Egypt’s new president, Mohamed Morsi, in recent weeks has not only moved to consolidate political control by forcing out the country’s military leaders and increasing the power of the presidential office; he is also beginning to come to grips with Egypt’s troubled economy. Last week, Egypt sought a $4.8 billion loan from the International Monetary Fund (IMF) —a significant increase over the $3.2 billion that it was originally pursuing. The loan has been an off-and-on possibility for Egypt for over a year; political uncertainty and domestic opposition have hindered negotiations in the past.
This loan is critical because Egypt’s foreign currency reserves are at low levels—a recurring theme in Egypt’s economic predicament over the past months. Foreign reserves have allowed Egypt to bolster its currency to avoid devaluation, a tactic that it cannot keep using indefinitely under the current situation. Last week, Egypt’s finance minister suggested that Egypt would not devalue its currency, but other sources think differently. For instance, the chief investment officer of Silk Invest, a fund invested in Egypt, told the Chicago Tribune that “Although a further (currency) depreciation is on the cards, a loan will help shore up the pound against a worse outcome.” Foreign investors, convinced that a devaluation is inevitable, have been sitting on the sidelines, depriving the country of much needed investment.
As I wrote in May, when Egypt was working on a previous iteration of the IMF deal, an IMF loan could also play an important role in bringing about further economic support from international lenders. Ahram recently reported on the discrepancy between aid pledged to Egypt and aid actually received: although some donor aid has come through, the fate of other aid seems far from certain. The UAE, for instance, pledged $3 billion in October that has yet to be seen. Remarking to the AP on the importance of the IMF meeting, Prime Minister Hesham Kandil said that it “gives a positive message to Egypt and the whole world that Egypt is stabilizing and that the economy is heading to recovery.”
In the same vein as his government’s efforts to create greater macroeconomic stability, President Morsi has also vocally supported tourism, promoting the country as a secure and welcoming destination for visitors. In 2011, Egypt’s tourism revenues declined by 30 percent, and these revenues are slow to bounce back.
The Muslim Brotherhood knows that its future political prospects depend on its ability to deliver economically. Ironically, the Muslim Brotherhood’s best hope for Egypt’s economy is to follow a set of policies similar to the ones that Hosni Mubarak pursued. As I wrote in a February 2011 Council on Foreign Relations Expert Brief, starting in 2004, Mubarak and his economic “dream team” pursued economic liberalization policies and made it easier to do business in Egypt. These policies led to strong growth before the financial crisis with peak growth reaching 8 percent. Egypt was often discussed by international investors as among the next group of emerging market economies after the BRICs to watch. Nevertheless, corruption was rife; the gains of Mubarak’s policies were too concentrated around a small group of his cronies and did too little to improve the average Egyptian’s quality of life. Figuring out how to deliver strong growth, distribute the gains more equally, and make a dent in the country’s high poverty levels must be the Morsi government’s priority.