There has been lots of media coverage over the past two years of the civil unrest in Egypt following the ouster of Honsi Mubarak 2 years ago. While political jockeying continues amongst members of the Muslim Brotherhood (Mr. Morsi’s Sunni dominated party) and the small Christian / Shi’ite minority who see his rule as a challenge to their vested interests secured through decades of supporting the military dictator Honsi Mubarak, the majority of Egyptians are presumably pleased with the new freedoms that have come with democracy and wish simply for the political coherence needed to move the country forward.

But those who stand to lose their privileged positions will not give up so easily (there is also the argument that Egypt’s new constitution does not protect minority rights, but I believe this is a scare tactic being used against Morsi’s regime). It is essentially a collective action problem, those who stand to lose from Morsi’s rule stand to lose a lot, while those who stand to benefit stand to gain only incremental benefits (at least in the short run). Morsi’s opponents are also bolstered by the idea that if they can simply continue to apply pressure a little longer, they can break Morsi’s hold on power.

And they may be correct. I for one am a fan of Morsi and the democracy experiment in Egypt. But no matter who is right or wrong, or who really wants what is best for the people of Egypt, if the Morsi government is unable to provide essential services to the people, his opponents will leverage this ineffectiveness as a means to incite further political instability in Egypt.

At the source of this potential humanitarian crisis is the shortage of food and fuel. It also ties into my post yesterday about international finance and energy subsidies:

“The root of the crisis, economists say, is that Egypt is running out of the hard currency it needs for fuel imports. The shortage is raising questions about Egypt’s ability to keep importing wheat that is essential to subsidized bread supplies, stirring fears of an economic catastrophe at a time when the government is already struggling to quell violent protests by its political rivals. “

“United States officials warn of disaster unless Egypt soon carries out a package of tax increases and subsidy cuts tied to a $4.8 billion loan from the International Monetary Fund. That would persuade other lenders that Egypt was creditworthy enough to obtain billions more in additional loans needed to meet its yawning deficit. “

“Egypt has held two years of unsuccessful talks with the I.M.F., and the current government is still balking at the politically painful package of overhauls — even as rising prices and unemployment make those measures more difficult with each passing day.

‘They are operating on the notion that Egypt is too big to be allowed to fail, that the U.S. and the West will step in,’ Mr. Shimy said. ‘They think Egypt has a right to get the loan, and I think they will probably keep pushing all the way.’”

“Energy subsidies make up as much as 30 percent of Egypt’s government spending, said Ragui Assaad, of the Economic Research Forum here. The country imports much of its fuel, and for the first time last year it was forced to import some of the natural gas used to generate electricity — the reason for the recent blackouts. Egypt also imports about 75 percent of its wheat, mixing the superior foreign wheat with lower-quality domestic supplies to improve its subsidized bread. “

“But the two years of mayhem in the streets since the ouster of Mr. Mubarak have decimated tourism and foreign investment, crippling the economy. The government’s reserve of hard currency has fallen to about $13 billion from $36 billion two years ago.”

Part of the problem appears to be people’s expectations. According to Mr. Farash of the Supply Ministry, people are hoarding goods and gaming the system because they fear future uncertainty. Fuel truck drivers are diverting fuel to black markets, and bakeries are reselling their subsidized wheat at higher prices to people who fear future shortages. The thinking being, once shortages do hit, those who have supplies horded will have the goods they need to survive and will be able to sell their excess at a steep profit.

Morsi’s government is planning on installing “smart cards” to increase accountability of fuel truck drivers and bakers, which should make gaming the system more difficult. But people will still find ways to take advantage if they believe it is essential for their future well being. In order to change people’s expectations and their actions, the Morsi government will need to secure international financing to allow the Egyptian economy to run as usual.

—

This is where the story ties into yesterdays Normative Narratives post. One section of yesterdays post highlighted a recent IMF report stating that countries should stop fuel subsidies as a means of injecting money into the economy. With 30% of Egyptian spending tied up in fuel subsidies, clearly the IMF will not extend financing until Egypt does something to temper its unsustainable fuel subsidies.

But these subsidies are popular amongst the people, something Morsi understandably does not want to undermine early into Egypt’s first attempt at democracy in decades. There are especially important now as the value of the Egyptian pound has plummeted in conjunction with the instability caused by removing Mubarak from power and unemployment remains high. Reducing fuel subsidies will be important for Egypt’s long term fiscal stability, but doing so prematurely—as the IMF is insisting on—would undermine the popular support needed for a democratic regime to govern.

Which brings us to the second point of yesterdays post; the BRICS proposed development bank. The Bank’s purpose is to provide an alternative to IMF and WB financing, and is specifically focused on energy and infrastructure projects. This Bank could be essential to providing the financing that the IMF is currently unwilling to lend without imposing the politically impossible conditions the IMF is insisting on. But this bank was just proposed, is it really possible for it to provide funding that is needed more or less immediately?

—

Up till this point, unrest in Egypt has been mostly politically motivated. But if a food and fuel shortage based humanitarian crisis unfolds, the Morsi regime will be under real threat of a full blown revolution. It is essential for Egypt’s attempt at democracy to succeed, as it is a natural experiment whose results will dictate whether future attempts at democracy are attempted in the region. In order for Morsi to remain in power, international financing has to come from somewhere. Will the IMF budge on it’s conditionality? Will the BRICS development bank be running soon enough to help stabilize the Egyptian economy? Will Morsi ultimately have to cave in to IMF demands in order to receive emergency financing? Or will the democracy project in Egypt fail? None of the answers to these important questions are yet written in stone—we will have to keep a close eye on the situation as it continues to unfold.