By Paolo von Schirach
June 6, 2011
WASHINGTON – If you thought that the US had a mighty fiscal crisis and that nothing could be worse than Greece, once more with begging bowl in hand, barely a year after a gigantic European Central Bank (ECB) and International Monetary Fund (IMF) bail out, think again. Egypt should come to mind as the looming Mediterranean Basin basket case. It is the largest and now semi-bankrupt non-oil Arab economy. Remarkably, this country of 80 million managed to get rid of octogenarian president-for-life-or-so-we-thought Hosni Mubarak in an almost peaceful fashion. This was a great success, considering the ongoing bloodshed in Yemen, Syria and, of course, Libya, with no victory in sight for those who want change.
Egypt revolution about economics as much politics
But the Egyptian uprising was at least equally a revolt of the unemployed and the marginalized demanding a better deal as it was a rebellion against autocracy and lack of accountability. The provisional government tried to assuage the economic tensions by giving lots of stuff away. Egypt’s almost 6 million civil servants and other public workers got a 20% wage increase, according to a The Financial Times story. Minimum wage has been increased and fuel subsidies have been extended. All these laudable attempts to buy social peace, however, because of the political upheaval, occurred as state revenue fell by half and exports also fell by half.
Spending up, revenue down
So, in Cairo we have now a really nasty combination of increased expenditures to keep a modicum of tranquillity and an incredible revenue shortfall. The public deficit will climb from almost 9% of GDP to about 11% next year. This is clearly unsustainable for an already fragile economy. To shore things up a bit, the Egyptian government just got a $ 3 billion loan from the IMF. But this is just a band aid, some budget support that will be be spent in no time.
How to get the economy moving
The hard part will be to get the economy moving again and to recreate a sense of confidence among foreigners, so that they will start coming to Egypt again, this way fueling a substantial hospitality industry that provides employment and much needed revenue.
European Union and G-8 countries to the rescue
French Foreign Minister Alain Juppe’, speaking in Washington at the Brookings Institution about the prospects for the Arab Spring, indicated that the EU has plans to shore up the tattered economies of the Arab countries just transitioning into what we hope will be democracy. Juppe’ recognised that, if the economies of Tunisia and Egypt fail, it will be chaos and consequently the prospects for democracy would be very dim.
He also added that the G-8 countries pledged a fresh fund amounting to $ 20 billion for Egypt and Tunisia. But he admitted that pledges are one thing, spending on a good plan is quite another. Can the Egyptians come up with a good economic revitalization strategy in which precious foreign assistance will play a major role? Let’s hope so.
Egypt is “too big to fail”
Very much like Greece, Egypt cannot make it on its own, this much is clear. Greece is lucky (or so we think) to be inside the European Union and thus apparently “too big to fail”. Egypt is also “too big to fail”; but for entirely different reasons. Because it is in many respects the center of gravity of the much of the Arab world. Still, its successful economic rescue, right in the middle of this delicate transition to some kind of democracy, cannot be taken for granted.