Egyptian economy in shambles

Egypt's economy is going from bad to worse. Unemployment is up, the budget deficit is growing and the value of the Egyptian pound has sunk. Millions of poor Egyptians are dependent on subsidized bread sold for 1 cent per loaf.
It’s been more than two years since massive public protests unseated long-time autocrat Hosni Mubarak. Elections resulted in the victory of Muhammad Mursi, who has been criticized by many in the country for not going far enough with democratic reforms.
The lack of security has devastated the Egyptian economy, which was already teetering. Tourism, responsible for about 10 percent of the country’s GDP, has plummeted, and foreign investors have pulled out. A $ 4.8 billion loan from the International Monetary Fund (IMF) was supposed to be a vote of confidence in Egypt’s economy and bring foreign investment back.
But that loan has been repeatedly delayed. Now Mursi is trying to push Egypt to meet some of the conditions the IMF is demanding such as increasing taxes. The government this week announced that companies and wealthy Egyptians will pay more taxes — increasing the rate from 20 to 25 percent. IMF officials recently visited Egypt and laid out a series of conditions for the loan.
A joint statement issued after that meeting stated that the Egyptian government is committed to economic reforms “addressing its economic and financial challenges aimed at restoring sustained and socially balanced growth.”
“What Egypt needs are human resources and skills suited to the modern needs of the economy,” IMF executive director for the Arab region Shaakour Shaalan, and an Egyptian himself, said after the visit. Shaalan said Egypt would receive the IMF $ 4.8 billion loan in multiple phases, starting with a first injection of $2.2 billion. “Usually the money is disbursed every three months,” Shaalan said.
Global leaders will also be carefully watching the IMF’s assessment of Egypt’s economic position before deciding on investment of their own there. “International investors will regain their confidence in the Egyptian economy and will eventually start to pump in money,” Shaalan said.
Egyptian parliamentary elections will be held in October. Mursi is hesitant to adopt some of the reforms demanded by the IMF, fearing they could jeopardize already deteriorating support for the government. One demand is to cut government subsidies on gasoline and cooking fuel. Previous efforts to do so sparked riots in Egypt and the government quickly back-pedaled.
“Speaking to members of the IMF technical team that just returned from Cairo, we were struck by the mismatch between the fund's statements on Egypt and official views aired by Egyptian policymakers,” New York-based economic analyst Mohamed Darwazah, said.
“One source described it as pure doubletalk, suggesting that the lack of transparency over fiscal reforms will only anger the Muslim Brotherhood’s biggest critics. At a minimum, subsidy reduction measures, and not just promises, must be in place before a “stand-By arrangement can be signed.” Darwazah said the Egyptian government will release a revised draft budget for the fiscal year 2013 and 2914, including “new cuts to energy subsidies and public sector salaries.”
Although the IMF sees these revised targets as accurate, implementation will remain risky. There is a growing fear in Cairo that any new reforms that reduce families’ disposal income could trigger more social upheaval.
“I am expecting a civil war next, which will be led by the hungry Egyptians. Poor people find it difficult to buy food at escalating prices now,” retired general Ahmed Elsheikh said.
Ahmed Shereba, Egyptian sales director for WireCo, said the middle class will suffer as well.
“I was OK living in Egypt for the past five years, but now after the increase in food prices, I'm thinking a lot about leaving — it’s eating up a lot from my salary.”
The international community has already pledged foreign aid to Egypt. The small, oil-rich Qatar has promised $ 3 billion, Libya says it will kick in $ 2 billion and Turkey $ 1 billion to allow Egypt to make it through the next few months. On one hand, this buys the government some time to institute economic reform. At the same time, economists say there is a risk that these pledges might allow the government to delay reforms. Darwazah added, “According to leaked details of the Egyptian draft budget for 2013-2014 the budget deficit will come in at around 9.5 percent.”
That is a substantial reduction this year when the deficit is expected to surpass 12 percent.
The draft budget includes piecemeal measures including some sales tax on steel, cement, mobile phone services, cigarettes and alcoholic beverages. There is also a new Valued Added Tax (VAT) which is slated go into effect in the first quarter of 2014.