Sophie Anmuth
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on : Thursday, 15 Nov, 2012
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Can Morsi Bite the Bullet?

Mubarak’s economic legacy haunts his successor

Egypt’s economy is in a dire state, but it remains unclear as to whether Egypt’s new civilian rulers will be able to rise to the challenge.

A boy stands next to a stall at Magra El-Oyoun market on January 24, 2012, Cairo. Getty Images

Egypt’s worsening economic and social situation might have fueled the fire of the 2011 revolution, but two years later most of the same problems persist. The blame is usually laid at the door of former president Hosni Mubarak or the Supreme Council of the Armed Forces, which took power after Mubarak stepped down in February 2011. Egypt transitioned to civilian rule when the first Muslim Brotherhood president in Egyptian history, Mohamed Morsi, took up his post in July 2012, but the problems he inherited remain unresolved.

Egypt’s new president appointed Prime Minister Hisham Qandil, who pledged to form a technocratic, rather than “bearded,” government to tackle Egypt’s huge economic and social problems. They indeed have a massive (if not impossible) task on their hands, with problems including a gaping budget deficit, rampant poverty, appalling health and education systems, and never-ending strikes over labor issues. Are they up to the job?

Too many promises

Before taking power, Morsi and his government made many big promises. In the annual Egyptian presidential speech commemorating the October War of 1973, President Morsi said he was very satisfied with the progress toward fulfilling the five main promises he made for his first hundred days in power. Nevertheless, they were unlikely to be able to keep those promises, given the dire state of the economy. This bodes ill for their credibility.

The Muslim Brotherhood inherited serious economic issues, which have only become worse in the wake of the revolution due to the lack of trust from investors and the decline in tourism. This includes a gaping budget deficit, amounting to 11 percent of the GDP, a lack of foreign currency reserves, slow growth, and high inflation; urban consumer inflation stood at 6.2 percent during the past year according to state statistics. Tourism used to make up 11 percent of the country’s GDP. Yet with concerns over security, there were 33 percent fewer tourists in 2011 than in 2010, according to the Egyptian Ministry of Tourism. This represents a loss of nearly US$4 billion, leaving US$8.8 billion in revenue from tourism in 2011.

Expectations were high following the revolution. Yet many Egyptians still live under the poverty line; a staggering 40 percent of the population according to the United Nations. Wages are low, and unemployment is high—especially for young people, with many graduates unable to find a job, a quarter of young Egyptians are out of work, according to Egypt’s Central Agency for Public Mobilisation and Statistics. The health and education systems are divided between a less-than-effective public sector and a costly private sector. Having given so many assurances about how it will fix Egypt’s problems, what can the government do to keep the confidence of the people it must inevitably disappoint?

Morsi’s credibility is at stake and some analysts believe the government should be more open about the economic situation. Jennifer Bremer, chair of the Public Policy and Administration Department at the American University in Cairo, says, “They should openly tell the people how bad the mess is . . . For the moment they can put the blame on the Mubarak era mistakes, but very soon people will start blaming them if they don’t make clear what they’re facing.” Bremer believes that honesty is the best policy and that asking for the people’s cooperation would lead to a healthier state budget. The Egyptians deserve to be warned of the economic hurdles ahead.

Five promises: the record

In an attempt to demonstrate that he was capable of delivering practical solutions and solving Egypt’s numerous problems, Morsi pledged that he would deal with five pressing quality-of-life issues within the first hundred days of his presidency. Now that this time has elapsed, it is clear that attempts to resolve these problems have met with mixed success.

Improving the quality and availability of state-subsidized bread was one of Morsi’s key promises, playing off the word 3aich, which means both “bread” and “dignified life.” The price of subsidized bread has not changed since the early 1980s—but many have said it was barely edible, with pieces of rubbish found baked into the bread. Supplies are inconsistent and queues sometimes impossibly long. The problem, according to the president, lies mainly in corruption, with the subsidized flour or the bread itself sold on the black market and not to the factories and the poor whom should have reached it. A real improvement might require increasing the price of bread. The website www.morsimeter.com, which documents the president’s progress, says that only one of the 13 steps in Morsi’s bread program has been achieved, whereas Morsi said 80 percent of his bread program was accomplished.

Resolving poor public sanitation was another meaningful promise. Private garbage collection companies complain of weak financing and lack of support from the state. Local government says the contractors are not doing their job, and rubbish piles up in the streets. The garbage-gathering Zabaleen still complain about the loss of their recycling pigs, and that areas of garbage traditionally belonging to them were given to private contractors—and they would like to be paid more.

Morsi’s pledge to resolve the congested traffic has also failed, as any reasonable person would expect. Police have started evicting street vendors to prevent them from sitting on the streets and obstructing traffic. A telephone service and local traffic radio stations in the main Egyptian cities have been implemented to guide drivers to less crowded roads. Other measures, dealing mainly with traffic laws, have barely started to be implemented or have been stuck in limbo.

