from Pressure Points and Middle East Program

Economics May Trump Politics in Egypt

June 8, 2012

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Blog posts represent the views of CFR fellows and staff and not those of CFR, which takes no institutional positions.

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Egypt’s political crisis is getting the attention it merits as the presidential election approaches.  But the economic crisis is not getting enough.

The financial commentator David Goldman wrote in April that “Last week, Egypt’s central bank reported that total reserves had fallen to $15 billion, but - more importantly - liquid foreign exchange reserves had fallen to only $9 billion, equivalent to just two months’ imports. Foreign exchange futures markets expect the Egyptian pound to lose half its value during the next year….”

Mohammed Samhouri, an economist at the Regional Center for Strategic Studies in Cairo,wrote this week that Egypt has no realistic way to meet the $22.5 billion budget deficit it faces for the fiscal year that’s about to start. Foreign exchange reserves are too low to meet it, and domestic borrowing will not be sufficient either; banks already have too much state debt. Foreign borrowing may not be available in sufficient quantity either: Egypt has still not closed its IMF loan of $3.2 billion, and most of the generous pledges made in various international conferences have not been fulfilled.

Samhouri adds that “Sluggish growth in Europe (projected at near zero in 2012) could pinch Egypt’s prime export market (36 percent in 2010) and the source of much of its foreign investment (61 percent in 2010). Additionally, Egypt remains very vulnerable to world prices of food and fuel—it imports 60 percent and 40 percent of both commodities respectively. Spikes in prices could further complicate its fiscal management.”

Meanwhile, Egypt’s population has grown by about a million and a half people since Mubarak was overthrown. As Samhouri sums it up, “forget the promises made during the presidential election campaign season; they all pale in comparison to the enormous and much more immediate fiscal challenges the new president will face when he takes his office on July 1—not just inauguration day, but the beginning of the new fiscal year.”

With this in mind, critics of the Muslim Brotherhood may wonder whether they should be rooting for or against the MB presidential candidate Mohamed Morsi. Together with Salafis of the Al Nour party, the MB holds 67 percent of the seats in parliament. If it wins the presidency it will be fully responsible to rescue Egypt from this economic crisis. If it fails, we can expect that it will be punished in the next elections; indeed the showing made by Gen. Ahmed Shafik in the first round of the presidential elections may reflect that MB popularity is already declining as Egyptians seek answers to the country’s problems. No doubt some millions will respond to rousing speeches and to emotional and religious appeals, but millions more will wonder where their jobs and their food are going to come from. The Brotherhood’s fate may depend less on persuading Egyptians of its social, political, and religious views than on whether it can turn around the numbers that point to a deep economic crisis within months of the elections.

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