In December 2012, the Central Bank of Egypt announced that the country’s foreign reserves had reached an alarming low of $15 billion, less than 50 percent of its holdings following Hosni Mubarak’s ouster in February 2011. At that point, the Bank was no longer capable of providing the treasury with the monthly dollar transfers necessary for the purchase of basic food and energy imports, and thus had to rely on foreign borrowing to cover these imports and debt service as well as to support local currency. The Muslim Brotherhood government of the time was not capable of completing a foreign finance package with the IMF due to its limited political capacity to implement unpopular austerity measures deemed necessary for fiscal restructuring. The only viable option was securing political money from Qatar and other allies to keep the regime afloat. By July 2013, the Morsi government had incurred around $10 billion in debt, almost one third of Egypt’s total foreign debt and ten times the annual average of foreign borrowing under Mubarak.
Such an account helps to illustrate the dire straits in which Egypt’s economy finds itself. The economy is currently suffering in particular from three issues: a huge budget deficit estimated to hover at around 12 percent of the GDP; a balance of payment deficit due to the slowdown in tourism and large capital outflows; and the continuous erosion of foreign reserves.
Most of the economic suffering stems from the political turmoil that has followed Mubarak’s ouster and the lack of an introduction of formal democratic mechanisms. The Supreme Council of the Armed Forces (SCAF), which ruled from February 2011 through July 2012, failed to address any of the critical economic questions. Then, during Morsi’s short reign, political conflict intensified and violence became rampant. Thus a newly elected president and a ratified constitution did not usher the country into a period of stability and economic recovery. The political situation collapsed in June and July 2013 amid mass protests calling for early presidential elections, which were followed by another ouster and a general crackdown on the Brotherhood and its allies. Since then, the country has been subjected to systematic suppression of political dissent and waves of civil strife and sectarian violence. In such a context, economic recovery is not viable.
Borrowing and Aid as “Economic Suicide?”
As the Qataris rushed to assist their Brotherhood allies in 2012, the Saudis and Emiratis, and to a lesser extent the Kuwaitis, extended their hand to the military to help sustain its rule in 2013. Hence not much changed economically between Morsi’s short reign and the military-backed interim government except the patrons. The Saudis and Emiratis have been more generous and seem to be committed to financing the whole transitional period until the military establishes a stable political regime.
It is estimated that the Egyptian government has received around $22 billion since July 2013. This massive capital inflow in the form of concessionary loans, cash, and in-kind aid has been quickly used to fund the country’s import bill and to support the local currency against the dollar. The government also used around $4.4 billion in a stimulus plan to generate growth and increase the employment rate. Needless to say, the short-term influx helped avoid the urgent question of fiscal restructuring as well as the liberalization of energy prices and the reduction in energy subsidies, which have stood for almost 20 percent of total expenditure since 2008.
Dalibor Rohac of the Cato Institute wondered in January whether Egypt’s policies were akin to economic suicide. He focused on the precariousness of stimulating the economy through an expansionary budget plan that is primarily reliant on short-term borrowing from Gulf countries at a time when the public debt hovers at around 90 percent of GDP.
Indeed, the continuous dependence on foreign borrowing and politically motivated aid is anything but sustainable. Despite their extremely large capital sures, neither Saudi Arabia nor the UAE can sustain a country as big as Egypt in the medium or long term. The support plan for the time being can only be understood in the context of Egypt’s political transition and the continued attempts to establish a functioning authority. The plan for the immediate future is simple: keep the economy afloat by extensive borrowing and aid to avoid any exchange rate shocks or basic material shortages that would exacerbate the already troubled transition.
Such capital inflow is not designed for the financing of fiscal restructuring or economic recovery; rather, it is aimed at financing the political transition by boosting the current authority’s legitimacy, its independence from external pressures, and its capacity to continue repressing the Brotherhood. Short-term inflows are not likely to create jobs or generate growth. They go directly into financing current expenditures and lead to the further ballooning of public debt without investing in projects that would generate the money needed for the repayment of debt service and installment. As such, these funds do not address the root cause of the country’s fiscal crisis, which can only be tackled in a stable political environment with social consensus.
Meeting Long-Term Economic Challenges
The interim regime’s focus is on concluding the new transitional period with the implementation of a functioning and legitimate authority. Whether the military will be capable of establishing an authority that can survive in a country that has toppled two presidents in less than three years is unclear. Such a task’s success is contingent on many variables that range from the defeat of the Brotherhood to the achievement of some societal reconciliation and integration of social and political actors into the emerging political order.
Once the prospect of political stability appears and a relatively functional political regime emerges, how is it likely to deal with the economy? Egypt’s economic problems are far more complex than just the regeneration of high growth rates and the rebuilding of foreign reserves. The upcoming regime will need to tackle two big problems that Mubarak, as well-established as his regime was, could not solve. The first is the question of fiscal restructuring, meaning the reduction of expenditure and the deficit by cutting subsidies and liberalizing prices of some basic products such as oil while increasing revenue through more indirect means such as a value added tax. The second question is one of social justice. Mubarak’s economic model was a success in that it generated high growth rates and built up large foreign reserves that more or less stabilized the exchange rate. Yet this model was not inclusive enough for many youths and members of the middle class, who found themselves on the losing side of decades of incremental but consistent neoliberal reforms. This makes the challenge facing any upcoming regime more complex, as an economic model that can meet expectations for recovery as well as social justice is needed.
Both restructuring state finances and remodeling the economy will have serious distributional and re-distributional repercussions, and both will be deeply intertwined in the composition of the sociopolitical coalition on which the post-Morsi, or rather the post-Mubarak, regime will depend.
It is possible that the Gulf states, especially Saudi Arabia and the UAE, will play a significant role in Egypt’s fiscal and economic restructuring by securing large capital inflows. These funds would be used by the incumbents in Egypt to finance restructuring and make it politically tolerable instead of only maintaining the current level of expenditure. Indeed, something like the early 1990s debt relief package could reoccur despite the different political context. Following Mubarak’s decision to join the international coalition against the Iraqi invasion of Kuwait in 1990-1991, Egypt secured an unprecedented relief package from the West and the Gulf countries. Fifty percent of Egypt’s foreign debt was cancelled and the other half was rescheduled. Such a measure enabled Mubarak to finally undertake the fiscal and monetary reforms he had avoided since 1986.
Could such a period of reform happen again? The answer remains unclear. As long as the political instability and social upheaval continue in Egypt, simply maintaining the status quo will be the priority.
 Dalibor Rohac, “Is Egypt Committing Economic Suicide?,” Financial Times, 6 January 2014, .