Egyptian President Mohammed Morsi walks to the podium for his address to world leaders at the United Nations General Assembly on September 26, 2012 in New York City.

The new president also promised more security and police reform. So far—apart from reshuffles, salary increases and the deployment of more policemen—observers say objectives such as cracking down on criminals and providing better equipment for law enforcement agencies have not been fulfilled. Critics also point out that there has not been any substantial reform in the Interior Ministry. The current Interior minister, Ahmed Gamal, was the head of security in South Sinai and Upper Egypt Assiut, two governorates where police crackdowns on militants were particularly brutal.

Morsi’s fifth promise, to bring an end to periodic fuel and cooking gas shortages, has seen some success in Cairo and its surrounding neighborhoods, including a corresponding crackdown on smuggling. The monitoring of gas stations had not yet begun, and some in Upper Egypt say they still cannot afford butane.

Not much experience in macroeconomics

Why have these problems remained so stubbornly unresolved? Part of the answer can be found in the scale of the problems themselves, and the limited amount of time that Morsi and his government have had to work on them. However, the president and his advisors must also take some of the blame. While it is possible that the Muslim Brotherhood’s intentions are genuinely altruistic, they likely lack experience in macroeconomics. Morsi has often failed to appoint ministers with training and experience in this field. For example, Prime Minister Hisham Qandil was the minister of water resources and irrigation in the former military-appointed government; many investors would have preferred a high-profile economist instead.

Observers say that once Egypt gets the US$4.8 billion loan it has requested from the IMF, investors will be reassured and flock to the country. However, at present, the loan is far from secured, an IMF delegation have been in Cairo for over two weeks negotiating the conditions of the loan. Many news outlets are reporting that the failure of Morsi’s government to make necessary reforms is a major barrier to securing the IMF money.

According to Jennifer Bremer, there may not be enough high-profile economists, or “people with serious experience in senior or mid-level economics among the Muslim Brotherhood.” This lack of experience is unsurprising, after Mubarak and his cronies purposely kept Muslim Brotherhood businessmen out of power.

“Sometimes the Brotherhood’s economic and social decisions give the feeling that they are running an NGO,” she adds. For example, to tackle the garbage issue, they asked the people to clean the streets themselves: a campaign dubbed “Clean Homeland” called on citizens and Muslim Brotherhood-affiliated youth to take the problem into their own hands in several cities. According to the president, it would be an inexpensive endeavour—but structural problems made the task more difficult than it first appeared.

Not enough social justice?

The Brotherhood cabinet has repeatedly pledged to pursue a ‘liberal’ economic policy and to respect private property and other tenants of mainstream capitalism. Their critics have two major fears: the neglect of social justice (the pursuit of which has been one of the main demands of the revolution), and the possibility that power will corrupt the Brotherhood and its own brand of crony capitalism would replace Mubarak’s.

The Brotherhood has many members who are businessmen, and therefore it is only logical that this has shaped the movement’s world-view and their decision to take a business-friendly stance. On the other hand, the Brotherhood has long deployed a strategy of neighborhood social protection, thus gaining sympathy and votes. It could be said they have a longstanding history of charity work, but not much of a desire to build a welfare state. Many Egyptians, on the other hand, long for a welfare state, which they associate with an idealized, Nasser-era golden age.

Wages are low in Egypt. A minimum wage is one of Morsi’s promises and a demand of the revolutionaries. The president has also pledged to increase pensions. But the problem is that an increase in civil servants’ wages doesn’t necessarily mean an increased level of productivity, and inflation would likely result. In addition, there are no minimum wages in the informal sector, and no means to enforce a minimum wage. Egypt’s new rulers therefore face a formidable task. As Dr. Malak Reda, a senior economist at the Egyptian Center for Economic Studies, says, “A minimum wage is good if the workers become more efficient and it is important to raise pensions to take into account the high inflation in the country.” Reda concedes that increased wages could have a negative impact on the budget and that the government will have to find ways to increase its revenues and better allocate its resources.

Not much talk of education and health

In terms of services, there is a worrying silence. Speeches by government members do not focus on health or education, even though both sectors are in a precarious state. Public sector employees have regularly demonstrated and gone on strike to say they actually cannot provide even a minimum level of service to the people, such is their lack of funds. Children often finish public secondary school without even being able to read. Patients often leave public hospitals with more diseases than they had coming in due to the extreme lack of drugs and equipment. In fact, Egyptian hospitals often lack even the equipment necessary to sterilize the premises.

Egyptian doctors who are on strike take part in a demonstration in Cairo on November 1, 2012

Indeed, “any policy that would increase health services and improve its quality as well as that of education would take time,” says Dr. Reda, and would require huge amounts of money—which the government does not have.

