Egypt's World Beggary Tour 2013 Goes On

The rise and millennia-long fall of the Egyptian Empire continues apace. From the giddy heights of empire catalogued in the Bible to its present penury, Egypt has come a long way--down, that is, with no end in sight. The latest humiliation of course is being flat broke after the "Arab Spring" broke its back financially as tourism and FDI have disappeared due to the very poor law and order situation in the country. That is, the very essential thing a country needs to move forward--political order--is elusive post-Mubarak.

What is happening should be known to almost all readers by now. Losing foreign exchange and unwilling to give up on politically popular food and energy subsidies in a context where even more civil unrest would emerge if these are removed, Egypt is going around the world--begging bowl in hand--to cadge foreign exchange to tide it over. But, for how long can it last without an IMF deal which would unlock further emergency funding? This being the IPE Zone, the "international" aspect comes from its never-ending search for money to tide it over, while the political one comes from its leadership delaying much-needed changes to set it on a more sustainable path in fear of losing in the polls. In a number of simple steps, then:

1. Egypt's foreign exchange reserves have been dwindling since the Arab Spring events since the emergent lack of political order has hurt tourism and FDI;
2. The natural lender would be the IMF but the institution is exceedingly unpopular at home due to Egypt being a repeat borrower during the Mubarak years;
3. Moreover, the IMF is asking for long-desired reforms to do away with foreign exchange-sapping food and energy subsidies;
4. Knowing the political fallout from scrapping these subsidies, the Muslim Brotherhood-dominated leadership has been wary of doing so while its leadership position remains tenuous;
5. Something the Brothers are awaiting to secure their leadership is another landslide victory in parliamentary elections set to be re-run in H2 2013 (a definite date has not yet been set);
6. In the meantime, Egypt is cadging any and all countries--especially energy exporters whose pricey products have caused the country so much difficulty in the first place such as Qatar, (supposedly) Libya and so on. 

The difficulty in lending to Egypt is that, on its own, it cannot conceivably repay its recent loans. It is banking on the IMF coming in after (a) the Brotherhood presumably wins parliamentary elections. With a firmer political base and to please the IMF, it is hoped that Egypt can then (b) remove these subsidies which will almost certainly result in even wider mass riots. It is further hoped that an IMF seal of approval will lead to (c) both tourist revenues and FDI coming back. That's a lot of "ifs" and "buts"--not encouraging stuff for would-be lenders. Before the IMF comes in, though, Egypt is using its recent loans to literally waste on rather pointless government spending including the aforementioned food and energy subsidies that do nothing to put in on a more sustainable economic path. Meanwhile uncertainties abound. It seems the latest cadging target is none other than Russia:

During a meeting in a Black Sea resort city, Egypt's president and members of his government turned to Russian President Vladimir Putin and asked for a sizable loan, according to Putin aide. Egypt's Mohammed Morsi appealed to Moscow and Cairo's past ties, recalling how the former Soviet Union stepped in to finance the building of the Aswan High Dam in the 1960s after the United States abruptly withdrew from the project, according to Russian media. 

Still, the Russians' response seemed rather equivocal: We'll talk later. Egypt has been knocking on doors around the region seeking billions of dollars in loans, bond purchases and grants, trying to fill rapidly draining coffers so it can keep power stations running and bakeries churning out cheap bread for the country's millions of poor. 

The AP gets most big picture details right:

The most crucial piece of aid, a $4.8 billion loan from the International Monetary Fund, has been delayed by months of negotiations over how Egypt will reduce its massive system of subsidies, which the poor rely on for cheap fuel and food but which suck up large portions of the budget. The government has taken some limited steps, but many economists believe it is postponing extensive reforms until after parliament elections to avoid austerity measures that could hurt Morsi's majority Muslim Brotherhood party at the polls. The problem is: No date has been set for elections, and they won't be held until the fall at the earliest. That could mean months of economic limbo, with foreign lenders and donors reluctant to give unless there is a clear economic plan. Securing the IMF loan is considered key to boosting investors' confidence in Egypt and unlocking further aid.

In the meantime, the government has been seeking injections of cash. Overall, Egypt has sought or is in talks for more than $30 billion since the fall of Mubarak — the vast majority since Morsi was inaugurated in June, according to a compilation by The Associated Press of what has been announced. In an email, an official in the president's office could not confirm exact numbers but said the figure is "close to accurate." The official, who was not authorized to talk to reporters and spoke on condition of anonymity, did not give further comment on economic policy...

With revenues down, the government has been burning through its foreign currency reserves, which have fallen to just $13.4 billion, a third of the pre-uprising level. Much of that has gone to propping up the currency and importing fuel and wheat for the subsidy system. Egypt spends some $14.5 billion a year in subsidizing fuel and $4 billion in food subsidies, the bulk of which goes to bread. Nearly half of Egypt's 90 million people live near or below the poverty line of $2 a day. 

They have no pride for Brother Morsi will beg anywhere, anytime, anyhow. Such is the fate of modern-day Egypt. I'll bet the Pharaohs are turning in their graves:

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Sharia Chameleon: Egypt's Clerics Decide on IMF?

