Anxiety Grips Egypt’s Economy

  • Middle East Policy

    Middle East Policy has been one of the world’s most cited publications on the region since its inception in 1982, and our Breaking Analysis series makes high-quality, diverse analysis available to a broader audience.

Nathaniel Kern, Matthew M. Reed

On the second anniversary of the departure of Hosni Mubarak, the Obama Administration is criticizing President Mohammed Morsi for his failure to act on economic issues. The warning, delivered by U.S. Ambassador Anne Patterson, indicates that Washington will not vote for a $4.8 billion IMF loan just because the U.S. generally approves of Egyptian foreign policy.

So far Morsi and the Muslim Brotherhood’s Freedom and Justice Party have refused to make tough economic decisions before parliamentary elections begin in April. In the meantime, a black market for foreign currency is undermining the Central Bank’s efforts to manage the pound’s devaluation.

Wishful Thinking

During his abbreviated visit to Germany on January 30, which was shortened due to unrest back home, Morsi told a joint business forum that one successful tourism season might bring in $14 billion and make the pending IMF loan unnecessary. He also called on Egyptian expatriates to deposit more of their savings in Egyptian banks. The previous week, Egypt’s new Finance Minister, El-Morsi Hegazy, an academic expert on Islamic Finance, predicted that Egypt could raise $10 billion by issuing sukuk bonds.

Morsi’s hopes for a successful tourism season fly in the face of recent violence. During the past two years, tourism revenue has dropped from $12 billion a year to about $9 billion, according to the Finance Ministry. 60 protestors were killed following the anniversary of Egypt’s revolution on January 25. Rioters attacked the lobby of Cairo’s landmark five-star Semiramis Intercontinental Hotel that same week.

Official figures for the number of tourists coming to Egypt in the past two years show a drop of 32%. But those figures also include visitors fleeing civil wars in Libya and the Sudans as well Palestinians now able to cross more freely in and out of Gaza.

Subsidy Reform Delayed

In late January, Egypt’s Finance Minister told the press that the government will complete the revision of its economic reform plan shortly and invite the IMF to visit Egypt soon. The government now says that it aims to cut energy subsidies, which are set to cost Egypt $16 billion this fiscal year, by 50% over the next five years. An earlier reform plan was more ambitious and called for energy subsidies to be cut by one-third during the first year.

But Reuters quoted Egypt’s Petroleum Minister Osama Kamal on February 12 saying that subsidy reform would be delayed by up to three months, pushing back the start date until after parliamentary elections begin in April. Thus far the government has only shown the courage to terminate subsidies for 95-octane gasoline. As the best grade found in Egypt, it is used by only a small minority of motorists who drive expensive foreign cars. The vast majority rely on—or have transitioned to—92-octane, which is still subsidized; while the commercial sector uses subsidized diesel and low-grade gas oil.

Real reform and savings will only be possible when subsidies on lower-octane fuels and diesel are curtailed. Recent shortages of these products have produced outrage, however, and it is unclear whether the government is willing to compound popular anger by raising prices.

U.S. Ambassador’s Warning

In a February 10 speech in Alexandria, U.S. Ambassador Anne Patterson warned that further delay could be devastating. In a sympathetic speech to the Alexandria Rotary Club, she warned: “The most catastrophic path is for the government and the political leadership of the country—whether in power or in opposition—to avoid decisions, to show no leadership, to ignore the economic situation of the country. When management of the economy is treated as a by-product of political disputes instead of a core function of political leadership, the business community is left trying to protect itself instead of investing and growing. The talks with the IMF need to be brought to closure,” Patterson said.

“The current system of fuel and energy subsidies is unsustainable,” she continued. “This needs to be discussed openly and the public needs to debate the solutions. A way must be found to bring the cost of the energy subsidies down while protecting Egypt’s poorest citizens, but possible solutions require an open public discussion—a discussion that is not taking place.”

Amr Moussa, a presidential candidate and former Arab League Secretary General, has proposed that parliamentary elections be postponed for six months. Such a delay would allow the government and the opposition to work together to fashion an urgent economic reform package. Inside Egypt, the IMF deal is controversial, although many critics are eager to blame government for not communicating its plans or articulating a serious economic vision. The ultra-conservative Nour party is also demanding that the loan comply with sharia law and be approved by religious scholars from Al-Azhar.

