Cairo Impasse Raises Economic Alarms

The extended standoff between President Mohammed Morsi and secular-leaning protesters is heaping new uncertainty on Egypt’s fragile economy and raising alarm from big international donors, just as businessmen and investors were seeing glimmers of hope.

Both sides raised the stakes Wednesday in a dispute sparked last week when the president issued a decree granting him almost absolute power over Egypt’s nascent government.

Mr. Morsi’s Muslim Brotherhood and like-minded Islamist politicians called for protests on Saturday in Cairo’s Tahrir Square, a departure from their decision to cancel a march earlier this week to keep from stoking violence. Anti-Morsi protesters already occupy Tahrir by the thousands, and liberal forces opposed to the president have scheduled a second march this week to fall on Friday.

Egypt’s two highest appeals courts joined a labor strike meant to protest Mr. Morsi’s expanded political power, Egypt’s state news agency reported. Some senior judges had met Monday with Mr. Morsi to seek clarification on the decree that was meant to prevent judges from disbanding an Islamist-dominated constitutional drafting committee. The judges’ fresh opposition amounts to a slap in the face for the embattled president.

Meanwhile, the head of the assembly tasked with drafting the constitution called on members to vote on the completed constitution by Thursday—racing to finish the document before the weekend, when the Supreme Court hears the case on the assembly’s constitutionality. Judge Hossam El Gheriany, the assembly’s leader, told members that accelerating the constitution’s drafting was the smoothest way to resolve the messy conflict dividing the nation.

He asked liberal assembly members—more than 20 of whom had left the 100-member assembly to protest its domination by Islamists—to return to vote on a charter that has been in the works for about five months. The president will choose when to put the document to a public referendum.

“If you are upset by [Morsi’s] decree, nothing will stop it except a new constitution issued immediately,” he said.

Egypt’s impasse has all but snuffed out what had been a light at the end of its dark economic tunnel, casting doubt on recent deals for international aid, foreign investment and a crucial $4.8 billion loan from the International Monetary Fund.

Any economic shift could still scuttle last week’s memorandum of understanding with the IMF, a fund spokeswoman warned Tuesday. “Consideration of the agreement by the IMF Executive Board will require that there is no major change in the economic outlook and implementation plans,” said spokeswoman Wafa Amr.

From the perspective of international investors, Mr. Morsi appeared to be saying all the right things since his inauguration at the end of June. He traveled the world with a team of businessmen to attract investment, securing billions in assistance from Arab, European and the U.S. governments. But following his decree a week ago, and the furious response from many Egyptians, Egypt’s EGX30 stock index lost 11.4%, including a 4.6% drop on Wednesday.

“All new investments in Egypt are frozen until the political and security situation stabilizes,” said Hussein Sabbour, chairman of the Egyptian Businessmen Association, a group that represents the country’s top 1,000 industrialists and businessmen. “There is a sense that the situation is out of control all over the country.”

At least three people have been killed and hundreds wounded in violence since the weekend. Activists remained camped out in central Cairo’s Tahrir Square on Wednesday, one day after tens of thousands of Mr. Morsi’s opponents rallied to protest Mr. Morsi’s decree.

Near Tahrir Square, riot police stepped up efforts to put down a separate uprising of young protesters that has run for the past 10 days, predating Mr. Morsi’s decree. Protesters angry over violence by Egypt’s security apparatus threw rocks and gasoline bombs at riot police, who hit back with rocks and gas. The battle took place within view of one of Cairo’s central business hotels, where the entrance was partially boarded up and guards asked those leaving the building to wear protective masks.

Hamdeen Sabahi, a former presidential candidate now part of a broad secular and liberal front launched last week to oppose Mr. Morsi’s decree, said there would be no dialogue until Mr. Morsi rescinds the decree. Failing that, he said, the front could consider escalating the standoff next week with measures like civil disobedience.

“We will insist on our right in a democratic country,” he said. “There’s no president above the people and the state.”

The street-level restlessness may further cow policy makers from making the tough economic decisions that stand to save Egypt’s economy.

Egypt needs to withdraw fuel subsidies that are seen as wasteful and misdirected, and already take up more than one-fourth of the country’s budget outlay. But politicians worry the country’s newly defiant population will resist even a modest price increase on commodities.

Mr. Morsi’s decree may also undermine a €5 billion ($6.3 billion) support package that Egypt signed with the European Union this month, a high-level European official said in an interview published Monday. “If Morsi chooses the road of dictatorship, then the funds pumped into the Egyptian market will be less,” Elmar Brok, the head of the EU Parliament’s foreign affairs committee, told a German newspaper.

Egypt is in desperate need of such assistance. The fraught transition to democracy that followed Mr. Mubarak’s downfall early last year frightened off foreign investors and tourists, pushing the country to the brink of a balance of payments crisis and putting considerable downward pressure on the Egyptian pound.

To keep the pound’s value from plummeting, the country’s Central Bank has bled through nearly two-thirds of the $36 billion in foreign currency reserves it held in December 2010.

The pound was trading at about 6.11 to the dollar on Wednesday, near to its eight-year low. The country’s foreign-currency reserves stood at $15.484 billion at the end of October—a hair above the three months of import cover the IMF recommends that countries maintain.

While many observers expect foreign governments and international financial institutions such as the IMF to eventually pony up the assistance Egypt desperately needs, the chorus of concern doesn’t bode well for foreign investment that could stand to reverse Egypt’s downward plunge.

“The fact that there’s even a possibility that the IMF might hold the funding might in turn restrict capital flows from businesses and foreign investors into Egypt,” said William Jackson, an emerging markets economist at Capital Economics, a London-based research consultancy. “The government’s in quite a difficult position.”

WSJ