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NY Times January 24, 2012
Economic Potholes Add Dangers on Egypt’s New Political Path
By DAVID D. KIRKPATRICK and MAYY EL SHEIKH
CAIRO — After a year of unending turmoil and military rule, Egypt
faces an acute financial crisis that could undermine its political
transition and pose a defining challenge to Islamists now coming
to power.
With mounting debts, negligible economic growth and dwindling
foreign reserves, the military rulers and the new Islamist-led
Parliament now confront some difficult choices, beginning with an
all but inevitable further devaluation of Egypt’s currency that
could send the prices of food and other goods soaring.
The government may also soon be forced to overhaul the vast system
of energy subsidies that now account for a fifth of government
spending. Increases in food prices and reductions of subsidies
have provoked riots here in the past.
“The situation is dire,” said Magda Kandil, executive director of
the Egyptian Center for Economic Studies, who called some of the
recent indicators “alarming.”
In a sign of the situation’s severity, the ruling military council
last week reversed itself and reopened talks with the
International Monetary Fund over the terms of a $3.2 billion loan.
The generals previously rejected the same deal as an affront to
national sovereignty, but officials of the military-led government
now say they may seek an even larger loan.
Moreover, the Muslim Brotherhood, the long-outlawed Islamist group
that controls half the seats in the new Parliament, also indicated
its openness to the financial lifeline in its separate meeting
with the I.M.F. representatives — an even more stunning reversal
after eight decades of denouncing Western colonialism and Arab
dependency.
Leaders of the Brotherhood readily acknowledge that steering Egypt
through the crisis will be a formative test of their ability to
govern. Activists focused on forcing Egypt’s military rulers to
give up power, meanwhile, say the economic malaise has become a
major obstacle to their cause because so many Egyptians have come
to crave a return to stability.
Others note with dismay that the bread-and-butter frustrations
that helped fuel the protests that ousted President Hosni Mubarak
one year ago have grown only more acute since then, especially for
the legions of jobless or underemployed young people.
Nowhere is the economic distress more evident than in the business
of Egyptian weddings, which are a costly rite of passage here that
marks the graduation into adult life and which generate revenue
that rivals the annual American aid budget for Egypt.
In one hard-pressed Cairo neighborhood, wedding planners say
couples have cut back on events that may have cost $300 before the
revolution because they can now pay only about $100. Jewelry
stores say the average amount that grooms spend on the traditional
gifts of gold for their brides has fallen sharply, and disc
jockeys say they now perform at just 2 or 3 weddings a month, down
from an average of 10 before the revolution.
“Nobody is getting married after the revolution,” said Amr
el-Khodary, 37, who was forced to close his shop that rents cars
for wedding parades.
Ibrahim Mohamed, a 26-year-old cab driver with a college degree,
is a case in point. A steep decline in fares, he said, has
prevented him from saving up the roughly $7,000 for an apartment,
furniture, a small wedding and the customary gift of jewelry that
he says he needs to marry.
“If it weren’t for the revolution,” he said, “I would have been
able to get married.”
The reasons for his plight have been piling up all year: a virtual
cutoff of foreign investment, a 30 percent decline in tourist
visits and the stagnation of economic growth. The official
unemployment rate is 12 percent, but among young people the real
rate of unemployment is at least double that figure.
The military rulers have also presided over a period of financial
turmoil. Inflation has surged into double digits, and the exchange
rate for the currency, the Egyptian pound, is under heavy
pressure. Foreign exchange reserves have plunged, as the
government is spending about $2 billion a month in a losing battle
to prop up the pound. Foreign currency reserves have fallen to
about $10 billion, after certain obligations, from about $36
billion before the revolt.
Economists say Egypt’s military rulers contributed to the strain
by shunning the planned loan from the I.M.F. last June, when it
could have provided badly needed hard currency and a financial
seal of approval that might have helped reassure foreign investors
and aid donors.
Instead, the ruling military council has tried to sustain the
government’s growing deficits by borrowing internally, while
businesses struggle to get the loans they need to expand and
revive the economy.
Now the military government appears to have used up its domestic
sources as well. On Monday, the government managed to sell
Egyptian banks only about a third of a planned bond offering
valued at $580 million, even at yields that reached a new peak of
nearly 16 percent.
“Continued borrowing from the domestic markets is a bankrupt
policy, literally,” said Ragui Assaad, an Egyptian economist at
the University of Minnesota who is now in Cairo.
Even with new sources of foreign currency from the I.M.F., he
said, Egypt would soon be forced to capitulate to a further
decline in the exchange rate — gradually, if the government is lucky.
“Of course it is going to hurt,” Mr. Assaad said. “But there is
going to be no choice but to devalue the currency.”
Fears of runaway inflation are already acute. “Nobody puts their
money in the bank because they are afraid it won’t be worth
anything later,” said Hamdy Shaaban, 40, a mechanic. “Why would I
put money in a bank? I don’t know what is going to happen next.”
But the other solution that many economists favor — overhauling
the policies that have Egypt spending more than $15 billion a year
on energy subsidies — appears for now to be politically
impossible. It is a regressive system that most benefits those who
drive sport utility vehicles and live in air-conditioned villas,
and other countries with similar systems have successfully
replaced them with more targeted subsidies for the needy.
But most Egyptians cherish the subsidy as a birthright, and few
believe that the transitional government has the credibility or
legitimacy to push through a major change. “Someone has to be able
to convince people that they are going to get compensated,” Mr.
Assaad said.
Still, many economists contend that Egypt can navigate around a
potential collapse. They note that the military-led government has
recently announced plans to trim nearly $4 billion from the
yawning deficit of over $30 billion, or more than 10 percent of
gross domestic product. Among other things, it has begun to trim
the energy subsidies to heavy industry, perhaps in preparation for
changes the monetary fund might require.
In addition, Ahmed Galal, managing director of the Economic
Research Forum, based in Cairo, said economists were increasingly
optimistic about the policies of the Muslim Brotherhood. The group
has made it clear that it supports free markets, and it has
already begun talking about the urgency of subsidy reform. Its
lawmakers began drawing up proposals to tackle the issue when they
were members of the opposition minority under Mr. Mubarak.
“These guys want to succeed,” Mr. Galal said of the Brotherhood’s
lawmakers. “They are really singing songs that are quite moderate,
quite civic, quite inclusive, and they are looking at countries
like Turkey rather than Iran or Afghanistan.”
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Egyptian Activists Say Their Revolution Remains Unfinished
full:
http://thelede.blogs.nytimes.com/2012/01/24/egyptian-activists-say-their-revolution-remains-unfinished/
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