF loan to pass, and much-need aid will pass by Egypt.

The country’s currency devaluation may be “disorderly”, according to this research note from Capital Economics:

“Failure to secure help from the IMF would make a disorderly devaluation more likely. In this scenario, the pound could overshoot, falling by perhaps 50% or more against the US$. The costs to the economy would be severe.

This is likely to lead to a spike in inflation, sharp hikes in interest rates, a potential banking crisis and rapid fall in asset prices.”

Higher inflation and a cheaper pound will be hardest for the poorest, who are already struggling in their daily lives.  Food will become expensive and meagre salaries will buy less.  A “Revolution of the Hungry” could lead to the revival of riots, political instability and public discontent with the Morsi administration.

Investor confidence will also be shaken in the short-term by the uncertainty created regarding Egypt’s economic plan and the government’s ability to get things done. A repeat of January 2011 could see companies scaling back or sitting out the crisis, and foreign direct investment could likely fizzle out.

The government will most likely try to press ahead with austerity measures, even without the prospect of signing an IMF loan agreement to get the budget under control, though pressure from political opposition forces will make it difficult to enact these reforms.

As Reuters reports, by “fast-tracking the constitution to a referendum that the opposition said was divisive, he [Morsi] may have squandered any chance of building a consensus on tax rises and spending cuts that are essential to rein in a crushing budget deficit.”

It is likely that with no agenda for resuming negotiations with the IMF, Egypt would have to go back to the drawing board and alter its macro-economic plan to accommodate the changing fiscal situation.  Government officials say this could happen even when Egypt resumes negotiations with the IMF in January.

Aside from the task of securing the IMF loan, Egypt faces a multitude of other significant challenges. Rebel Economy broke these down into a few major themes: the labour movement, tax reform, energy subsidies and the rule of law.

The Labour Movement

Egypt has experienced an increase in labour action since the outbreak of the revolution. Protests have forced factories and companies to shut down, which has shaken investor confidence and highlighted the need for more effective laws that govern employer-employee relations.

“There have been more strikes than ever before,” says Joel Benin, an academic who has written extensively on Egypt’s labour movement. There were 1,400 strikes and forms of collection action in 2011 alone, compared with no more than 800 in any previous decade, Benin estimated.

The main demand has been for the implementation of a minimum wage (ranging between 1,200 and 1,500 Egyptian pounds), better working conditions and recognition of Egypt’s newly formed independent unions.

A draft labour law, introduced by Ahmed el-Borai, the former labour minister, allowed unions to organise for the first time beyond the parameters of the government-controlled Egyptian Trade Union Federation. But there have been delays in fully enforcing the law, leaving workers in legal limbo, the Financial Times reported.

In 2013 the Shura Council, which now has legislative powers, or the lower house of Parliament, if re-elected as planned, could re-visit this.

Strikes have been increasingly effective. In three of the most recent strikes, at DP World’s Ain Sokhna port (a private company),  Eastern Tobacco and Arab Polvara (both public), demands were eventually either fully or partially met.

The key challenge for employers, especially in the private sector, will be accepting that even if they spend a bit more on workers by implementing a minimum wage, the labour force in Egypt is still much cheaper than its regional competitors in Turkey, Morocco and Tunisia, and certainly Europe.

The government will need to introduce a labour law that satisfies workers’, unions’ and employers’ needs. It shouldn’t try to dominate the labour union movement and should avoid criminalising protests or responding with any heavy-handed measures, which would be counter-productive in the unrest it ensues.

Energy Subsidies

After years of debate, cutting one of Egypt’s biggest bills has become essential to balancing the nation’s financial books.

The government spends about 20% of its budget on keeping fuel prices down for the general public in a subsidy system that benefits the richest rather than the neediest.  Now, Egypt is one of the worst offenders for energy subsidies in the world on par with Russia and China.  And because its domestic consumption is rapidly growing, Egypt winds up using its share of production locally rather than earning much-needed revenue from exports. That means it buys expensive fuel from abroad and sells it at a discounted price domestically.

The country has shifted from being a net exporter to a net importer of oil over the past decade.  This month Egypt’s petroleum ministry admitted it had also switched to a net importer of gas from a net exporter.  The consequences of such an unsustainable practice are immense.

