As Egypt’s foreign exchange reserves dipped below what the central bank called a critical minimum and the country’s currency began sinking, the country cut imports of essentials such as oil earlier this month. Reuters reported January 8, “State-owned Egyptian General Petroleum Corporation (EGPC) has only purchased 3 million barrels of crude oil for the first quarter of this year, half of what it was seeking in a tender, traders said.
That content tender was already considered insufficient to supply Egypt’s refineries, even at reduced running rates. ‘Of course it’s not enough, they need more – but no money,’ a trader, active in the East Mediterranean oil market said.”
Even before government cut back oil imports by half, 15 Egyptian power stations, representing more than a tenth of the country’s installed capacity, had stopped generating power, the daily al-Ahram reported December 28.
Egypt is running out of everything, except well-wishers from the Western foreign policy establishment, for which the Arab Spring has been a humiliating proposition. After a year of attempts to reinforce the Sunni opposition in Syria, the West is left with an insurgency dominated by radical jihadists, and an Assad regime that continues to draw support from minorities who fear the Sunnis even more than they fear Assad. In Libya, the US helped overthrow Colonel Muammar Gaddafi, and for its trouble got a dead ambassador and roving bands of terrorists equipped with the best of the Libyan arsenal.
No nation the size of Egypt has become ungovernable except as a result of war during the whole of the modern period. The deterioration of the Arab Spring into societal breakdown constitutes a reproach to the Western foreign policy establishment, which could not envision this outcome before, and refuses to consider its consequences now.
The closer Egypt comes to chaos, the shriller the expressions of solidarity with Cairo from Western leaders. The discovery of a 2010 video of President Mohammed Morsi denouncing Jews as “descendants of apes and pigs” came at an inopportune moment. The least of the problem is that Morsi hates Jews; no-one suspected him of any other sentiments. The trouble is that the speech exposes Egypt’s president as a pre-modern creature of barbaric habits of thought and Dark Age ignorance – hardly the man to execute the most difficult operation that the leader of any troubled economy has been asked to accomplish in the recent record of economic disaster.
Western leaders have a story, though, and they are sticking to it. European Union President Herman Van Rompuy was in Cairo last week, along with a delegation of American lawmakers led by senators John McCain and Lindsey Graham. The European leader promised $6.7 billion in loans and investments, provided that Egypt sign the agreement with the International Monetary Fund that it has been unable to close for the past year.
Even Bill Gates has gotten involved, as part of a consortium of US investors buying a $1 billion stake in the Egyptian cement and construction firm Orascom. The whole of Egypt’s stock market is worth about as much as a middling member of the S&P 500, on par with American Express or 3M, which is about all one needs to know about the valuation of an economy with 80 million citizens.
Money is what Egypt needs, in mushrooming quantities. Egypt’s import bill has tripled since 2006, mainly because the cost of its most important commodities – food and energy – rose drastically. Its exports, meanwhile, remain a fifth below the 2008 peak due to endemic shortages of electricity and other essentials. Tourism, the country’s biggest source of foreign exchange, has dropped by about half.
That is why the Hosni Mubarak regime collapsed when it did. Asia’s fast-growing economies crowded Egypt out of the world market for commodities, bidding up the price of food and energy to the point that the impoverished Egyptian economy could not afford necessities. Western politicians don’t seem to grasp the magnitude of the problem. On January 14, the European Union’s Van Rompuy “stressed the need for Egypt to achieve economic growth rates on par with pre-revolutionary growth, as this would help combat Egypt’s high unemployment rates,” al-Ahram reported. The trouble is that the collapse of economic growth provoked the revolution.
Egypt’s Trade Deficit Reaches Nearly $4 Billion a Month
Source: Bloomberg
The country’s trade deficit was running at an annual rate of nearly $42 billion as of November 2012, before the central bank allowed the Egyptian pound to sink on foreign exchange markets. That’s 15% of Gross Domestic Product, a startling amount (the government’s budget deficit also stands at around 15% of GDP. Against this $50 billion, Egypt can expect to earn perhaps $6 billion from tourists and $4 billion from the Suez Canal, and take in perhaps $15 billion in remittances from Egyptian workers overseas. That is dicey, because devaluation prompts workers to postpone remittances to a declining currency. In the best case scenario Egypt will need nearly $20 billion for imports during 2013. The money isn’t there.