Washington’s Perspective

The Ambassador’s comments confirm that the Obama Administration agrees with the IMF. The Fund insists that Morsi’s government must commit fully to an economic reform plan before a $4.8 billion loan is finalized. “Once this step is completed, we will discuss the timing of a possible mission to Cairo to assess the revised program,” IMF spokeswoman Wafa Amr told Egypt’s Al Ahram on February 11. The IMF loan is seen as the lynchpin for additional multilateral and commercial finance, capable of unlocking another $14.5 billion in aid from other sources.

Prior to these remarks, some speculated that the Obama Administration might tolerate Morsi’s lack of economic action because his government has been a stabilizing regional influence so far. The U.S. is the largest shareholder in the IMF.

Managing Devaluation

Egypt’s Central Bank revealed this month that the country’s foreign reserves had fallen to $13.6 billion at the end of January from $15 billion in December. (Foreign reserves stood at $36 billion before the revolution.) The latest hemorrhage occurred in spite of reassurances in mid-January from Finance Minister Hegazy that deposits from Qatar had boosted reserves to $15.5 billion.

In recognition of slower than expected economic progress and dwindling reserves, the Central Bank changed the rules of its currency auctions on February 4; they will now be held twice a week, rather than the initial four times per week. The rate at which the bank will let the currency fall (or rise) at each auction has also been narrowed significantly. Under these rules, the pound may lose value in smaller percentage increments over a longer period of time.

Since authorities began conducting auctions at the end of last year, the pound has lost about 8% of its value. On February 11, the Central Bank held its twentieth currency auction in which it sold the smallest amount of dollars to date ($37.8 million). Importers, however, are finding it harder and harder to acquire the currency they need. Egypt’s black market has become more active as a result.

Suffering and Scarcity

Even under the previous rules, importers complained about the difficulty in obtaining needed foreign exchange. In a January 31 report, the New York Times quoted the chief financial officer of Venus International—a major wheat importer—who described the struggle.

“The erosion of the Egyptian pound and its scarcity in the market increases the foreign exchange risk on one side, and slows down dramatically our cash flow” as the company and its customers “must find U.S. dollars to pay the imports,” Sadri Marathi told the paper. “Sooner or later we will feel that the Egyptian population will be massively suffering from the economic crisis.”

Paralysis and Pudding

The paper also quoted Nassef Sawiris, chief executive of Orascom Construction Industries, the Cairo-based international building and fertilizer group. “While continuing any kind of political dialogue, it is of absolute urgency that economic-policy shaping moves to the front line. The political shocks of the last two years have paralyzed economic policy-shaping,” he said.

Sawiris told the Financial Times on February 4 that he welcomed overtures from the Muslim Brotherhood, which is trying to narrow the gap between the business community and government. “We are very optimistic that this [i.e. reconciliation] will be implemented and will restore confidence, but a lot of our European and U.S. partners are telling us that the proof of the pudding is in the eating.”

Inflation Rising

The depreciation of the pound is also impacting inflation. The annual inflation rate for urban consumers hit 4.7% in December. According to official data, the rate shot up to 6.3% in January. Double-digit inflation is not out of the question. The urban poor would be most affected, especially since the country is heavily dependent on imported food.

Amb. Patterson noted the implications of the fall in foreign exchange reserves to $13.6 billion last month—a precipitous decline—but also pointed out that the reserves did not take into account the billions of dollars in arrears that Egypt owes oil companies. “If Egypt cannot pay its import bill, her people will not be missing out on television sets and cars, but on electricity, gasoline and food,” she said.


Foreign Reports is a Washington, D.C.-based consulting firm that writes and distributes timely intelligence reports on political developments in the Middle East relevant to oil markets. Oil companies, governments, and financial institutions rely on Foreign Reports for their insight and analysis on key issues affecting the world generally and the Middle East specifically. The firm was founded in 1956 and the current President is Nathaniel Kern.

  • Middle East Policy

    Middle East Policy has been one of the world’s most cited publications on the region since its inception in 1982, and our Breaking Analysis series makes high-quality, diverse analysis available to a broader audience.

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