January 16, 2013
Six months into his presidency, Mohammed
Morsi is about to make a public policy decision similar to one that ultimately
helped to bring about his predecessor’s downfall. Out of economic necessity,
Morsi will likely sign a deal with the International Monetary Fund. But the
incoming loan will be accompanied by a set of fiscal conditionality that could
make the already precarious president and his Freedom and Justice Party even
less popular. Unless the Muslim Brotherhood manages to find a religious,
privatized coping mechanism.
In 1991, under pressure from massive
fiscal and current account deficits, then-President Hosni Mubarak signed on to
an IMF loan and IMF-sponsored structural adjustment program. The following
years saw the economy open up to foreign investment, the removal of tariffs
that protected small farmers, and the widespread privatization of publicly held
enterprises, often in corrupt deals. At the same time, the government cut the
top tax rate and slashed spending on subsidies while social spending remained
largely stagnant. The reforms contributed to consistently impressive GDP
growth, with the IMF singing the Mubarak regime’s praises for creating a
“better business climate.” Many Egyptians, meanwhile, noticed that their
situation wasn’t improving. Between 2000 and 2005 alone, when GDP growth
averaged around 5 percent, the percentage of Egyptians living in absolute
poverty rose from 16.7 percent to 19.6 percent. The inequality exacerbated by
the 1990s; structural adjustment helped provide the impetus for the revolution.
While activists and politicians have
good reason to campaign against the IMF based on Egypt’s previous experiences
with structural adjustment, an infusion of foreign currency is at this point needed
to prevent economic catastrophe. Foreign direct investment has shrunk by around
75 percent since January 25, 2011, and tourism revenues declined by around 30
percent. Egypt is facing a full-on balance of payments crisis. Almost 60
percent of the Central Bank’s foreign reserves have been spent trying to prop
up the pound in the last two years—and with limited success. Late last month,
the Central Bank moved to an auction system to slow the devaluation of the
pound, which dropped by more than 6 percent since the start of the revolution.
If Egypt is to avoid a situation in
which it can no longer pay for crucial imports—including staple commodities
like wheat and oil—money has to come in from outside. Since the summer of 2011,
a loan from the IMF has been under negotiation in fits and starts. The
agreement was ready to be inked in November when political instability due to
Morsi’s constitutional declaration forced it to be postponed. This month might
finally be the one when it goes through, though. Minister of Planning and
International Cooperation Ashraf Al-Araby told Al-Arabiya last week the deal
would be finalized before parliamentary elections in February. The $4.8 billion
IMF loan—with a fairly generous 1.06 percent interest rate—will help clear the
way for an infusion of other loans and grants that could stop the pound’s
precipitous depreciation.
But as it often does, the IMF is
requiring the debtor to get its fiscal house in order, in this case requiring
Morsi’s government to rein in the budget deficit that currently stands at
almost 10 percent of GDP. In December, Morsi offered an idea of what IMF-backed
austerity could look like when he used his temporary legislative powers to
introduce a raft of changes to the tax code, including steep tax hikes on
cigarettes, cooking oil and other basic goods in addition to raising income
taxes on high earners. Another part of the austerity plan involves cutting the
energy subsidies that are widely viewed as ineffectively targeted but crucial
for many poor Egyptians. Further budgetary adjustments could lay down the road,
though the military budget, which equals about 2 percent of GDP will likely go
untouched.
The subsidy cuts and tax code changes
will inevitably lead to higher prices. Coupled with an increasing costs of
imports due to the devaluing currency—in particular wheat, around 50 percent of
which comes from abroad—poor Egyptians will once again feel the pain of
adjustment. The political consequences of this could be catastrophic for Morsi.
In 1977, President Anwar Sadat cut subsidies on bread, rice, sugar and other
staples at the urging of the IMF. That move triggered riots across the country
that left scores dead and hundreds injured and were only quashed once the army
was deployed on the streets—and the subsidy cuts were reversed. With, to put it
mildly, a vibrant culture of street protests since the start of the revolution
and many Egyptians already opposed to Morsi’s presidency (as evidenced by the
major protests at the presidential palace in November), a severe economic shock
could undermine the little credibility that Morsi and the Brotherhood have with
the general public, maybe even leading to the so-called “revolution of the
hungry.”
Or maybe not. For decades the Muslim
Brotherhood in Egypt built its popularity on its ability to provide social
services where the state failed. Brotherhood-run hospitals provided higher
quality medical care at affordable prices than was available in shoddy,
ill-equipped and underfunded government-run hospitals. Special food markets
sold meat and staple goods at low prices subsidized by Brotherhood donations.
These provisions helped the Brotherhood recruit members and gain good will
among Egypt’s impoverished majority. The Freedom and Justice Party’s good
fortune in the three rounds of elections so far—more than 30 percent of last
year’s parliamentary election, a victory for Morsi in the presidential
election, a 60 percent approval of the Brotherhood-backed constitution—may have
resulted partially from the Brotherhood’s years of charitable works.
Muslim Brotherhood charities could
potentially help offset the social costs of economic restructuring and maintain
some positive sentiment for Morsi, the Freedom and Justice Party and the
Brotherhood in the wake of IMF-backed austerity. Goods sold at discount
Brotherhood-sponsored markets could help compensate for the rise in prices for
some poor people, for example. Why would the ruling party rely on a
non-governmental social movement to deal with effects of public policy? It may
sound counterintuitive but it is in some ways consistent with how the
Brotherhood has operated so far, as when Muslim Brotherhood members attacked,
and violently interrogated
protesters outside the presidential palace in November, acting as a parallel
security force.
Such a policy is, moreover, consistent
with the Muslim Brotherhood’s ideological vision. The group’s leaders have made
clear from early on that they support a free-market economy for Egypt with a
more limited role for the state. In meetings with foreign governments and
foreign investors, Brotherhood leaders have repeatedly reiterated their
commitment to the free market. At the same time, some Brotherhood members have
floated the idea of making zakat, or
Islamic alms giving, legally compulsory. (A greater reliance on private
charities is not uncommon for religious economic conservatives. George W.
Bush’s administration promoted the growth of “faith-based initiatives.”) The Brotherhood’s left-wing opponents,
such as Nasserist politician Hamdeen Sabahi, have a radically different vision
for Egypt’s social welfare, one in which the state—not the mosque—is
responsible for guaranteeing basic economic security. This disparity between
the left and the Muslim Brothers underscores that the divisions between their
views on economics and religion are not coincidental.
After a revolution demanding bread,
freedom and social justice, severe austerity will be a challenging sell, no
matter how much religious charities try to mitigate the effects. How the
pound’s devaluation, the IMF loan, and the austerity program will play out
remains completely unknown. As has been the case in all of the political
situations in Egypt in the past two years, the political winds are constantly
shifting. The current economic situation is a dire one and Morsi and the
Brotherhood will undoubtedly be looking for whatever support they can muster
it.
Max
Strasser is the former news editor of the Egypt Independent. His articles have appeared in Foreign
Policy, the New Statesman, the Nation and elsewhere.