U.S. and International Monetary Fund officials are in Cairo this week for talks on how to avert an economic crisis in a country where revolutionary fervor has left government finances reeling and cast a broad cloud of suspicion over the nation’s business class.
The protests that have upended the Arab world’s politics have had a broad economic spillover as well, from high world oil prices to an abrupt increase in spending by countries such as Saudi Arabia on public subsidies in hopes of tamping down public dissatisfaction. It has also touched off a broad debate about whether nations such as Egypt can find strategies to create jobs and better distribute the gains of economic growth even as it faces pressing financial problems and a political backlash against reforms encouraged by the developed world and institutions such as the IMF.
A fund delegation is expected to report on Egypt’s situation next week during the agency’s spring meetings. U.S. Assistant Treasury Secretary Charles Collyns was holding separate talks about “ways the United States and international community can be supportive of Egypt,” according to a statement from the U.S. Embassy in Cairo.
Egypt has not requested help from the IMF, but Egyptian Finance Minister Samir Radwan in recent days has openly discussed the country’s possible need for outside assistance to prop up an economy suffering multiple shocks: growth undercut by a still-unsettled political crisis, a sharp drop in its foreign reserves, an outflow of wealth, and exorbitant borrowing costs.
Main sources of revenue such as tourism evaporated during the recent political unrest, while the bill for imported oil and food — both heavily subsidized by the government — rose sharply and labor protests shut down many manufacturers.
Corruption investigations against former president Hosni Mubarak and other former high-ranking officials and business figures are proceeding as part of the country’s political transition. But they have also raised questions about whether the economic reforms championed by those such as Gamal Mubarak, the ex-president’s son who is due to be questioned in a corruption probe next week, will give way to a more government-oriented economy less open to global corporations and capital.
In the meantime, Radwan has been appealing for help, stumping for investment in Europe, turning to his oil-rich Gulf neighbors as a possible source of funds to keep the government afloat, and raising the possibility of restructuring billions of dollars in bilateral loans Egypt owes to European countries and the United States.
Egypt’s finance ministry on Tuesday cut its estimates of the country’s economic growth to 2.5 percent, less than half of what had been predicted before the Jan. 25 uprising against Mubarak’s regime and far below what’s considered necessary to provide jobs for the country’s young and growing labor force. The ministry also said the country would likely run a roughly $3 billion balance of payments deficit for the first three months of the year, a sharp change from what had been a surplus and a sign of wealth leaving the country. Central Bank and finance ministry figures indicate Egypt’s foreign reserves of $36 billion, a cushion the country had nurtured carefully, declined from the start of the year to the end of March to $30 billion, a rapid fall much of which is thought to have been spent to keep the value of the Egyptian pound from collapsing.
The situation has triggered debate not just about Egypt’s likely need for help at some point, but about the future of an economic reform effort that seemed to be gaining traction before the crisis. The country’s economic growth and policies had reached a point at which some in the country promoted it as an emerging nation that could join the likes of Brazil and India as a prop of the global economy.
Instead, Egypt faces perhaps months or more of uncertainty about the direction of its economic policies, as well as an immediate impulse to open the government purse to meet public demands. The interim government has promised higher wages, youth jobs and compensation for businesses damaged in the recent protests. It’s paying a $300 monthly pension to the families of people killed in the demonstrations, and put $250 million into an emergency fund to buy stocks of Egyptian companies to keep the local stock market from falling too much further. The Egyptian exchange is down more than 23 percent for the year after a nearly two-month closure.
The Arab states as a whole have been criticized for government policies that have kept a close hold on the local economy, with benefits focused on a privileged few and the broad use of subsidies to keep the peace. The lack of jobs for young workers in particular is considered socially explosive, and analysts have noted in particular a disturbing mismatch in which unemployment rates are higher for those with college degrees.
In Egypt “the macroeconomic situation was not that bad before the crisis. But it’s a country, like many in the Middle East, where beyond the macro figures the distribution was a big issue,” IMF Director Dominique Strauss-Kahn said Tuesday. “The increase in prices of food and fuel understandably creates the temptation to help with subsidies. A big change is happening there with the push towards democracy; at the same time they must be careful not to create problems for their fiscal sustainability.”