On a domestic level, fuel is so cheap that almost everyone uses their car to get around and congestion and pollution are normal.  In addition, the government spends more on energy subsidies that health and education combined so the social impact is enormous.  More worrying still is the rising (external) debt pile. The nation sells its fuel at a much cheaper price than it buys it so inevitably debts to international and domestic energy companies and banks grow.

Bankers that have interests in energy have told Rebel Economy repeatedly that energy subsidies are at the crux of Egypt’s wider problems. Reserves have been depleted not only to support the pound but to keep importing petroleum products to keep up with demand.  The Central Bank released a statement this week saying it had spent $14 billion since the beginning of 2011 on imports of petroleum products and foodstuffs.  Undoubtedly, this was to plug a shortage in the market. 

So what can be done? What is clear is that everyone now regards energy subsidies as a drain on the budget and politicians acknowledge that reforms have to be made. But not much has come of the countless promises to enforce reforms including a coupon system that would better regulate subsidies and fuel price hikes that would instil a healthy aversion to buying gallons of fuel.  So far, the Morsi administration has shown it is too weak to implement difficult reforms for fear of riots and a backlash.  With two months before the parliamentary elections, it appears that Morsi must choose between temporary popularity by retaining the status quo of these plentiful fuel subsidies, or steer the nation out of its crisis and show a strong hand.

Tax Reform

The fact that Morsi couldn’t implement a hike in sales tax on alcohol in a country that is mostly dry shows what an uphill struggle his government faces in carrying out tax reform.

The government recently announced a package of tax hikes on goods and services, ranging from cigarettes and mobile phone calls to electricity bills and real estate. Within hours, the reforms were delayed amid calls for “societal dialogue” by members of the opposition and media.  The delay was also seen as an attempt to win the popular vote at a politically sensitive time when Egyptians were set to vote on the constitution.

The move had more severe impacts, however. Egypt had to postpone the signing of the IMF agreement partly because tax reforms are a crucial part of the economic reform programme presented to the Fund. Without these tax hikes, it is unlikely the IMF would have agreed to disburse $4.8 billion.

Raising taxes is necessary to shore up finances and plug a budget deficit that reached 11% of GDP in the fiscal year that ended June 2012, and is projected to exceed 10% by June 2013.

But Morsi and his aides have yet to gain broad support on the matter with members of the opposition, a task that is necessary but hard to imagine given their poor track record in consensus building with non-Islamists.

Other tax measures, such as reforming the 20% income tax on wages whether rich or poor, as well as addressing corporation tax and broadening the tax base, are to be taken up by the next Parliament.


Rule of Law

There is an ongoing concern about respect for the rule of law in Egypt, which is critical to address before returning to stability.  For example, the people blocking Tahrir Square believe the government is illegitimate so they illegally block traffic. Police, too, haven’t won back respect from the people, so they are unable to enforce the law sometimes.

As for the new constitution, though it spells out the new parameters for the rule of law, many people believe those parameters are incorrect. Max Rodenbeck spelled out the key flaws in this Economist report. The new constitution could give “Morsi’s party, the Muslim Brotherhood, a grip on power not unlike that enjoyed by Mubarak”, he writes.

The somewhat unpopular new constitution and a government still trying to win legitimacy from people means there is a rule of law crisis in Egypt.  As Haitham Tabei writes in EgyptSource:

“Solutions must be found to the [rule of law] crisis, outside the current framework of religious institutions and inept security forces, and must depend instead on a state of citizenship, which guarantees the safety and protection of all its citizens regardless of religion.”


These challenges, though significant, are not impossible. Egypt’s geostrategic position on the crossroads of Europe and Africa, its large population and favourable tax conditions are all drivers of growth and mean the nation will continue to attract companies that want to tap the retail market, quickly. European banks, hit by the Eurozone crisis have had to offload assets in Egypt but these assets have caught the attention of Gulf banks, despite the political instability.

Société Générale has agreed to sell its majority stake in NSGB, its Egyptian subsidiary, to Qatar National Bank for $2 billion. BNP Paribas seeks bids for the sale of its Egyptian retail arm, which is expected to generate between $400 million and $500 million. Last year, Standard Chartered came close to acquiring the Egyptian assets of Greece’s Piraeus Bank.

