Ever since the Arab Spring the Egyptian economy has been on shaky footing. However, it seems that things may now be coming to a head and a true economic crisis may be imminent.
GDP was growing at roughly 7% before the 2008 financial crisis and Egypt saw only a small drop in total output between 2008 and 2010. Yet, growth has plummeted since the revolution and is hovering at closer to 2% now. Tourism, which previously accounted for 12% of the Egyptian economy, has vanished and continued strikes, protests, and unrest disrupt basic economic activity.
More concerning than these fiscal issues is the monetary crisis currently bearing down on the nation. The currency has slipped 10% since December, which has contributed to rising inflation and a further disincentive for capital inflows. Most concerning of all is the rapidly diminishing hard currency reserves of the Egyptian government. Foreign reserves now cover only three months worth of imports and have fallen to about a third of their pre-revolution levels.
Egypt is eligible for a $4.8 billion loan from the IMF if President Morsi can present a plausible plan for economic restructuring, including important reductions in subsidies for food and fuel. With a budget deficit of 12% of GDP and $20 billion being spent on subsidies, these changes make sound economic sense. More importantly, an IMF loan would act as a signal for other investors that Egypt is credit worthy. The Economist estimates an IMF agreement could unlock an additional $15 billion in loans and aid from other sources. Unfortunately, the politics of the situation make it unlikely that a deal can be reached without significant domestic unrest.
Rising food prices was one the principal sparks to the Arab Spring. In countries like Egypt, prices for many food staples had doubled over the course of the last decade. A moribund economy and difficulty feeding one’s family is a combustible combination. President Morsi already faces daily protests and will certainly be loath to take any action that raises food prices. The other area of the Egyptian economy that is heavily subsidized is diesel fuel. Unfortunately, much of this fuel is used in the farming industry and a rise in fuel prices would have an indirect effect on food prices, pushing them higher or forcing farmers out of business. Indeed, there are already signs that the Egyptian government is having trouble covering the cost of fuel subsidies and The New York Times reports that lines have formed at some petrol stations, stretching more than a mile.
Further complicating the mess, Egypt’s parliament has been dissolved and power rests almost exclusively in the hands of Mr. Morsi. In theory this should make it easier for him to push through reforms, yet it also means that Egyptians will have only one person to blame if their livelihoods are damaged. In a coalition or unity government, blame could be spread across the parties, but in this case voters will almost certainly hold the Muslim Brotherhood accountable. Given looming elections in the fall, this reality will likely be anathema to Mr. Morsi.
Ultimately, Egypt should reach an agreement with the IMF. The United States and European powers will be loath to see Egypt plunged into further turmoil and could use their considerable influence at the IMF to ease the terms of Egypt’s loan. However, the politics of the situation are so toxic that any deal will still produce unrest and may come only after the situation in Egypt has truly deteriorated to unacceptable levels.