Monday, December 31, 2012

Egypt Readies for Backlash Over Austerity

Egypt readies for backlash over austerity measures

By Abigail Hauslohner
Sunday, December 30, 4:59 PM

CAIRO — Egypt’s government is readying itself for the potential political fallout of impending austerity measures as it seeks to guarantee a badly needed $4.8 billion loan from the International Monetary Fund next month.

As the Egyptian pound hit a record low Sunday, Prime Minister Hesham Kandil told reporters that the loan might be the only way out of Egypt’s economic crisis.

Kandil’s comments came one day after Egypt’s central bank implemented a new system of buying and selling dollars, which it said would slow the depletion of the country’s dwindling foreign-currency reserves. Egypt is facing a rising budget deficit and mounting public frustration two years after popular demands for more jobs, economic equality and social justice led to the ouster of President Hosni Mubarak.

In a speech Saturday before the upper house of parliament, President Mohamed Morsi urged Egyptians to accept coming reforms and get on board with “stability” after a month of political unrest.

But the reforms will be no easy sell. Economists say there will be little gain without pain in the Arab world’s largest country, where about 40 percent of the population lives on less than $2 a day per person.

And many say the government is running out of time. Political turmoil since Mubarak’s overthrow has caused revenue from tourism and foreign investment to plummet. Egypt has more than halved its foreign-currency reserves to keep up with debt and budget obligations.

Egyptian officials say they are on track to sign the IMF loan by the end of January. But meeting the IMF’s expectations in the weeks ahead will be no less challenging than they were earlier this month, when preliminary plans to sign the deal were derailed by political unrest.

The government requested a delay as mass protests against a ratified constitution flared into violence.

An attempt to introduce spending cuts and tax reforms during the crisis was almost immediately shelved, underscoring the dis­order that the government’s critics, and even some of its officials, say has prevailed in the upper ranks of Egypt’s recently elected Islamist government.

Government officials said the tax increases on income and key commodities, including gas and cement, would be reintroduced in time.

“We need to explain the economic facts to the people, and we need to explain that these [measures] will spare the poor and will only affect the rich,” said Mohamed Gouda, who heads the economic committee of the Muslim Brotherhood’s Freedom and Justice Party, which advises Morsi on economic policy. “If we can convey that, then the people will cooperate with any procedures that we take.”

The IMF loan will not cover Egypt’s $21.6 billion deficit, but economists say it will open the door to more loans and give Morsi’s administration a boost of credibility in international markets.

“If we don’t get the IMF, it will discourage a lot of potential donors,” said Hazem el-Beblawi, who recently served as Egypt’s finance minister. The IMF did not respond to a request for comment Sunday.

The crisis comes at a critical time for Egyptian politics. The constitutional crisis expanded and embittered political opposition to Morsi and his Islamist allies, and opponents say they are prepared to continue their fight as the country heads into parliamentary elections two months away.

Public anger has risen alongside prices and unemployment over the past two years, and many Egyptians say the revolution’s demands have been ignored by the country’s new leadership. Rumors of an impending plunge in the pound’s value led to a rush on banks and a shortage of U.S. dollars.

Morsi’s government has been at pains to play down the crisis, blaming the dollar shortage on political tumult and rumors spread by the opposition.

In his address Saturday, Morsi urged Egyptians to avoid further political unrest and denounced rumors of looming bankruptcy.

Kandil, making the case for loans Sunday, compared the country’s budget situation to a family that has been spending well beyond its means.

Economists say the analogy is apt, but the problems, rooted in decades of corrupt authoritarian rule, will take years to address.

Mubarak cultivated a bloated bureaucracy and national subsidy system while allowing government cronies to profit off selective privatization measures during the latter years of his rule. The patronage and subsidies kept swathes of the population quiet but did not create basic safety nets for the public at large, which rebelled as inflation and unemployment grew.

“There is the need for some serious and probably painful reforms,” said Mohamed El Dahshan, a Harvard University researcher and lecturer on development economics at Cairo’s Ain Shams University. “On the other hand, you have a people that has been suffering for the past decade from a policy that has been very pro-market, without any social aspect.”

Government officials and Brotherhood economists say they have discussed ways to cushion the blow by creating a welfare database and refining the distribution of subsidies so that only the poor benefit. But officials have not presented a detailed plan and time frame.

The potential for political backlash, particularly from the middle and lower classes that economists say are likely to feel the immediate blow, has opened an opportunity for the political opposition.

Some opposition leaders have argued against the IMF loan and any associated austerity measures as policies that would invariably work against the social justice demands of Egypt’s 2011 revolution.

The last serious effort to cut bread subsidies sparked nationwide riots in 1977.

Kandil on Sunday called on Egyptians to participate in a “national dialogue” on the economic program in the coming days.

“Our options to cover this deficit are limited because it is a cumulative problem, and therefore we are trying to take fast, quick decisions,” Kandil said.

Sharaf al-Hourani and Ingy Hassieb contributed to this report.

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