Despite the euphoria following the ouster of Egypt’s first democratically elected president, still tough days lie ahead. The short honey money, if it is there, will put to test two key issues of how to agree on economic measures that would at least keep the country afloat in the short-term and pave the way for a political stability seen as crucial to put a foundation for the country’s future.
A good signal of this euphoria was Egypt’s stock market surge last Thursday when it closed 7.3 percent, its biggest jump in a year and with many companies crossing the 10 percent maximum increase allowed.
However, this signal did not conceal the structural problems facing the economic situation and fueled by political turmoil.
For instance, Bank of America Merrill Lynch estimated that over the coming 18 months, Egypt needs $ 33 billion in gross finance and that there is only a tight room of six months before external position tightens.
A day before Muhammad Mursi’s ouster, officials announced that Egypt is tapping the international wheat market after staying out since February, the longest for a country that is regarded as one of top wheat importers in the world.
A total of 3.6 million tons are expected to be shipped that can meet the country’s need up to November, which will bring total wheat imports to nine million tons, an increase of 200,000 tons over last year’s purchase.
Egypt used to buy on average up to 10 million tons during the reign of former President Hosni Mubarak.
The ability to finance wheat and other imports is important for Egypt. This need brings more pressure on it to conclude the vital agreement with the International Monetary Fund (IMF).
That deal was originally mooted back more than three years ago during Mubarak’s regime and was expected to top $ 4.8 billion.
The ongoing talks on the IMF deal reflect the strong relation between politics and economy as it centered on two main issues of whether there is an internationally recognized government in Cairo and on what terms the deal will be concluded particularly in the two areas of raising taxes and slashing some subsidies mainly fuel.
The IMF started to drag its feet when following the overthrowing of Mubarak by the military council, talks resumed following elections to the extent that back in April the then Prime Minister Hesham Kandil was so optimistic that he expected a deal to be concluded within two weeks.
Part of that optimism was attributed mainly to a general understanding to cut on fuel subsidy by more than 20 percent through applying a smart card that allows consumers to get some of their needs from the subsidized fuel, while the rest had to pay market price.
If that arrangement was carried out, it was estimated to save the country more than $ 4 billion a year.
Also, it was expected that a deal on raising some taxes could be reached.
The two points of increasing taxes and slashing some fuel subsidy was seen crucial to guarantee the loan. And following the dramatic political developments, the deal seems to be put on hold awaiting the outcome of developments on two fronts domestically and internationally.
The first relates to the formation of a new government in Egypt and its economic team and whether it will endorse progress in talks with IMF and be able to forge ahead to sign a deal that needs a political will from the leadership and willingness from the people to pay the needed price.
More important, the IMF needs to be sure the government in place enjoys an international recognition.
The ongoing debate on how to describe what happened last week and whether it is a coup or a popular revolution supported by the military underpins such problem.
The Obama administration was quite careful not to use the word coup in describing what actually happened, otherwise an automatic legal measure will be triggered that will freeze an estimated $ 1.5 billion annual aid to Egypt. It was noticeable in a picture released by the White House showing President Obama chairing a meeting on how to handle the situation in Egypt.
Among those attending, Attorney General Eric Holder, now a typical figure in such meetings, given the legal implication of calling the ouster of Mursi a coup, his presence seems justified.
And that is the significance of the IMF loan as it opens the way for more than $ 9 billion in fresh loans from other sources, but all wait for concluding the IMF deal.
Moreover, the question mark still hangs on whether direct aid will continue to flow from countries such as Qatar and Libya as happened before during Mursi’s government.
Yet the bottom line remains is whether the new government backed by the military will be able to conclude a national reconciliation process that provides a conducive environment to tackle the mounting economic problems.
Egypt: Euphoria and reality
