By Islam Al Tayeb and Elly Jupp, Special to CNN
Editor’s note: Islam Al Tayeb is a research analyst at the International Institute for Strategic Studies Middle East, and Elly Jupp is a research associate at IISS-Middle East. The views expressed are their own.
When people took to Egypt’s streets in 2011, they demanded not just freedom and social justice, but also bread. Indeed, frustration with high levels of poverty, unemployment and meager economic opportunities were a major trigger for the initial protests. A little more than a year into his presidency and it was clear Mohamed Morsy had done little to improve Egypt’s perilous economic situation. He has been duly swept from office, but whatever government comes next is left with the same challenge of balancing the competing demands of the Egyptian economy and the country’s people.
On one side, the Egyptian people are demanding that key commodities, principally fuel and food, continue to be subsidized. On the other, international financial institutions insist the subsidies should be cut. In the meantime, terms have still not been agreed for a desperately needed $4.8 billion IMF loan, with the International Monetary Fund insisting upon reductions in subsidies as part of an economic reform plan, even though Morsy’s government appears to have been correct in predicting that cutting them would prompt outrage among cash-strapped or unemployed Egyptians.
Morsy’s government amassed a substantial budget deficit and plundered the country’s foreign currency reserves in an effort to prop up the ailing Egyptian pound and pay for imports of fuel and food so the government could keep providing commodities at subsidized rates.
More broadly, Egypt’s underperforming economy is struggling to contend with “a socioeconomic time bomb” of rising youth unemployment, a projected GDP growth rate of just 2 percent and declining foreign currency reserves of $16 billion. All this is compounded by the fact that one in four Egyptians lives below the international poverty line of $2 a day per person and 13 percent of the population is currently out of work.
None of this will be helped by the damage that the latest unrest is likely to do to tourism of foreign direct investment. But complicating matters still further has been the fact that ratings agencies have consistently downgraded Egypt since the 2011 revolution. A May Standard & Poor’s report, for example, downgraded Egypt’s long-term credit rating from B- to CCC+, and its short-term rating from B to C. True, some support has come from Libya and Qatar, which deposited $2 billion and $3 billion respectively in the Egyptian Central Bank in April. But how forthcoming with funds the new Qatari government will be with the troubled state is not clear.
Political hardships and failures, in addition to ongoing economic strife, have left Egyptians disillusioned. On the streets, the price of basic foodstuffs and fuel is rising. State subsidized “solar” diesel fuel is needed at every level of economic activity; from transport to domestic cooking equipment. Waiting times at gas stations stretch into hours, contributing to traffic jams in Cairo, Alexandria and Egypt’s other main cities. Egypt’s petroleum minister argued recently that the current situation is a result of illegal smuggling activities and false rumors rather than actual petrol shortages. Regardless, the fuel situation is now critical.
How did it get like this? Part of the explanation for Egypt’s dysfunctional economic situation was the concentration of economic policy making in Morsy and the composition of his homogenous team of advisers following elections in 2012. The Muslim Brotherhood’s “Renaissance Project” sought to revive Egypt’s economy, reduce unemployment and move it away from the rentier state model, but was light on detail as to how to achieve these objectives. The leadership of the program comprised senior Brotherhood players who were politically well connected but lacked experience in conducting economic policy at the highest levels or running large bureaucracies.
The current status quo is damaging to the state and the army. Since toppling the regime in 1952, the Egyptian army has enjoyed thriving military commercial activities in the domestic economy. And, while the army’s budget remains shrouded in secrecy, it is widely known that it is heavily involved in real estate, manufacturing, consumer services and Egypt’s very own military factories. The fact is that maintaining a tight grip on security while encouraging economic growth is vital not only to avoid the decaying of the state, but also to safeguard the army’s vested interests.
All this means that Morsy was in an unenviable position – cutting back on public sector spending and subsidies seemed politically impossible, yet remains crucial for the revival of the Egyptian economy. But while it is true that the economy was not getting the leadership it needed under Morsy, with qualification for office generally based on alignment with the Muslim Brotherhood’s values rather than proven ability to manage the economic policy, it is still far from clear that the army has a rational, well-thought out plan for the economy either.
As long as Egypt sees the solution to its problems as religious or military, and shies away from addressing economic fundamentals, the only guarantee is that its people will continue to suffer.