Mohammed Morsi: Egypt's Struggling Economy Needs Money — Just Not From the IMF
In the past two years, Egypt has been at the forefront of changes in the Middle East, but one thing has remained unchanged for Egyptians since the 2011 uprising: their dismal economy. Egypt is suffering its worst economic crisis since the Great Depression, the country’s former finance minister admitted recently. While the country desperately needs foreign assistance to prevent an economic meltdown, the International Monetary Fund’s Stand-By Arrangement, a proposed $4.8 billion loan package, could aggravate Egypt’s economic woes by forcing the Egyptian government to adopt austerity measures in a time of mounting social instability.
Many of the economic conditions that contributed to the uprising in 2011 still plague the country today: GDP growth has decreased by 3%, the unemployment rate now sits at 13.2%, and the Egyptian pound has faced rapid devaluation. In addition to these debilitating conditions, Egypt has suffered from a lack of foreign investment and tourism revenue, which has traditionally served as the largest sector of the Egyptian economy. These conditions have led to a sharp rise in consumer prices with the Consumer Price Index having risen by 25 points since 2011.
Particularly worrisome for the government is the price of food and fuel, which has skyrocketed since the uprising. Since the country imports nearly 70% of its food and much of its fuel, Egypt needs strong hard currency in reserve to maintain imports. Unfortunately, the reserve for hard currency has fallen to roughly $13.5 billion from $36 billion two years ago, below the critical level needed to sustain imports for three months. High prices on such basic commodities will cause social unrest. Annia Ciezaldo of Foreign Affairs writes that for decades, food — bread in particular — has become a powerful symbol of what individuals can and cannot have in Egyptian society. With mounting prices on bread and other stable products comes a growing sense of public dissatisfaction with the government.
The IMF’s conditional loan of $4.8 billion will only aggravate consumer prices in Egypt. The Stand-By Agreement proposed by the IMF calls for substantial cuts to energy subsidies and higher taxes on consumption. Energy subsidies, which account for roughly 30% of government spending, have reduced the cost of fuel in the country. While such subsidies pose a threat to long-term stability, now may not be the time to reform the subsidy program as fuel prices continue to escalate. Rather, the solution may be to extend more fuel resources to the country in the short term. On the other hand, higher consumption taxes will only penalize consumer spending, causing a further rise in prices. While the IMF package does create room for several necessary finance reforms, it does so at the expense of the poor, who comprise nearly 40% of the Egyptian population. By burdening a large portion of Egyptian population that already faces poor economic conditions, the IMF package will only heighten public dissatisfaction with the current government.
With IMF’s Stand-By Arrangement likely to undermine a fledgling Egyptian democracy, the best solution to Egypt’s economic woes could come from the country's regional partners. In early April 2013, Qatar pledged $3 billion to buy Egyptian government bonds, on top of its existing aid commitment of $5 billion. A similar deal was struck with Libya for $2 billion with no interest. Such agreements would provide relief without the unfavorable conditionality of the IMF package. While an IMF loan agreement may be useful in the future, it currently runs the risk of social instability, a risk that should be avoided for the time being.