Other merger and acquisition activity in the retail market is likely to continue in 2013.  We are already seeing signs of this happening with Dubai’s Majid Al Futtaim in talks with Egypt’s Mansour Group, owned by billionaire Mohammed Mansour, to buy its supermarket business in a deal valued at $200 million to $300 million.

Enacting a law that would allow issuance of Islamic bonds, or sukuk, is also seen as one driver for investment growth next year, economists say. A sukuk law has been mooted for several years but only taken more seriously after the revolution when Islamist parties have lobbied harder for Islamic financing. Globally, $109 billion worth of sukuk were issued in the first nine months of 2012, up 69% from a year earlier, with the rise driven primarily by Malaysia and Gulf governments, according to research by Zawya.  Egypt is yet to tap into this lucrative market.

Above all, economists say another driver of economic growth will be resolving investment disputes post-revolution. Egypt’s biggest companies, especially those in the property sector, have faced legal challenges because of Mubarak-era contracts. More recently contracts in some of the industrial sectors, including goldminer Centamin have been under the microscope.  Some of these cases are rushed through with little valid evidence and are eventually overturned. A more accurate and thorough approach to investment cases will pave the way for a better corporate structure.


The great mistake of the Mubarak regime was not seeing its role as broader than just increasing growth. Their policies led to a revived economy, but the profits only stayed with a small elite and did not make an impact on the vast majority.

Economic policy is not just about making some numbers go up and others go down. That is why the definitions are so important. Gamal Mubarak’s cabinet of technocrats lacked the vision to redefine the aspirations of the government.

And that is one area where the Brotherhood’s Renaissance Project team are right. Khaled AlQazzaz, an advisor to Morsi on “integrated development”, explained during a conference earlier this year that the government was planning to change the metrics it uses to evaluate successes and failures. That means they are proposing a new way of looking at how the government improves the lives of Egyptians.

It will no longer just be about the GDP rate and number of teachers to pupils. It will be about whether the lives of Egyptians is improving or not, analyzed through a new set of performance indicators. This way all policies can be directed toward the right solution. The answer isn’t always in more teachers, but changing the curriculum. It’s not about number of hospitals, but about the health of Egyptians.

In New York City, the police department radically changed they way they approached crime by targeting the crime rate itself rather than police officers’ response time to a scene.

New York just reported its lowest number of murders for decades.

The government should go even further and establish an independent ministry to be in charge of the portfolio, so Egyptians know that the numbers aren’t being fudged to make the president look good.

It should also give the opposition movement something to think about. Are their policies just better technical tricks to balance the books or do they have a vision for Egypt that is broader than “neoliberalism without corruption”? This should be the basis of all political platforms: how will you grow the economy and how will you measure the impacts? The answer to those twin questions would give people a good idea of why they should or shouldn’t vote for them.


With little of its own money to spend, Egypt will be forced in 2013 to implement belt-tightening measures on stomachs that are already hungry.

The cries for “bread, freedom and social justice” continue to echo in protests that have not ceased since the 2011 uprising.

But austerity measures are difficult enough to implement in a country with political stability let alone one that is as polarised as Egypt. Strict reforms will undoubtedly stoke further unrest in the year ahead.

It does not help that the government consistently fails to consult the public about its plans in a transparent manner, or when it puts out decisions only to backtrack hours later. Transparency is crucial.

State institutions also contradict themselves in the information they put out, and state media is biased, all of which creates a climate of uncertainty and mistrust in government.

It is now or never for Morsi.

He has two paths to choose from: retaining the status quo or leading the country out of the crisis with a strong hand, clear communication and a promise to soften the blow for the most vulnerable. He has the power to implement reforms that will begin to change the lives of millions of people who are suffering from decades of neglect.

Can Morsi make the first, difficult steps of change not seen in the country for decades? Will he be strong and bold enough to lead the country out of its economic, social and political malaise? 2013 will be the test.


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  • Posted January 6, 2013 at 5:12 pm | Permalink

    Great analysis. Thank you for the website. I have been disappointed at how little the Western press is aware of how serious the situation in Egypt is…

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