stability | Normative Narratives

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.

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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?

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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.

Protesters opposing Egyptian President Mohamed Mursi march despite a nighttime curfew in the city of Suez January 28, 2013. REUTERS/Stringer

This past weekend marked the two year anniversary of the ousting of former Egyptian dictator Honsi Mubarak. Unfortunately, instead of serving as a uniting force in Egypt, the anniversary seemed to reignite the flames of revolution for many Egyptian dissenters. 52 people have been killed in violent uprisings in the past week. These uprisings were (in general) a response to disillusionment with the Morsi government and specifically to the death sentences given to 20+ violent soccer “ultras” by an Egyptian judge.
“The continuation of the struggle of the different political forces … over the management of state affairs could lead to the collapse of the state,” said General Sisi, who is also defense minister in the government Mursi appointed.

He said the economic, political and social challenges facing the country represented ‘a real threat to the security of Egypt and the cohesiveness of the Egyptian state’ and the army would remain ‘the solid and cohesive block’ on which the state rests.”

The Economic issues facing Egypt have two primary sources. One is the depreciation of the Egyptian pound, which has meant higher prices for food and other imports. Egypt owes countries “oil debts” based on previously agreed upon contracts. As the currency depreciates, Egypt will owe more oil, as oil contracts are typically denominated in an international currency (which is appreciating against the Egyptian pound). Further compounding the problem, a depreciating currency has meant Egypt cannot keep up with international demand for it’s oil, “The state-owned Egyptian General Petroleum Corporation has been unable to receive some deliveries of crude because it could not obtain letters of credit.” Not only can Egypt not increase its oil production for additional revenue, it is currently having trouble fulfilling already agreed upon contracts.

Monetary instability has led to a second related issue, the stagnation of the Egyptian economy. The Egyptian economy suffers from inadequate investment, there is simply not enough credit for the economy to function at (or even near) full output. Higher food prices and lower oil revenues mean less domestic savings and investment in the economy. Compounding the problem, companies are not exactly lining up to invest in Egypt due to political uncertainty and general insecurity. The government cannot assume more debt, because it hopes to secure an IMF loan to help fix its currency problems:

“Most worrying to economists and former government officials is the possibility that the government will not able to gain a consensus on austerity measures needed to get the country on track after two years of instability, rising unemployment and lower tourism revenues.

Such measures would also help to secure a $4.8 billion loan from the International Monetary Fund, talks on which were suspended last month by the president, Mohammed Morsi, because of the political crisis surrounding the constitution.

The IMF loan would provide a quick, cheap source of funds but, more importantly, send a signal to international donors and investors that Egypt is on the path to a sustainable economy.”

What Egypt really needs, first and foremost, is political stability. Political instability drives away desperately needed foreign investment (both FDI and IMF loans). Physical insecurity from fighting and violent protests hurts the day-to-day domestic economic activity that underpins any strong economy (no economy can flourish solely on exports).

I blame Morsi’s opposition groups for most of the instability in Egypt. “Mursi’s opponents have called for more protests on Monday. ‘Down, down Mursi, down down the regime that killed and tortured us!’ people in Port Said chanted as the coffins of those killed on Saturday were carried through the streets.”

These are the same opponents who have time and time again refused to come to the negotiating table with Morsi. If you will not negotiate for what you want, and instead call for violent protests and overthrowing the government, then you do not represent a legitimate faction. Political ideology almost always flows from the top down, top opposition officials could call for either compromise or opposition; they have made their stance very clear.

It would be one thing if Morsi was indeed a dictator who would not let his opposition have a voice, but this is not the reality of the situation. Morsi was elected democratically, and his constitution passed an open and transparent vote. Democracy needs to be given a chance to work in Egypt; up until this point it has not. Instead of working with Morsi to ensure the stability and security needed to fix Egypt’s economic problems, the opposition has used economic (and ensuing social) issues as an opportunity to challenge Morsi’s presidency.

Egypt is a very important Western ally in the Middle-East. The opposition needs to come to the bargaining table with Morsi in order to stop the violence that has destabilized the country. Once there is political cooperation and less violent protest, the Morsi government will be able to better provide the social services needed for a democracy to function. It will also allow Egypt to attract the international investments it needs to get the economy producing closer to capacity, which will reinforce political and social cohesion (when people prosper, everyone is happy, when they do not, no one is).

It is in everyone’s best interest for Democracy to work in Egypt. The only people who would suffer are the old Mubarak-era-elite who stand to lose power as democracy and modernization envelope Egypt. Morsi and the international community cannot let this loud minority to continue to play the “spoiler” role, there is too much at stake.