Egypt’s looming economic shock doctrine

Published on Pambazuka News, by Sharif Abdel Kouddous, April 5, 2012.

The Egyptian economy will need of some kind of financial aid within the next few months to avoid a severe downturn. Egypt is teetering on the edge of an economic crisis. Cast adrift in a deepening political quagmire over the past fourteen months, the economy has now reached a critical juncture, as the country faces the pressing challenge of financing a large budget deficit as rapidly dwindling foreign currency reserves threaten to crack apart an already fragile situation. 

Yet, more than a year after the launch of a revolution driven in large part by economic grievances, the budgetary and fiscal proposals being considered to secure external financial assistance are geared more towards furthering Mubarak-era policies than to promoting social justice.

The state deficit for the fiscal year that ends in June is expected to exceed 140 billion Egyptian pounds ($23 billion), or about 8.7 percent of expected economic output, according to the Minister of Planning and International Cooperation. Meanwhile, the central bank’s foreign reserves have been shrinking by roughly $2 billion every month, precipitated by a sharp decline in tourism and foreign direct investment since the revolution began.

Over the past year, the government has used up more than $20 billion to prop up the local currency. In February, foreign reserves stood at $15.7 billion, enough for just three months of imports, and with it, the looming prospect of devaluation … //

… The shroud of secrecy on economic affairs is nowhere more prevalent in Egypt than within the army, which maintains a sprawling business empire that accounts for between 15 to 40 percent of GDP. Utilizing a mass conscripted labor force, army divisions manufacture everything from television sets and off-road vehicles to bottled water and fertilizer.

Since Mubarak’s ouster, which brought the military to power, the army has provided the ailing Egyptian government with no less than 12 billion Egyptian pounds ($2 billion), including a $1 billion loan to the Finance Ministry to prop up foreign reserves.

“We have an army that has a separate budget totally away from the control of civil government. It’s beyond belief,” Attalah says. “The way this was discussed in the public discourse was ‘wow we should be grateful for the army that stepped in and helped our economy.’ For God’s sake this is our money!”

The ruling Supreme Council, and the successive governments it has appointed in the post-Mubarak transitional period have repeatedly laid the blame for Egypt’s economic difficulties on the revolutionary protest movement and widespread labor strikes. While political protests have dwindled in number and frequency as of late, labor protests, primarily in the form of strikes, have continued unabated and have, in fact, increased in recent weeks as workers push for the revolution to tackle long-standing socio-economic grievances.

Yet the pressing issues the economy now faces—particularly the depletion of foreign reserves—are more likely the offspring of a badly mismanaged political transition that has forced the country into a fiscal cul-de-sac. Despite a major political upheaval compounded by economic troubles plaguing Europe—Egypt’s main trading partner—the Egyptian economy grew by nearly two percent in 2011. Egypt’s current economic woes are primarily confined to the super-structure—monetary issues like the budget deficit, balance of payments, inflation—rather than the infrastructure, which remains largely unchanged.

“The military council are the ones to blame, it’s not about the revolution,” Adly says. “They were the ones in control and they managed the political transition in a very stupid way, either deliberately or not.”

Successive military-appointed governments, as well as the central bank, did little to mitigate the problem of foreign reserve depletion in the aftermath of Mubarak’s ouster. Possible measures, like applying restraints on imports or restrictions on capital outflows (as much as $12 billion was transferred abroad in 2011), were ignored. Meanwhile, an enduring climate of political instability has kept investors and various forms of financial assistance from re-injecting foreign currency into the economy.

By most accounts, the Egyptian economy will need of some kind of financial aid within the next few months to avoid a severe downturn. It remains unclear when or if an IMF loan will be signed or what economic reforms will be agreed upon by the Muslim Brotherhood. What is becoming clear is that signs point to a continuation and deepening of many of the same policies that stirred up last year’s revolt. (full long text).

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