Understandably, the government’s focus seems to be getting the economy back on track, and then to implement all the social measures they have promised, but this first step, raising the money in the first place, is perhaps the most difficult one.

A massive overhaul of the tax and subsidies system

Egypt’s subsidy program presents Morsi’s government with a more extreme example of the dilemma faced by many Western countries in the current economic climate: they can either reduce the budget deficit or protect living standards. Some analysts say that if energy subsidies were totally eliminated, the fiscal account would be almost in balance. The government says it wants to cut subsidies for a number of basic commodities including oil, fuel, gas, and rice, which worries the vast number of Egyptians who live below the poverty line.

Petroleum Minister Osama Kamal said Egypt would set a limit on the amount of subsidized fuel and cooking gas each family can purchase—but he did not give any starting date. A few other details have emerged, such as a planned increase in the price of 95 octane fuel (used for expensive cars), and value-added taxes on certain luxury items, such as cigarettes. Kamal has already stated that the government is expected to miss its planned targets for cutting subsidies in the budget for the 2012/2013 fiscal year.

With parliamentary elections due in the next few months, the government is unlikely to hasten unpopular decisions, even though this might delay IMF assistance.

Many think the subsidies should be distributed directly to the poor rather than injected into commodities. This could eradicate smuggling and the black market. “Cutting subsidies for some large and medium-sized companies could be acceptable to increase the budget revenue. But removing subsidies for small and micro enterprises is a bad idea,” says Dr. Reda. “With the political opening and enfranchising of millions, future political regimes will have to answer social and economic demands through higher taxes on the rich and more public investments,” says Amr Adly, an economist at the Egyptian Initiative for Personal Rights NGO, in a column for an Egyptian newspaper.

Morsi’s program spoke about finding new sources of income for the government by increasing taxes on financial transactions and on polluting industries, fighting tax evasion and privatisation of public companies.

Focus on investment and productivity

The government has tried very hard to reassure investors. Countless enumerations of the country’s resources and reassurances about the government’s commitment to rapid development have been made in official speeches and at conferences. However, taxing both initial public offerings and annual dividend allocation is a part of the economic reform plan, which is likely to displease investors if implemented.

The presidential spokesperson said that the main focus of Morsi’s visits abroad (to China and Turkey, for example) is the economy. This seems to be true. Not only is Egypt asking for an IMF loan, but it has asked many other countries for help. So far, Qatar seems to have the deepest pockets.

“Some capital inflow may save the country’s economy in the short term. However, it hardly serves as a basis for the restructuring of the economic development model in years to come,” writes Amr Adly.

Improving productivity is another issue that has been repeatedly stressed. Here, the government is pinning its hopes on vocational training—but this will require investment in Egypt’s education infrastructure, which (as discussed above) has its own problems.

Another governmental measure, primarily aimed at streamlining government spending on energy subsidies, is to ask shops and cafés to close earlier from December onwards. Cairo’s governor has also said that this would encourage people to sleep longer and thus improve their productivity.

This is highly unlikely to succeed, as it would be a massive change to the lifestyle of most urban Egyptians. It also goes against the will of the Chambers of Commerce, whose head, Ahmed El-Wakeel, said it would lead to major losses and to a rise in unemployment. The government had to postpone the implementation of the law and to grant the shops and restaurants two more opening hours than initially planned.

This episode is but one example of the impression of helplessness of the government in its management of the economy and the reforms it wants to implement—and their sometimes-surprising lack of sense when prioritizing economic issues.

Hard choices

The Brotherhood has gained power after decades in opposition, but the price of this power is the necessity of making harsh, unpopular, ‘no-win’ decisions.

Their program was full of social promises but, as with the political promises, they seem hard to keep. Addressing poverty, unemployment and the high cost of living appear more like long-term goals, without even mentioning issues in the health and education sectors. In the campaign everyone—workers, farmers, pensioners, street children—had something planned for them. So far, little has been done (and maybe nothing could be done anyway). Economic growth and lower state expenditures might be prerequisites to launching social care programs, but the social cost might be too high to even allow these expectations to bear out.

With Egypt’s economy in crisis, Morsi and his allies in the Brotherhood face a series of ‘damned if they do, damned if they don’t’ decisions. With no record in government, Egyptians can do nothing but wait and see if Mohammed Morsi has the resolve to fix the economy, even if unpopular decisions have to be made.

Sophie Anmuth

Sophie Anmuth

Sophie Anmuth is a freelance journalist specialising in the Middle East, with a range of interests varying from politics to culture stories. Born in Paris, she is currently based in Cairo. She works for French and English-language media. Her academic background is in philosophy, international relations, journalism and Arabic.

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One Comment

  1. Ahmed R. says:

    Good piece, quite informative. However there is not much info about US aid to Egypt! Are we back
    to the same old story of US financial aid to the Egyptian military?

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