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Shortages, Power Outages, Privatization and Inflation

The Economics of Egypt’s Coup

by ERIC WALBERG

As Egypt inches towards the first anniversary of the July 3 coup, the economy continues to flounder. The military-backed reverting to Mubarak-era policies has been buttressed only by lavish handouts from the Gulf Security Council (GCC) states and vague promises of future investment by western business, namely Coca Cola.

Despite loud media support for the military government, ongoing gas shortages and power outages, plus Egyptian Prime Minister Hazem el-Beblawi’s minimum wage law, which excluded the neediest 75% of the labor force, sparked a wave of wildcat strikes that forced his government to resign on February 24.

This was the scenario as Egyptian officials came cap in hand to the Arab Summit held in Kuwait in late March. There was little cause for cheer at the meet, with the GCC crowd fighting among themselves, Syria’s membership suspended, and the rest of the members seen as economic basket cases.

In any case, the Arab League is increasingly irrelevant, dominated now by the Saudis and Gulf states, which are caught in a web of contradictions, both condemning the Muslim Brotherhoods throughout the region as terrorists, and at the same time supporting the al-Qaeda-type terrorists intent on toppling the Syrian dictator.

The GCC oil sheikhs ‘paid’ $15bn in aid for the July 2013 coup in Egypt, but the handouts were quickly used up on buttressing the Egyptian pound and on a dismal $4.9bn stimulus package. The Egyptian pound has continued its slide, economic growth has stalled (at best its 1% in the first quarter of 2014), the budget deficit stands at14% of GDP, unemployment is 13.4%, inflation is 10%, while public debt and foreign debt are accelerating. GCC aid is not just monetary, and includes fuel and natural gas, which Egypt was cavalierly exporting until last year.

A Bank of America report in February described a presidential bid by Field Marshal Abdel Fattah el-Sisi as “market-friendly in the near term”, but warned that Sisi’s holdover of officials and discredited policies from the Mubarak era did not bode well in the long term, suggesting it was “a watered down version of the pre-revolution regime”. Addressing the nation on TV, in early March Sisi lamented, “Our economic conditions are so, so difficult.” He pointed to fuel and other subsidies which cost the government $15bn a year, account for 30% of the government budget and 9% of GDP, but gave no clear prescription.

A major problem for foreign investors is angst about the legality of much of the privatization carried out under Mubarak. After the 2011 uprising, the corruption involved began to be exposed, a raft of legal challenges were launched, and judges started overturning deals under popular pressure.  A draft investment law now aims to prevent third parties from challenging contracts made between the government and an investor.

Investors want to have their cake and eat it: no more corrupt Mubarakite officials, and at the same time no more challenges to corrupt investment deals (which often strip a state company of its assets and lay off workers, spiriting any profits abroad).

The Muslim Brotherhood (MB) government tried to square the circle. It allowed the illegal privatisations to be challenged, turned back the massive corruption, and encouraged a new class of small and more devout businessmen to build a new Egypt, emulating the Turkish miracle which unfolded under the Islamists there. Egypt is ripe for such a development, but the paranoia of the secular elite and their unwillingness to make room for a less corrupt, more dynamic, more home-grown, non-Cairene strata of entrepreneurs means that the only way forward for Egypt has been crushed “in the near term”.

Of course, it will be ordinary Egyptians who face the music—losing subsidies and jobs, watching their modest new minimum wage be eaten up in inflation, as a neo-Mubarak investor-friendly climate is fashioned.

In the past, the Gulf states have been protected by the British and more recently the Americans. Now, it seems, they think their billions of dollars will buy them ‘security’ from Egypt. This is the subtext of interim Egyptian President Adly Mansour’s vow to the Kuwaiti press on the eve of the Arab Summit: GCC security is now a national responsibility for Egypt as they are “partners in identity”. He explained that Arab nations are suffering from “blind terrorism”, and announced that Egypt will urge Arab countries to forge a new agreement on combating terrorism.

The Egyptian military saw the MB as too sympathetic to the Palestinian cause, in particular, Hamas in Gaza, and feared the MB was distancing itself from the Egypt-Israel peace treaty. One might well argue that the MB was addressing the same root problem of “blind terrorism” (though they would argue it is US-Israeli terrorism), and that their sympathy with Gazans was because they are Egyptians’ real “partners in identity”. (Indeed, Gaza was governed by Egypt until 1967.)

The MB were beginning to catch on to the international finance boondoggle—the money saved in any IMF “structural adjustment” slashing subsidies will of course go to the foreign bankers—until they were toppled. Instead of a ‘slash and burn’ ending of subsidies, they were trying to make them work without corruption. They re-re-negotiated with the IMF, finally proposing that some of the debt be cancelled as “odious debt”, a precedent that earned them no allies in Washington, despite the fact that the US used this principle to cancel Iraq’s foreign debt in 2003.

The MB were also beginning to move the Israeli mountain by refusing polite negotiations, working directly with Hamas (and mediating Hamas-Fatah talks) and developing an ambitious plan to transform the Sinai, including building civilian infrastructure, creating industry, and strengthening its internal and military security, in defiance of the US-Israeli assumption that it was a no-man’s buffer zone. There were tantalizing hints that a new Middle East economic constellation was being forged which would have included Iran. Before he was arrested, President Mohamed Morsi made hundreds of dismissals in the military ranks, and hundreds more in the bureaucracy, actions which started to chip away at the corrupt ruling elite’s stranglehold on Egypt’s economy.

Israeli leaders breathed a collective sigh of relief when Sisi took power, and are busy developing newly found offshore Palestinian natural gas reserves, planning to not only end imports from Egypt (which were priced below market value and cost Egypt $1bn), but to export Palestinian gas to Egypt to meet ongoing gas shortages. Egypt will pay an estimated four times more for these imports than it earned on its gas exports to Israel between 2005–2011.

This embarrassing turn of events will hardly add to Sisi’s popularity. The military is once again scrambling to look relevant, clearly unable to deal with a rapidly changing landscape and formulate a plan to save Egypt from its ongoing travails. Neither the IMF, US-Israel, even the GCCers have reason to be optimistic in either the “near term” or long term.

Eric Walberg writes about the Middle East. He can be reached at his website

A shorter version of this appeared at middleeasteye.net.