Egypt’s real challenge: reviving the economy

On Oct. 27, Sheikh Mansour bin Zayed Al Nahyan, the deputy prime minister of the UAE and the minister of presidential affairs, said, “Arab support for Egypt will not last long, and Egypt must think about innovative, unconventional solutions.”

This "warning" statement seems at odds with what Egyptian Prime Minister Hazem el-Beblawi said the previous day, against the backdrop of his visit to the UAE. He said, "The agreement with the UAE includes full support to Egypt’s economy that starts with this new funding package obtained by Egypt within the framework agreement that was signed with the Emirati government Saturday evening. It includes a new $3.9 billion [in aid], and opens the doors wide for cooperation in the future." Perhaps Emirati officials felt that their Egyptian counterparts were seeking to commit them to limitless support that knows no ceiling or end. Thus, the minister of presidential affairs' statement came to urge Egyptians themselves to take responsibility in rescuing the economic situation in Egypt. In the absence of political stability, the government is often muscled into meeting social and labor demands despite the rising budget deficit. Successive governments have been unable to implement any real structural reform to generate real revenues or savings to finance these additional social benefits. If such a situation persists, any support provided by the UAE or other parties would be like giving a blood transfusion to patient who is continuously bleeding, without stitching up the wound.

Egypt's economic troubles can be simplified along the following points:

Growing budget deficit:  During the past 10 years, the government began to spend much more than the money generated from taxes and other resources, such as Suez Canal revenue. In particular, most of the spending went to social welfare such as food and energy subsidies, and wage increases as a result of labor demands that escalated after the revolution. This led the budget deficit to rise from 134 billion pounds ($19.5 billion) to 205 billion pounds ($30 billion) in just three years! Unless serious reforms are implemented, the fiscal year 2013-2014 could end up with staggering 302 billion pounds ($44 billion) in deficit, roughly equivalent to 15% of gross domestic product (GDP), which is unsustainable and extremely dangerous according to the Egyptian  Ministry of Finance’s own report.

An unprecedented increase in domestic debt: To face the escalating budget deficit, the government had to issue treasury bonds, increasingly borrowing from local banks, which led to an unprecedented increase in domestic debt to cover the expanding gap between expenditure and revenue. The governor of the Central Bank announced that the total domestic public debt had reached 1.53 trillion pounds ($223 billion) at the end of June 2013 (just before President Mohammed Morsi's departure). This brought the total debt in Egypt — including domestic and foreign debt — to 1.83 trillion pounds ($265 billion). This astronomical figure is equivalent to 89% of Egypt’s GDP.

Crowding out the private sector: When the government resorted to borrowing from local banks, this "crowded out" the private sector, making it more difficult and expensive to obtain needed finance from savings and deposits at local banks and limiting its ability to expand, invest and grow.

High interest to serve domestic debt: With the deteriorating credit rating of Egypt, interest rates on the treasury bonds went soaring, reaching 10.9%. This high rate reflects inflation in Egypt, stability of its currency and risk factors that affect the confidence of lenders concerning the country's political, economic and social stability, as well as the government's ability to overcome these challenges. Interest payments for government debt swallowed 147 billion pounds ($21 billion) in 2012-2013 compared to only 72 billion pounds ($10.5 billion) in 2009-2010 with a 104% increase in merely three years. This amount alone is nearly the size of the total budget deficit. This means that were it not for the government debt, the basic deficit would be very small. This shows that the problem must have started prior to the revolution — albeit increasing following the slowdown that the government was forced to compensate for — to prevent the country from slipping into an economic recession that would have a negative impact on Egyptians for a long time to come. It also shows that the Egyptian budget is capable at present of covering itself, if it weren’t for the presence of these high-interest payments which cause the huge budget deficit to increasingly spiral out of control. Thus, the primary challenge is: How can Egypt prevent this gap (or bleeding wound) from expanding?

A decline in sources of foreign currency: Given the political unrest, violent clashes and terrorist attacks, tourism revenues decreased and many foreign investors left the Egyptian Stock Exchange. Meanwhile, foreign direct investment rates fell sharply. This resulted in pressure to devalue the Egyptian pound. Although there was an unprecedented increase in remittances from Egyptians living abroad, this was not enough to prevent a sharp decrease in foreign reserves which fell from $36 billion in December 2010 to $15 billion on June 30, 2013 — before the Gulf states provided an aid package following the ouster of Morsi and the Muslim Brotherhood from power.

