In Egypt, it's the economy...
July 9th, 2013
07:38 AM ET

In Egypt, it's the economy...

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 from GPS: What needs to happen next in Egypt

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.

More from GPS: Six lessons for Egypt

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.

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Topics: Egypt • Middle East • Protests

soundoff (23 Responses)
  1. No

    It's an Islame problem.

    July 9, 2013 at 9:27 am | Reply
    • j. von hettlingen

      Egypt needs a technocratic government to start with, which could win the confidence of the IMF and investors Yet for the two opposite camps, it's all about power. This is the biggest tragedy for the Egyptians, who have to bear the brunt of political infightings.

      July 10, 2013 at 7:38 am | Reply
  2. JAL

    Big tourism should be Egypt's main focus. Everyone wants to visit, at least once in their lifetime. However, it must be safe and fun place.

    July 9, 2013 at 9:29 am | Reply
    • JAL

      Counter-marginalization is over.

      July 9, 2013 at 5:36 pm | Reply
  3. noob

    There are too many people there and the birth rate is soaring. Egypt needs a mandatory 1 child policy like China.

    July 9, 2013 at 12:55 pm | Reply
  4. smokeyjoe

    Yet another article that ignores the underlaying cause of the Egyptian crisis. Egypt peaked in oil production 1995/96 and went in terminal decline. Internal consumption driven by rising population and subsidies continued to increase demand. In 2010 the declining production equaled the rising demand. This meant that Egypt had no surplus to export. Since it has little else to export this cut off the country from foreign exchange. With out that foreign exchange Egypt can not import any fossil fuels to make up for the decline in production. This creates a huge energy crisis that paralyzes the economy. Now Egypt will have to within its ever declining energy budget. With in 20 years Egypt will have exhausted all its fossil fuel resources and will have a population of more than 100 million. This is the reality of peak oil.

    July 9, 2013 at 1:20 pm | Reply
  5. yoda9999

    arab birthrate is like 10 kids per family even higher if no parent is employed. all the arab countries will explode.

    July 9, 2013 at 1:44 pm | Reply
    • smokeyjoe

      So true. In fact they are exploding now. When Saudi Arabia explodes it will be a crisis for the rest of the world.

      July 9, 2013 at 2:27 pm | Reply

    This Bloodshed will teach Egyptians a very valuable lesson.

    People MUST be Ruling the Army, Not the otherway around..

    Good thing is Egyptians are now realizing that their ARMY is a BIG FAILURE. Egyptian military has been feeding on FOREIGN AID for the past 50 YEARS and on top of that THEY LOST THEIR OWN LAND.

    July 9, 2013 at 8:19 pm | Reply
    • Dr. Joseph Banoub

      I am amazed at your assessment.
      Then again that does not shock me when your US President supports the MB terrorists!
      Please restrain from writing such articulate and elegant declarations.

      July 10, 2013 at 11:30 am | Reply
    • BM

      If you are truly Egyptian, you would see that most of the population would much rather have the Army in control than Morsi and the MB. You are also straying way off the topic of this article, which talks about the main incentive for people taking to the streets (the economic condition in Egypt, which worsened quickly under the MB).

      Also, Egypt is not under full military rule right now, but the military is protecting the borders. The last clash this week, which claimed 50 MB supporters' lives, was because they attempted to breach an area with military guards. Unfortunately, the military is not trained on dealing with civilians, so they will shoot anyone who gets too close and appears to be armed. There was live footage of the so-called "peaceful" MB supporters who were armed with hand guns and semi-automatic machine guns. Some of them had their faces covered with masks to avoid being identified. There were also multiple people throwing molotovs at the army members. And now the MB is crying that they lost "innocent lives". I understand that they want their leader, Morsi, back, but they can't expect to try to raid an area with the Egyptian army to get their way. In most countries, military camps are highly secured and it's known that civilians can not trespass there. Even if you're attempting to cross "peacefully", you need to recognize that crossing military boundaries is basically committing suicide.

      With this said, I'm sorry for the loss of those Egyptian lives this week and I hope there is no more bloodshed.

      July 12, 2013 at 4:38 pm | Reply
  7. Dele

    A clear indication that the authors are bias against the MB and all that it represents, even when they agree with the very unenviable position of the former president. Egyptians are only being too impatient to allow Morsi to repair the badly battered economy of their country for the past 50 years alongside the thirst for power of the opposition parties. Which of the two do you hate the most, religion or the military.

    July 10, 2013 at 3:33 am | Reply
  8. Michel Goubran

    Yes Egypt is economically in trouble. Any government, every morning has to supply food to 85 million people. 75% are illiterate with a mean GPS of $ 2.0. The solution is for all these criticizing countries to stop wishes, requests for democracy and effectively help. starting by the US, need to change the 1.5 billion dollars aid to food and commodities instead of the indigestible tanks and ammunitions. The EU, poor itself, should give technical support and some bank guaranties. Qatar & Seoudi Arabia did just that. Tourism & the Suez Canal are the main source of foreign currency, they should be protected. For all civilized nations to encourage the separation of church and state like M.Ataturk in Turkey. Then, you can talk about democracy in the Middle East.

    July 10, 2013 at 7:44 am | Reply
  9. rh0nshawn

    Im very eager to watch and be updated about EGYPT Situations and turn on my cable?? But I find it hard to see what I need. Im glad that I found this new device,the android tv. It gives me access to Egyptian tv anytime anywhere. here Ill share the link

    July 10, 2013 at 12:09 pm | Reply

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