As Egypt’s battle for social justice continues, the country is struggling to stay afloat financially. Melodie Michel reports.
As this issue of GTR goes to press, Egypt’s finance ministry had just been set on fire. The highly symbolic gesture was part of yet another round of violent altercations between supporters of ousted president Mohamed Morsi and the army, resulting in nearly 300 victims and prompting the resignation of vice-president Mohamed ElBaradei.
It has been almost three years since the Arab Spring broke out on Tahrir Square, but the country has yet to find a peaceful conclusion to the protests. The quiet interlude that followed the lifetime jail sentence of former President Hosni Mubarak (who has since been released)and the election of Mohamed Morsi was cut short in December last year, after the new president issued a temporary constitutional declaration granting him a range of new powers.
The unrest culminated on July 3, when the Egyptian armed forces announced the end of Morsi’s presidency, the suspension of the constitution and the appointment of the chief justice of the constitutional court, Adly Mansour, as head of the government until an upcoming election.
In this context, maintaining the country’s trade flows has proven nearly impossible, and despite the help provided by its neighbours, Egypt is facing the challenge of having to save its trade relationships in order to keep its economy afloat as public debt keeps rising (79.7% of GDP in 2012, up from 70.2% in 2008). The country’s trade deficit grew to US$2.3bn in May 2013, and foreign direct investment (FDI) has dropped from as much as US$10bn a few years ago to US$1.3bn in the first nine months of the 2012/13 fiscal year.
Elizabeth Stephens, head of political risk and credit advisory at JLT Specialty, explains to GTR that Egypt didn’t even have time to get back on its feet between the Arab Spring and the current events. “No improvement per se had ever been realised. The country is now in a worse position than square one due to the erosion of its income base between October 2012 and April/May 2013, the peak season for tourism,” she says.
The world’s largest wheat importer, Egypt is running dangerously low on supplies with just 500,000 tonnes of imported wheat left in its reserve in July, according to former minister of supplies Bassem Ouda. This was only enough to maintain the government’s subsidised bread programme for two months.
Fortunately, Egypt was able to secure commodity funding from its Middle Eastern neighbours, with the United Arab Emirates, Saudi Arabia and Kuwait promising a total of US$12bn in cash, loans and fuel. Stephens adds that oil and wheat are the country’s most critical priorities, and should therefore continue to receive support despite the unrest.
There has been an increase in bank pricing since the overthrow of Morsi, which was followed by the country’s credit rating downgrade to B- by Fitch. Foreign exchange reserves are depleting (US$14.5bn in June 2013) and banks are exerting extreme caution when deciding whether or not to provide finance to Egyptian importers and exporters, making it difficult for them to secure US dollar funding for commodities trade.
Even with the money injected by Gulf states, it will take time for Egypt to recover its stability, and with it banks’ credit appetite, especially when violent clashes force them to shut down for days – HSBC and Citi both had to close their branches in mid-August on orders from the Egyptian Central Bank. As Stephens points out: “The identity of the ruling party is of relatively minor importance when compared with the main need, which is for consistency, sound policy direction and International Monetary Fund (IMF) or international support.”
Now that Egypt has officially put its US$4.8bn IMF loan negotiations on hold, it is unlikely bank support will improve. Ashraf al-Araby, the interim government’s planning minister, announced in mid July that the military-backed government would choose to rely on foreign help to close its budget deficit, instead of fulfilling the IMF’s requirements by removing subsidies and increasing taxes.
“The time is not appropriate to begin a new round of negotiations with the IMF. Aid from Arab countries will help Egypt get through the transitional period,” he told local media outlets.
The loan was seen as a major condition for western economies to provide further help to Egypt, and the recent decision has been criticised by some as a way to postpone unpopular reforms in the midst of social unrest. As a result, the stabilisation of the country’s economy is hard to envision in the near future.
As for US aid, a month after the overthrow and despite escalating violence Washington has not recognised Morsi’s ousting as a coup, which would automatically trigger a congressional ban on its US$1.3bn annual funding to the Egyptian military. The Obama administration now faces growing criticism for its continued military support, but ending the 30-year arrangement would cost the US billions as Egyptian importers would default on their payments to weapons’ manufacturers. Stephens points out that the potential withdrawal of US aid could also “compound the situation”.
While the source of Egypt’s economic recovery is still to be determined, the impact of the uncertainty is being felt on a global scale. In the wake of the August 14 bloodbath, crude oil prices climbed to US$111 over possible supply disruptions. Although the country is not a major oil producer, it is feared the state of emergency declared by the government might affect commodities trade routes, particularly the Suez Canal.
If trade through the Suez Canal were disrupted, forcing exporters to divert ships through the Cape of Good Hope, shipping times between Asia and Europe would also be increased by about two weeks, causing delivery costs to skyrocket.
As global concern grows over the Egyptian uncertainty, it is impossible to predict the fate of the country in the medium term. Democratic elections could restore confidence if held within the next six months, but one thing is for sure: Egypt will need a lot of external help before it can rise from the ashes and rebuild its economy.