Egypt’s new president has a window of opportunity to pull the economy from the brink of disaster, but he will have to chart a careful path to convince a host of deeply sceptical players at home and abroad that his is a government they can trust.
After winning the country’s first freely contested election for head of state, the Muslim Brotherhood’s Mohamed Mursi, 60, brings with him strongly free-market policies that would delight investors were it not for Egypt’s daunting economic challenges and fraught politics.
He also brings a detailed economic plan meticulously drawn up over the course of a year, supported by the Brotherhood’s well organised political machine.
However, to spur growth and win over investors to trust Egypt for the long term, Mursi will have to restore stability to a country rocked by sometimes violent political turmoil in the 16 months since an uprising forced Hosni Mubarak from power.
To do this, he will have to build up a working relationship with generals who stripped the presidency of many of its powers in the week before the result of the presidential election was announced on Sunday.
He also faces the prospect of a new constitution to replace the current interim constitution which is vague on the full extent of presidential powers.
But analysts say the popular mandate handed to Mursi in the election makes it harder for political opponents to obstruct reforms he initiates.
“There is definitely a window of opportunity. I think there is goodwill out there because of the nature of the result, because it was a clear result,” said one Western diplomat.
“If we get a cabinet that is broad based and brings in good economic expertise as well as people who have credibility outside Egypt, then … it’s probably quite good news in the short term,” the diplomat said.
ECONOMY ON THE BRINK
Egypt’s uprising hammered the economy by chasing away tourists and foreign investors and prompting government employees to strike for higher wages. The economy contracted by 4.3 percent in the first quarter of 2011 and stagnated in the following three quarters.
The Brotherhood’s economic plan relies on private Egyptian and foreign investors and the group has pledged to move fast to negotiate a loan from the International Monetary Fund (IMF) once it forms a government.
“We trust Egypt but, with no security, investors will flee. Change is very hard and bumpy,” said Adnan Ahmed Yousef, president of the Union of Arab Banks and chief executive of Bahrain-based Albaraka Banking Group.
An army-backed interim government kept the economy on the rails since Mubarak’s overthrow through a series of short-term measures that have brought the country dangerously close to fiscal collapse.
These include financing a burgeoning budget deficit by selling domestic treasury bills and bonds at steadily rising interest rates and shortening maturities.
The pile of local currency debt has built up to well over 600 billion Egyptian pounds ($99 billion) from about 500 billion pounds just before the uprising.
The borrowing has stretched the lending ability of local banks, causing the average yield on 1-year T-bills to surge to almost 16 percent, its highest in more than a decade, from 10.4 percent in January 2011.
The interim government borrowed an additional $6 billion in T-bills denominated in U.S. dollars that the new government, strapped for foreign currency, will have to repay or roll over when the first begin maturing in November.
The interim government has also drawn down foreign reserves by more than half, to about $15.5 billion, to support the currency, partly out of fear that an increase in the cost of imported goods would fuel inflation and political discontent.
The dangerously low level of reserves has left the country with less than three months of import coverage.
Brotherhood officials have said that once a new government is in place they plan to pick up from the previous government’s stop-start negotiations for a $3.2 billion IMF loan.
An IMF agreement could bring further billions in aid pledged by Arab and international donors – money that Mursi’s election could help unlock.
The IMF has made any loan conditional on a credible programme to get the country’s finances under control, that the programme have broad domestic political support and that Egypt line up additional financing from foreign donors.
This could take months to pull together but, with so much short-term debt coming due in the second half of the year, the clock is ticking.
“To a large extent, it depends on who they’ve got, who they’ll bring into the cabinet, who they’ll bring in as finance minister. It will take a little bit of time to get clarity,” the diplomat said.
“There is still a certain lack of clarity over the distribution of powers, and the risk – you don’t have parliament to offer endorsement, you have the military involved in the economy.”
Since the uprising, the Brotherhood has been putting together a detailed economic and social programme called al-Nahda (The Renaissance).
The programme aims to shore up the new administration’s support among Egyptians though a 100-day campaign in five areas that yield immediate social benefits.
These include rapid measures to get the country’s notoriously choked traffic flowing more efficiently, restore security and clean up piles of rubbish that have long blighted Egypt’s streets.
Other measures would ensure that bottlenecks disrupting availability of subsidised bread, petrol and butane cooking gas are removed. With energy subsidies eating up as much as a quarter of the state budget, this could prove expensive.
The Brotherhood says it will gradually decrease subsidies on energy products used by industry.
It has said it will target subsidies on products such as gasoline and diesel so that they are directed to the poor.
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