The drip, drip, drip of Egypt's bad economic news

The Egyptian pound has tumbled in recent weeks, but it could go much further. Here's why.

Egypt's President Mohamed Morsi is in a bind.

Egypt desperately needs a $4.8 billion loan from the International Monetary Fund, but to get it President Morsi needs to cut subsidies and adopt other austerity measures that will erode the already shaky living standards of millions of the Egyptian poor. But if he balks, Egypt's foreign currency reserves will continue to deplete and the Egyptian pound will continue to plummet, hurting business and raising the costs of government subsidies on bread and fuel that millions of poor Egyptians rely on.

Either way, Egypt is facing the threat of a major economic shock after a manageable drip, drip, drip of economic pain for the past two years. Egypt's fuel subsidies are wasteful and untargeted, but they have become a critical support of the economy after decades in place. Practically every scrap of food moved in Egypt relies on gasoline- or diesel-powered transport, and an increase in those costs will go straight to the price of food. The IMF has also sought a cut in cooking fuel subsidies.

While the IMF proposals come with ideas on better ways to target subsidized goods towards the neediest, complicated new monitoring mechanisms will need to be put in place – not the Egyptian bureaucracy's strongest suit.

What's more, the Egyptian government is the biggest wheat importer in the world, and the queues for subsidized bread in every Egyptian city are proof of how much so many here rely on the government subsidy. While there's no current plan to cut wheat subsidies, every time the pound falls against the dollar, the cost of that subsidy goes up in local terms, straining the government's effort further. Foreign currency reserves at the Central Bank have fallen from about $36 billion at the time of Mubarak's ouster to about $15 billion today, both reflecting the rising costs of imports and direct efforts to bolster the currency.

Yesterday, the Egyptian pound was being offered at 6.5 to the dollar at money changers in Cairo, the lowest level in eight years and about seven percent lower than it was at the start of December. Egyptians with long memories, remembering past devaluations of the currency, have rushed to buy dollars, exacerbating the problem and leading the government to impose new currency controls, including a $30,000 daily limit on foreign currency withdrawals and a ban on carrying more than $10,000 out of the country.

Neither those efforts, nor a new currency regime that many local economists believe would lead to the eventual devaluation of the pound, have done anything to stem the bleeding. And that's driving up costs for Egyptian industry, from furniture manufacturers to chemical plants that rely on imported, dollar-denominated raw materials.

A recently laid-off civil engineer, who was working on a housing project in the greater Cairo area, says his project was shut down due to not just rising material costs but also difficulty obtaining financing from banks worried about what might come. "There's uncertainty in the financial picture, worries that the pound could fall much further, and worries that demand for new homes decline as incomes are hit," he explains, asking that his name not be used. "This isn't a healthy environment to spend money and everyone knows that – businesses, and average people."

Cutting subsidies is always dangerous in countries like Egypt. The Jan. 25 uprising against Hosni Mubarak in 2011 was in some ways driven by a spike in global commodities prices, and was the biggest upheaval in the country since January 1977. What happened in 1977? Then-President Anwar Sadat cut government food subsidies, sending hundreds of thousands of angry Egyptians to the streets, with rioting and violence in multiple Egyptian cities. President Sadat backed down three days later.

Morsi has also backed down. In early December he announced a raft of tax hikes that many here believe was a price of the IMF loan. He reversed course within a day, as advisers and public outrage informed him that steep tax hikes could deal a blow to the Egyptian economy and to the pocketbooks of poor Egyptians. Are those tax increases still coming down the pike? Finance Minister Momtaz al-Saeed implied that was the case at the end of December.

Finally, it's unclear when the IMF money will become available. The IMF is expected to visit Cairo sometime this month. But historically, the international lender has been uncomfortable stumping up cash in uncertain situations. Egypt is to hold a parliamentary election within two months, and the government they put in office might not be willing to abide by any deal Morsi cuts now – a fact of which IMF negotiators will be well aware. Even after a successful parliamentary election, given Egypt's recent track record, it will probably be months before a new government is formed. Those new legislators may agree to the IMF's terms, but it seems quite likely that will be many months away from today. There's a very real risk that the IMF will stay on the sidelines when Egypt needs foreign capital the most.

To be sure, the IMF must remember cases of demanded subsidy cuts leading to riots and political instability in the past. The IMF's insistence on subsidy cuts from Indonesia's dictator Soeharto, even as that country's currency collapsed in 1998, sparked riots that drove the economy into a tailspin and Soeharto from power.

For Egypt's poor, quite understandably, bread is everything. And in one way or another, it looks likely to get more expensive.