Slowing economy: The lack of foreign currency made it difficult to import raw materials and intermediates. Coupled with political unrest and other factors, this led to a slowdown in industrial and economic activity in general, and to increasing unemployment which soared from 9% to 13%.

Government bodies that hemorrhage money: A number of government bodies continue to deplete the general budget; they include the Egyptian Radio and Television Union (ERTU) and the Egyptian General Petroleum Corporation (due to energy subsidies).

The Muslim Brotherhood and its supporters would seize this news as evidence that the current regime is leading Egypt toward bankruptcy, which the Brotherhood predicts will happen within a month, or sometimes three months (the prediction is periodically pushed forward as the promised doomsday approaches!) They fail to mention, however, that the numbers they are using as evidence are those that represent Egypt's financial situation on June 30, 2013, at the end of the Brotherhood's rule itself. They also neglect the fact that former Central Bank Governor Farouk al-Oqda resigned from his post in December, signaling looming economic failure of the Brotherhood ill-fated rule. This was immediately after Morsi issued his constitutional declarations, which led to a wave of protests that pulverized the last remaining hope that political stability could drive economic recovery. These protests led to Oqda's resignation, which unleashed a wave of pessimistic speculations that Egypt would reach the brink of bankruptcy at the end of last year. As the situation deteriorated and it became clear that the Brotherhood was nearing the end of its rule, Qatar itself — the main ally and financial supporter of the Muslim Brotherhood's rule — prepared to jump from the Brotherhood's sinking ship, several weeks before Morsi's ouster.

To be fair, Egypt’s economic health began to deteriorate immediately after the January revolution in 2011. This is understandable in light of the protests and the social and labor demands that arose from long-accumulated grievances, which suddenly exploded in the face of the transitional government following the January revolution. This is in addition to the collapse of the police and poor security situation, as well as the fall of many major economic figures as a result of their association with the Mubarak regime. However, the Brotherhood is directly responsible for the worsening economic conditions in a number of ways: First, following the January revolution it insisted on a very long road map, which it  thought would allow it to control the reins of power and to determine the form of the state through monopolizing the drafting of the constitution, by linking the constituent committee to the outcome of parliamentary elections. Second, the Brotherhood refused to work based on the principles of participation and consensus, as it had promised following the revolution. Instead, it resorted to monopoly and domination, despite the weak popular support it enjoyed. It relied on the strength of its secret funding and underground organization, and on its decades-long electoral capabilities that could not be matched by other political forces which only emerged after the revolution with fledgling organizational and financial means.

The “blood sacrifice” strategy followed by the Brotherhood in the past few months — which relied on creating confrontations that inevitably lead to bloody violence and casualties  — has shown that its true goal was transmitting a frightful image of the situation in Egypt, both internally and externally. This is despite the fact that these protests were limited in size and produced little political impact. The Brotherhood  used the blood of Egyptians to leverage their television strategy aimed at creating exaggerated negative impressions, harming stability, and preventing the return to a normal life. It aimed at scaring off tourists, investors, lenders and international institutions to hurt Egypt in a war of attrition. It blocked roads to paralyze traffic and spread rumors designed to hurt the economy and drain the state. Of course, the curfew in itself led to a slowdown in the economy, in a country that typically relies on nighttime shopping.

Setting aside the Brotherhood's warfare tactics, is Egypt capable of overcoming these serious economic challenges? And to what extent can Gulf aid keep Egypt from drowning?

Notwithstanding the governmental budget deficit, Egypt’s formal and parallel economies enjoy elements of great potential. In terms of demand, there is a huge potential for significant growth in domestic demand to meet the latent consumption needs and aspirations of tens of millions of Egyptians, especially when stability is restored and unemployment reduced. On the supply side, a great deal of the production power is unutilized as many factories and service establishments operate at a fraction of their capacity because of weak domestic demand. Furthermore, infrastructure needs to be upgraded in almost every field — an activity which is not as sensitive to stability as tourism or foreign investment. The right economic stimulation package can have a positive effect in building a bridge between latent demand and unutilized production capacity.

But how can the government invest in this bridge when it is already overstretched with its existing huge budget deficit?