For most of the past year, Egypt has been negotiating for a $4.8 billion loan from the International Monetary Fund, which is supposed to open the door for additional loans, for example, some $6.7 billion in “loans and grants” from the European Community – although a fraction of that money, even if committed, will be spendable during 2013. But the government of Mohammed Morsi does not have the political authority to demand painful sacrifices from a population whose lower half suffers from extreme privation.
As part of the loan package, The International Monetary Fund wants Egypt to cut its budget deficit to just 8.5% from about 15%, almost entirely by reducing energy and food subsidies. That is a reduction of government spending by the equivalent of 6% of GDP in a matter of months – the rough equivalent of a trillion-dollar one-time cut in public spending in the United States. That would impose extreme hardships on the half of Egypt’s population living on less than $2 a day. Although the present subsidy system is unwieldy and inefficient, the likelihood that Morsi’s Islamist government could introduce effective subsidy reforms by next summer is vanishingly small.
Instead of acceding to IMF conditions, Morsi has adopted the usual dodge of weak governments, that is, currency devaluation and exchange controls. Egypt’s pound has lost about 10% of its value during the past month, which will be reflected in higher prices for essentials during the next several weeks. Egyptian companies, meanwhile, can withdraw no more than $30,000 per day.
Egypt’s Pound Falls by 10%
Source: Central Bank of Egypt
Egypt’s cash position is even worse than it appears. The $7 billion or so in the central bank’s liquid cash reserves does not take into account the billions of dollars that Egyptian importers owe to unpaid suppliers. Nor does it take into account new obligations that Egypt has had to assume to get cash up front. Qatar lent Egypt $2.5 billion, all of which appears to have been spent defending the Egyptian pound on the foreign exchange market. It appears that Egypt will have to pay off the Qatari loan by purchasing natural gas from Qatar at inflated prices.
“The import price [for Qatari natural gas] is expected to reach US$14 per 1 million thermal units…The Egyptian government exports gas to Jordan at $5.50 per one million units, while Qatar exports it at more than $9,” the Egypt Independent reported December 17. It seems that Qatar is getting its money back by charging Egypt double for natural gas.
The discovery of Morsi’s apes-and-pigs comment might have provided a pretext for America’s Republican Party to wash their hands of the Egyptian president and shift the blame for the entire mess onto the Obama administration. Such is the loyalty of the Republican mainstream to the so-called freedom agenda of the former Bush administration, though, that Republican leaders have gone out of their way to declare their solidarity with Cairo.
Senator McCain declared January 17:
Among our group here, Democrats and Republicans, there is plenty that we disagree about. But when it comes to Egypt, we largely speak with one voice…We all believe in the continued importance of the US-Egypt relationship. We were all early supporters of the peaceful aspirations of the Egyptian people that inspired your revolution nearly two years ago – for democracy, for economic opportunity, for the protection of justice and human rights under the rule of law.
And we have come to Cairo with one major message: For us in the United States, especially in the Congress, the promise of Egyptian revolution is the opportunity is has presented us to recast our relationship with Egypt – to make it a truly strategic partnership between our peoples, our nations, and our elected governments, not one that rests narrowly on one person or one party.
…In our meeting with President Morsi, we voiced our strong disapproval of statements he made a few years ago that have recently surfaced. We had a constructive discussion on this subject. We leave it to the President to make any further comments on this matter that he may wish.
How one conducts a “constructive discussion” with someone who believes that Jews are the descendants of apes and pigs is a matter we will leave to Senator McCain’s memoirs, if ever they appear. President Morsi’s paranoid ravings are sadly typical of Egypt’s pre-modern backwardness – its 45% rate of illiteracy, its 90% rate of female genital mutilation, its 33% rate of consanguineal marriage – that make it a money sink unable to adapt to the shifts in the global market during the past several years.
American policymakers of both parties bring to mind the tolerance of the enamored millionaire Joe E Brown at the end of Some Like It Hot. After the manifestly anti-American Muslim Brotherhood displaced the “tech-savvy activists” of Tahrir square; Mohamed Morsi dismissed Americans friends in the Egyptian military in August; after Morsi allowed two days of rampages against the American Embassy in Cairo following the Benghazi incident; and after Morsi himself was exposed as a paranoid clown in the 2010 video, we hear an echo of Joe E Brown’s response to the news that his intended bride is really a man: “Nobody’s perfect.”
It is hard to imagine what might change the narrative in the Republican mainstream. After falling on its collective sword for the Bush freedom agenda in two lost presidential elections, the Republican leadership cannot distance itself from its past errors without taking early retirement.
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Spengler is channeled by David P Goldman. Asia Times.