Coup or Not, Egypt’s Problem is the Economy

Coup or Not, Egypt’s Problem is the Economy

What happened in Egypt was not a coup; it was a popular uprising against an incompetent president, who failed to deliver what he promised over a year ago. He ruled undemocratically and refused to acknowledge the people’s grievances. This is what any Egyptian, especially the millions, who took to the streets from June 30th until July 3rd would tell you. Whether it was a coup or not, does not matter. What matters, is what Egyptians think.

The average Egyptian is not a member of the Muslim Brotherhood. The average Egyptian only cares about having a stable job, being able to afford food, and feeling safe in the streets. Egyptians from all walks of life turned against Morsi because of his failure to deliver on the economic front, combined with the Brotherhood’s political vanity and electoral majoritarianism. Many Egyptians believe that the ‘June 30th Revolution’ was their reset button, but the same problems remain unsolved.

There are two issues that will characterize and determine the success of Egypt’s second transition: the economy and security. Following the ousting of Hosni Mubarak in February 2011, political instability plagued Egypt and the economy suffered. After Morsi was elected, Egyptians waited for the so-called ‘Renaissance Project’ he bolstered during his election campaign, but no economic reforms were implemented. Unemployment climbed to 13.2 percent, while the Egyptian pound lost 12 percent of its value against the U.S. dollar, contributing to high inflation and rising prices of basic goods for Egyptians. According to the Egyptian Finance Ministry, Egypt’s budget deficit hit EGP205 billion (approximately $29.2 billion) in the first 11 months of the 2012/13 fiscal year, making up 11.8 percent of GDP.

In addition, the country’s foreign reserves fell from $36 billion to $14.9 billion in two and a half years, a sum that can only sustain imports for three months. Moreover, tourism, which is one of the most important sectors in the Egyptian economy, has been in continuous stagnation. With 40 percent of the population living under the poverty line, Egyptians are in need of a new economic system that can produce tangible results. These deteriorating economic conditions and an overall lack of law and order have caused crime rates to increase in an exponential manner. Security is another issue that Morsi failed to address, and it is an area, where Egyptians want to see immediate improvement.

In the context of the Middle East, Arab investors have shown optimism after Morsi’s overthrow. Under Morsi’s rule, local businessmen and foreign investors were alienated. The Gulf States in particular, with the exception of Qatar, were wary of the Brotherhood. Their friendliness towards Iran, as demonstrated by Mahmoud Ahmadinejad’s visit to Cairo in February, raised alarm bells in the Gulf. Egypt and Iran ceased diplomatic relations following the Islamic Revolution of 1979, and no leader of the Islamic Republic has visited Egypt prior to February this year.

On July 9, less than a week after Morsi’s ouster, the UAE and Saudi Arabia announced that they would offer $8 billion in aid to Egypt. In the case of the UAE, the loans are interest free, while $2 billion of Saudi Arabia’s aid will be in the form of oil and gas. Both countries were also the first to congratulate the Egyptian people and interim President Adly Mansour upon taking his position. Kuwait, which was also wary of the Brotherhood, pledged a $4 billon aid package to Egypt. It is obvious that Morsi’s last foreign policy decision to cut diplomatic ties with Syria did not appeal to the Gulf States. This demonstrates the extent to which the Gulf States distrusted Morsi and the Muslim Brotherhood, especially after Ahmadinejad’s visit.

Gulf aid will increase Egypt’s foreign currency reserves, which have been dramatically decreasing since the January 25th Revolution. Even though these loans will not necessarily impact the Egyptian pound, foreign reserves will be raised to $20 billion and eliminate the black market for the U.S. dollar. Local businessmen have stated that these Gulf investments will encourage other foreign investors and institutions, such as the IMF, to re-evaluate their positions on Egypt. Nassef Sawiris, the billionaire chairman and chief executive of Orascom Construction Industries, Egypt’s largest company, said the interim government “must learn from the failures of the previous government,” but he remains optimistic, despite political uncertainty.

Egypt’s stock exchange is the prime illustration of local optimism, as it added approximately $3.2 billion to its value on July 4th, only one day after Morsi’s ouster. Driven by local traders, the 7.3 percent climb was the biggest market gain of the year. In addition, a new donation fund called “Support Egypt” has been set up in various local banks by Egyptians, who are eager to see the country move forward. The goal is to collect 10 billion Egyptian pounds. Various pledges by businessmen, the Armed Forces, and the Interior Ministry have already garnered millions of pounds for this fund.

Despite this local optimism, the political situation remains uncertain due to increasing instances of violence, causing foreign investors to stay away from Egypt. It is unclear what kind of path this transitional government will take, but it definitely will not be easy given Egypt’s economic woes. Interim president Adly Mansour has appointed former finance minister and liberal economist Dr. Hazem El Biblawi to head the transitional cabinet. Biblawi is known to be a critic of state subsidies, previously labeling it as the “cancer” in Egypt’s budget. However, Egyptians have been heavily reliant on food and gas subsidies since the Nasser era, and their withdrawal may lead to further unrest.

Biblawi, however, chose the social democrat and London-trained economist, Dr. Ziad Bahaa El Din, to serve as his deputy in the cabinet. Dr. Bahaa El Din earned his PhD from the London School of Economics, has served on the board of Egypt’s central bank, and as head of a government financial regulatory body. Both appointments constitue a positive development in Egypt’s transition due to their strong economic credentials. A ‘technocratic’ government – a demand that has been consistently called for by revolutionaries – seems to be forming. Mohamed El Baradei, leading opposition figure and former head of the IAEA, has been appointed as Vice President with a special focus on international affairs, and has also been known to support free-market economics.

Stability in the political sphere is a pre-requisite to a functioning economy and the implementation of law and order. The transitional government needs to set up a framework that can accommodate both factors, while continuing to reach out to the Muslim Brotherhood for dialogue, to avoid another Morsi-type political exclusion. For businessmen and foreign investors, the government needs to create an environment that can attract much-needed foreign direct investment. For the impatient Egyptian citizen, the government needs to elevate living standards, implement law, order, and security measures, and thereby gain trust. After all, the protesters’ chants have been consistent throughout both uprisings. The people want “bread, freedom and social justice.”

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