Just like the crisis is complex, the solution, in my opinion is multifaceted:

Minimize the gap: The government must take the appropriate measures needed to reduce the budget deficit through streamlining expenditures — particularly in energy subsidies, which alone consume 100 billion Egyptian pounds ($14.5 billion)! Approximately 37 billion pounds ($5.4 billion) could be saved by putting the smart fuel card system into use, to give one example, and revenues can also be increased through the application of property taxes, as another example.

Pumping money into infrastructure projects: These savings, among others, should be directed to curing the economy’s real illnesses and not just treating the symptoms, through the implementation of a stimulus package that begins with investing in utilities, roads and infrastructure, in addition to the development of new industrial and service zones extending economic opportunity to impoverished regions.

The introduction of national projects: It is nice to see the Gulf states filling immediate and urgent needs, whether in the energy sector, or to compensate for the depletion of the Central Bank’s foreign currency reserves. But, these are temporary and topical solutions that only address the symptoms of the problem; the real remedy may lie in stimulating the economy itself. Therefore, the Egyptian government must prepare and present investment plans in joint national projects, such as the Suez Canal zone development project, that would appeal to our investment partners in the Gulf while passing legislation that would better protect Arab and foreign investments.

An Arab Development Fund: Egypt must take the initiative, provide studies and commit to governmental investment in the establishment of an Arab African Fund for Development that would invest in Egypt, Sudan and other Nile basin countries, which would stimulate Egypt’s private sector, as well as the Gulf states’ sovereign and private funds, and encourage them to participate while leveraging Egypt’s relations with the Nile basin countries to help protect Egypt’s water share.

Smart Crisis Management: Despite the fact that the Egyptian government is cognizant of the Muslim Brotherhood’s plan to undermine the country’s stability through the provocation of bloody confrontations, Egyptian authorities keep on falling into the Brotherhood’s trap. After every one of these skirmishes, and with every casualty that falls, the Brotherhood exploits the situation in the media to inflict even more damage upon Egypt’s image and its stability. In addition, many decisions and actions solely rely on security considerations, often lacking strategic perspective and showing little concern for the overall effect on public opinion and the net outcome of the battle at hand. The government needs to apply prudent crisis management strategies and strike a balance between the benefits and negative repercussions of any decision. But instead of employing effective solutions and correcting its recurring errors, the government resorts to accusing the foreign media of conspiring against it, to the point where the president’s media adviser accused Britain’s Guardian of being a tabloid mouthpiece for the counter-revolution!

Openness: Egyptians need to be sobered with the truth and asked to take responsibility in pulling out their country from the bankruptcy abyss. A balance must be found between the legitimate demands to rectify the accumulated effect of years of social injustice, and the treasury’s financial ability to honor these demands, in a manner that would prevent the state from collapsing under the weight of financial stresses that current resources cannot fulfill. But who has the courage, and political capital, to level out with the people? While Lt. Gen. Abdel Fattah al-Sisi is not directly in charge of the regime nor the economic dossier, he does, nevertheless, possess a great deal of popularity that might enable him, if he chooses to invest some of his political capital, to frankly reveal the true state of affairs to the Egyptian people and ask for their support.

Expanding the political alliance: The political alliance that laid the foundations for the June 30 revolution must be expanded and not allowed to get fragmented. Care must be taken to avoid measures that would splinter it or hand the Brotherhood with new allies, which could expand the scope of confrontations and protests, and make them even more dangerous.

In short, extinguishing the fires, and allocating resources to solve the immediate problems and crises, must not distract us from the inevitable need to assign some resources to the task of treating the underlying causes of the fire, and effectively bridge the gap. Shortsightedness and playing a “rotating card” game as a financial policy where new borrowings pay old debts  can only lead us into continuously suffering from recurring fires and escalating crises, until the day comes when no one would be willing to lend us a dime or even offer us a bucket of water to put out the blaze.

Wael Nawara is an Egyptian writer, activist and columnist for Al-Monitor's Egypt Pulse. He is also the co-founder of the Al Dostor Party, the National Association for Change and El Ghad Party. Formerly president of the Arab Alliance for Freedom and Democracy, he was a visiting fellow at the Institute of Politics, Kennedy School of Government, Harvard University. On Twitter: @WaelNawara