People who are not distracted by business or trade from commemorating God - Sura 24:37

There's an interesting new complication in Egypt's never-ending quest to obtain IMF loans (which we aren't even sure the IMF wants to give anyway). Islamist lawmakers from the Salafist party want to add even more difficulties to the whole process as if there weren't enough. Remember, the Salafists are even more conservative than the Muslim Brotherhood-allied Freedom and Justice Party (FJP). The main bone of contention of the Salafist Islamic hardliners, as you probably know already, will surround the IMF charging interest (riba) on these emergency loans. Strictly speaking, the Quran disavows charging of interest. The famous quotation on usury is this one:

Those who devour usury will not stand except as stands one whom the Satan by his touch has driven to madness. That is because they say, "trade is like usury", but Allah has permitted trade and has forbidden usury - Al Baqra 2:275

It is here where the controversial new Egyptian constitution rammed through the legislature by the FJP with a little help from the Salafists has thrown a further money wrench into the bailout proceedings since it mentions consulting the clerics on matters relating to sharia law:

The Salafist Nour Party says the loan agreement, seen as vital to easing a deep economic crisis, must be approved by a body of senior scholars at Al-Azhar, a religious institution whose new role is embedded in the constitution. Such a challenge could complicate the Muslim Brotherhood-led administration's effort to finalize the International Monetary Fund deal that was tentatively agreed last year but shelved following political unrest in Cairo.

Abdullah Badran, head of the Nour Party's bloc in the upper house of parliament, told Reuters the move was intended to "activate the role of the Senior Scholars' Authority in all matters pertaining to sharia (Islamic law)". He said the party was studying its legal options. The Nour Party believes the IMF agreement must be vetted by the scholars because it includes a loan on which Egypt will pay interest - something that is forbidden under Islamic law.

The constitution states that the opinion of Al-Azhar's Senior Scholars' Authority must be sought "on matters pertaining to Islamic sharia". It does not say whether their opinion is binding on government nor make clear the scope of Al-Azhar's role. The article is one of several written into the constitution by the Islamist-dominated committee that finalized the document in December, fast-tracking it into law despite the objections of liberals, leftists, feminists and Christians, among others. 

A contention that erstwhile Muslim Brotherhood stalwart President Morsi has made is that the 1.1% concessional rate charged by the IMF hardly constitutes "usury," but it's certainly possible to argue that it's a rate of interest nonetheless. In other words, the interest rate doesn't matter so much as violating the principle that no interest should be charged to begin with.

And just when you thought things could not possibly get worse for Egypt, the path to an IMF bailout may have become even more torturous.

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Islamic EconoFundamentalism: Egypt's FX Rationing

Is sound money management a normative activity? I would tend to think so since depreciation, inflation and so on tend to have widespread negative effects on the population's well-being. However, it comes as no real surprise that the Egyptian central bank has taken what are arguably steps on the road to a full-blown economic crisis, namely: (a) rapid currency devaluation and (b) foreign exchange rationing. For our dear Arabic readers, the press release is up on the Central Bank of Egypt website--an, er, exciting place to work in there ever was one.

Reuters has the pertinent details:

Egypt's central bank said it would start foreign currency auctions on Sunday to conserve reserves that have fallen to a critical level, pointing to a deepening economic crisis as President Mohamed Mursi tries to calm political turmoil. The announcement was posted on the bank's website on Saturday just two hours after Mursi used a major policy speech to declare the economy was showing signs of improvement [if this is an improvement...]

The central bank has spent more than $20 billion in foreign reserves to support the pound since a mass uprising against Hosni Mubarak in early 2011 chased away tourists and foreign investors...Violent street protests and political wrangling over the last month have prompted a rush by investors and ordinary citizens to switch their Egyptian pounds into foreign currency on concerns the government might devalue or bring in capital controls. The bank allowed the pound to weaken to an eight-year low of 6.188 to the U.S. dollar on Thursday. On Saturday it urged Egyptians to "rationalise their use" of foreign currency and not speculate against the pound.

I would like to wish our Egyptian friends a Happy New Year, but I am afraid that the conditions that have led to this state of affairs are only likely to worsen in 2013. The constitution ramrodded by the fundamentalist leadership is deeply divisive, causing many of the natives to go restless. In turn, widespread turmoil at home is hardly conducive to attracting much-needed FDI or tourists. While the new currency controls may partially be aimed at staunching capital flight, I don't think they will deter those who want to park their money in safer places alike the Dubai.

There is debate about the meaning of FX rationing so late in the game. It may mean that Egypt does not expect its purported $4.8B IMF bailout deal to be cemented by January, causing it to prepare for the worst. OTOH, it may be the Central Bank of Egypt--still de jure independent the last time I checked--signalling to the fundamentalist crew that things are getting really, really bad. Morsi mentions that Egypt's reserves have been buoyed in recent months, but that's largely down to Arab states lending it some money to tide it over until...the IMF lends it money too? One can only hope.

It's bad news all around...unless you're Morsi's spin doctor, that is.What a shining success, this Arab Spring. As I've said before, more pragmatic sorts will legitimately question if this parlous state of affairs is an improvement in any tangible sense over the Mubarak years.

1/1/2013 UPDATE: Government foreign exchange auctions have not prevented the Egyptian pound from sliding to all-time lows. Market participants can smell Egypt's desperation.

1/3/2013 UPDATE: Still sliding to a new record low of 6.42 to the US dollar.

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