For weeks, the government of the Islamist president, Mohamed Morsi, has struggled to address the pressure on the Egyptian pound, as the political clashes in Cairo at the end of last year and the chaotic handling of economy since the ousting of Hosni Mubarak took their toll.
The pound has lost more than 5.5 per cent of its value since late December and the slide has not been halted despite a $2.5bn financial lifeline from Qatar.
The economic troubles have been long in the making. The economy was hit hard during the revolution and confidence has continued to erode as Egypt’s transition has lurched from crisis to crisis. Foreign exchange reserves halved, to about $15bn, as the central bank supported the pound, with levels now hovering at no more than three months of imports.
Although the markets were encouraged by Mr Morsi’s election in June, his controversial decision to temporarily seize all legislative powers and push through an Islamist-tinged constitutional draft provoked the worst political turmoil since the revolution and intensified doubts about the stated democratic credentials of the Brotherhood.
With political divisions widening, Mr Morsi delayed a desperately needed $4.8bn loan package from the International Monetary Fund. Reports of tensions between the cabinet and the presidency and a sudden reversal of tax increases last month compounded the nervousness in the markets.
Politicians and analysts blame the incoherence of the economic team and the lack of co-ordination between institutions for the chaotic economic performance.
“From day one, it was obvious [the Muslim Brotherhood] will have problems in governing. Maybe they have an idea about politics but for sure they don’t have the technical personnel to manage the economy,” says Mohamed Abu Basha, economist at EFG Hermes, the regional investment bank. “So they need to open up and make friends with other people and make the environment ready for others to contribute. But the environment is very divided.”
By seeking to dominate institutions and pushing his weight around – an attitude that many even within the Brotherhood itself had cautioned against precisely because of the burden of responsibility it entails – Mr Morsi has constrained his economic room to manoeuvre.
Many able technocrats, for example, have balked at joining the government that he reshuffled this month.
Mr Morsi’s attempt to postpone the tax and subsidies cuts that are required for an IMF deal – but also necessary to manage an economic recovery – are becoming more difficult by the day. The central bank has been trying to manage a slow and limited devaluation but if confidence in the economy is not restored it could yet lose control of the currency.
While devaluation would help the economy’s competitiveness – and as central bank officials note inflation, at less than 5 per cent, is still manageable – it could undermine the Brotherhood’s electoral chances. “They have to choose between two evils, one being a lesser evil than the other. But either you have to increase taxes or you could have things fall apart,” says Mr Abu Basha.
Government officials insist that with the constitution referendum now over, the IMF deal and plans for tax and subsidies measures are back on track.
A team from the Fund is expected to resume negotiations in Cairo by the end of the month, with the government believed to be contemplating signing the agreement in February and possibly delaying the elections for a few months.
Angus Blair, president of Signet Institute, a Cairo-based think-tank, says that there is enormous goodwill towards Egypt and western powers will not allow the economy to fail. One way or another, Mr Morsi will have to reach an agreement with the IMF, which would unlock other western economic assistance.
“They can’t wait for elections to make some decisions. I don’t see a way around not having the IMF loan. They’ve got to have it.”
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Copyright The Financial Times http://www.ft.com/intl/cms/s/0/7c7d3446-5e35-11e2-8780-00144feab49a.html#axzz2I5RmF2O9