Egypt's economy is collapsing, and no one is stopping it

Egypt's economy has a political problem. And its politics have an economic problem. And the two are feeding each other in dangerous and toxic ways that makes fixing either or both harder with each passing day.

On Sunday, the first trading day of the week, Egypt's benchmark stock index lost 0.83 percent, wiping 5.2 billion pounds ($760 million) of value from the country's publicly traded companies as political opposition to a drawn out, four-stage parliamentary election process, concocted by the country's ruling Muslim Brotherhood last week, mounted.

In theory, parliamentary elections could help break the country's current impasse, in which elected President Mohamed Morsi and his Muslim Brotherhood hold almost all of the formal political power in the country, but in which the nation's various other factions and political movements, from socialists to secular-leaning free-market-favoring politicians, are not participating and are agitating to return to the drawing board once more. Some prominent opposition politicians, like Mohammad ElBaradei, have already been calling for a boycott of the polls, scheduled to begin in late April and run through the end of June.

And even if the elections go forward as scheduled, they guarantee further political turmoil and uncertainty through the middle of the summer, at a time when Egypt's economy can ill afford it. The country's foreign currency reserves fell to $13.6 billion at the end of January, from $36 billion at the start of the uprising against Hosni Mubarak two years ago. That 62 percent decline in hard currency on hand is the simplest measure of the collapse in Egyptian investment, tourism, and international faith in Egypt's new leaders to turn around the situation as you'll find.

The pound had steadily declined since Mubarak was pushed from power with the country's grim economic outlook straining its foreign reserves. Billions in hard currency have been spent by the central bank trying to protect the country directly, as well as on wheat and fuel imports that the government subsidizes for domestic consumers. But notice my use of the word "had." Of late, the pound's decline is no longer "steady." Since about Jan. 13, the pound's decline against the dollar has been precipitous.

That's particularly dangerous for Egypt, since so many dollar-dominated commodities are subsidized by an Egyptian government that receives most of its revenue in pounds. In other words, every bushel of wheat or barrel of oil that the government purchases is far more expensive in domestic terms, which in turn further depletes the government's foreign currency reserves, makes investors even more nervous about the chances of a pound collapse, and so puts more pressure on the pound. The very definition of a vicious cycle.

(Chart by The Arabist. Original here)

What happened on in the middle of January? On Jan. 7 the International Monetary Fund (IMF) wrapped up a mission to Egypt, and there were high hopes that the country would reach an agreement on a desperately needed $4.8 billion loan. Yet the IMF balked, judging that Egypt's fractured politics and looming parliamentary elections meant that any promises President Morsi made to the IMF about cutting subsidies and other spending reductions being demanded as a part of the package couldn't be enforced.

The IMF mission departed Egypt on Jan. 7 with a promise of only further discussions. Here's the key sentence in the brief statement IMF Middle East and Central Asia Director Masood Ahmed issued then (emphasis mine): President Morsi and his government "expressed their firm commitment to articulate and implement a homegrown macroeconomic program that enjoys broad support and addresses these challenges."

"Broad support" in this context means political support, a sense that the nation's political elites, and the citizens they ostensibly represent, are willing to accept financial pain for the theoretical long-term good. In particular, the IMF has been seeking a cut in Egypt's blanket fuel subsidies that would target poor consumers, and require big companies and the better off to pay something closer to market prices.

But Egypt's politics this year have been starkly polarized in a way that has crippled the whole notion of a "national consensus" about anything. The Muslim Brotherhood are seen by the revolutionaries who led the uprising against Mubarak as impervious to external input, and no meaningful political dialogue has taken place between the Brothers and their opponents for months. The second anniversary of the revolution on Jan. 25 saw big protests against Morsi, and clashes at Tahrir, in front of the presidential palace, and in a number of other cities beyond the capital. Dozens died across the country that weekend, with the worst violence coming in Port Said, along the country's economically vital Suez Canal. 

The Suez fighting followed death sentences handed down to 21 people for their involvement in a deadly riot after a football game in the city a year earlier. A state of emergency was declared in Port Said for a few days and a curfew declared that locals scoffed at and ignored.

That pound chart above should make it clear that any hopes of Egypt "muddling through" its current crisis are well and truly past, and decisive and swift action is needed. But the country's political elites, from Morsi to his opponents like ElBaradei, have been short on concrete suggestions that could address the needs and aspirations of Egypt's poor.

With the government already talking about rationing subsidized bread – and indications from the market that Egyptian wheat stocks and international purchases are declining – further paroxysms of public anger are more likely than not. An Egyptian government that fails to feed its people is one does not persist for very long, and while an IMF loan would at minimum buy Egypt some breathing space, an agreement to sharply cut subsidies from Morsi before the parliamentary elections could prove politically disastrous for the Muslim Brotherhood's Freedom and Justice Party (FJP) at the scheduled parliamentary polls. The IMF is scheduled to return for further talks at the beginning of March. But if it continues to insist on "broad support" for the bitter pill it has asked Egypt to swallow, it's hard to see a deal done until the parliamentary elections are over.

This has left Morsi between a rock and a hard place. His track record so far has been to tend to the political needs of the FJP as a first order of business, but while subsidy cuts are unpopular, so is the strain the collapsing pound is putting on the household budgets of millions of Egyptians.

The uprising against Mubarak, and the prospect it brought of a democratic Egypt in the most populous Arab nation, was rightly greeted as a breathtaking and possibly transformational moment. But that optimism is now coming up against the reality of greater public suffering. And the clock is winding down.