Egypt Resorts to Stopgap Economic Measures in Crisis

The interim government hopes to stave off short term pain but does little to improve the country’s economic prospects.

A fruit salesman in Cairo, Egypt, April 3, 2010
A fruit salesman in Cairo, Egypt, April 3, 2010 (Matt Cottam)

Egypt’s economy is crumbling and in dire need of structural reforms. Yet its politicians are reluctant to enact them, resorting to populist measures instead to stave off unrest.

President Adli Mansour’s interim administration, which was installed by the military in July after it had deposed the elected Muslim Brotherhood leader Mohamed Morsi, is coping with fuel and food shortages and looking at a $32 billion annualized trade deficit while foreign income, from investment and tourism, has dwindled since the start of the “Arab Spring” uprising that overthrew the longtime dictator Hosni Mubarak more than two years ago.

Aid from nearby Arab Gulf states, including Saudi Arabia and the United Arab Emirates, which welcomed Morsi’s demise, can only take Egypt so far. Help from the International Monetary Fund is unlikely because the government is unwilling to pursue the sort of economic and fiscal reforms the organization in Washington recommends.

Rather than reduce fuel and food subsidies, which take up a forth of government spending, or make it easier for foreign companies to do business in Egypt, Morsi’s government raised wages for civil servants and imposed capital and price controls to keep consumer goods affordable and prevent money flowing out of the country. The result was high inflation, forcing Egyptians to turn to the black market, and a deficit that is equivalent to 11.5 percent of economic output. The Egyptian pound lost 60 percent of its value against the dollar, pricing everything but bread out of the reach of the poorer half of the population which lives on $2 per day or less. Foreign currency reserves have shrunk to be able to cover less than three months’ worth of imports.

The interim government isn’t doing much better. It renationalized two state companies that were sold off by Mubarak and revived a 1940s law that enables it to cut fruit and vegetable prices by up to 25 percent.

Prices have risen more than 30 percent since the start of this year, says the Arab nation’s central bank. A government spokesman accused sellers’ “greed” but rising transportation costs, caused in part by a suspension in train service after the military removed the Muslim Brotherhood from power in July to prevent supporters of the Islamist movement from flocking to the cities to protest, are more likely to blame.

Rising food prices were one thing that brought millions of Egyptians to the streets in early 2011 to demand Mubarak’s resignation. A lack of economic progress also undermined confidence in Morsi’s administration. It is not unreasonable for the current government to fear that if the malaise persists, it, too, will be confronted with popular unrest. But the stopgap measures it is implementing will do little to improve Egypt’s lot either in the short term or the long.