On Sunday August 12th, 2012, President Morsi, The Freedom and Justice Party (FJP), and the Muslim Brotherhood (MB) consolidated their control on Egypt’s executive and legislative branches, uncontested, after the sacking of SCAF’s leadership and reversing their constitutional amendments. This ushered the real beginning of their reign over Egypt. Since then, many have assumed that they are on their way to establish long-term control of Egypt, the state. However, I would argue that this is contingent on their ability to perform economically over the next 6-12 months, and avert a broad economic crisis that would challenge their political dominance.
Two Urgent Challenges: The current government is facing numerous social, political and economic challenges; however, two economic areas standout as the most urgent, and potentially, the most disruptive: macro-economy issues, and distributional issues.
On the macro economy: first, there is a dangerously growing balance of payment deficit. We all know about the deteriorating foreign currency reserves. Over 18 months, our foreign currency reserves declined from $36 billion to $15 billion – a $21 billion loss. Some of the $21 billion went to defend the Egyptian pound and maintain its stability; others were a result of the decline in foreign direct investments (FDI) as well as revenues from tourism and exports; and a large chunk (that still needs to be identified) went to capital flight, both from foreign investors, as well as loyalists of the previous regime who transferred their wealth to safe havens in Europe and elsewhere. Today, Egypt has an unsustainable deficit in its balance of payments that can only be offset in the short term with loans and foreign currency support, as the economy regains its stability and growth.
Second, there is the growing budget deficit. Tax income has declined due to the economic slowdown; and the government is under pressure to quickly increase its spending in salaries, subsidies and social services. You can always fill in the short term gap with more debt (or printing money!), but this comes at a heavy price in terms of debt service and higher inflation. Today, it is estimated that around 40% of the government budget goes to subsidies, mostly energy subsidies. When you add the debt service (interest and principal payments) and salaries of government employees, you end up close to three quarters of the government budget, leaving very little space to implement any economic growth policy or to improve social services.
The second area is what I term “the distributional issues”. The government is facing challenges of subsidies, social services, salaries and strikes! Energy subsidies consume a huge part of the government budget, and is growing. Removing the subsidies will result in inflation in transport and food prices. Social services (healthcare, education, municipal services like garbage collection or public transportation) are all in a shameful situation and need urgent reforms, which requires quick investments as well as structural reforms. Government employees are all, rightfully, requesting adjustments to their miserable salaries, and they have discovered the strike tactics and are using them on daily basis. These distributional pressures were kept under the lid by the previous regime using coercive force by the Ministry of Interior and Central Security Forces; however, this security apparatus is much weakened after the revolution, and it is becoming less acceptable to use coercive power against legitimate economic and social demands.
The result of these two urgent economic pressures represents the toughest challenge for the new government. The need to appease the population, especially the government workers and employees; maintain prices and control inflation; trigger growth again by restarting tourism, attracting FDI, and also increasing domestic and regional investments. All of this needs to happens under many constraints that limit their maneuverability space.
As the new MB President and Government attempt to navigate these economic challenges, their maneuverability space is severely constrained by a number of factors: First, their ability to undertake unpopular measures and force them over an angry population is very limited. On the one hand, people are in a rebellious mood and are easily excited to hit the streets; on the other hand, the government’s coercive force is severely downgraded. It is unwise to undertake large unpopular programs without widely socializing them and gaining broad acceptance among the public; however, the government media apparatus that used to help popularize such measures is widely discredited and ineffective. What makes this tougher is that the MB made a choice of not cooperating with other political forces, whether the leftist labor movements or the large business interests (which were closely aligned with the previous regime).
The second limiting factor comes from the domestic political scene. The MB decided (or were pushed to?) do it alone. They formed a narrow MB government rather than going for a broad national coalition. As a result, many effective technocrats and business and labor interests and leaders were not included or refused to serve on this government. The opposition is highly critical, and is keeping tab on how the MB are delivering on their promises, which they are not and cannot, given the reality and gravity of the economic and social situation.
Additionally, if the MB are to rescue the economy, they will have to take a ton of loans, attract foreign and domestic investments, and encourage tourism. However, these three areas contradict with their rhetoric!! They were strong critics of Ganzoury and previous governments for relying on loans; they took a nationalistic tone against too much reliance on foreign investments; and they also had strong issues with beach tourism which involves western tourists consuming alcohol and laying on the beach in their bikini’s! These contradictions make them an easy target to the sensational and liberal media, and also limit their appeal to the more conservative strands among their constituents, as well as the ultra-conservative Salafi movement.
The third limiting factor is the regional and international dimension, where everyone is watching their performance carefully, and trying to understand which way they will sway. The MB and its politicians have been trying to speak from both sides of their mouth! The latest US movie fiasco is a good example. They used a conciliatory rhetoric in their international media appearances, while using a populist rhetoric with their local base. Once that was obvious (in a funny Twitter exchange between the MB and US Embassy in Cairo), they tried to take a more conciliatory approach and absorb the anger of their base and the public through organized and controlled activities, rallies, and the like. The good news is their final pragmatist choice, and their ability to quickly evolve and adapt; however, their initial response shows the dichotomy that they are facing.
So what does all this mean?
First, the MB President and Government must perform, economically. If they don’t, they risk their position in power and much of their political gains. Unlike many who argue that their control over Egypt is a fait accompli, I would argue that it is contingent on their ability to perform economically in the next 6-12 months. Otherwise, we WILL (not may) witness additional rounds of turbulence that will involve broad sectors of the society, seeking socio-economic, rather than political agendas. The only way to avert a large crisis is to involve other forces in the society in governing (and accountability) – and acting as a responsible leader in a time of crisis.
The current actions of the MB regime run contrary to this. First, their economic policies are identical to what Gamal Mubarak and his regime were implementing in the last decade! They are pursuing new-liberal economic policy, with complete disregard to the social and labor movements. What makes it worse, is that they are doing this alone, while alienating the rest of the political forces (fragmented as they are, they are still influential). They are also doing this while trying to consolidate their political power through partisan political appointments for most major positions in the national government and governorates, which is acting as another destabilizing factor.
So where would the MB take it from there? As we speak, they will have to make three major strategic choices, with very limited time to plan or reflect. First, on the domestic political side, they need to decide it they will continue to do it alone, rather than forging a broad coalition that includes other more liberal forces, especially as the Salafi’s continue to challenge them from the ultra-conservative side. Second, on the international arena, they need to decide on their relationship with the West at large, and with the US specifically. Would they continue the alliance that was forged by President Sadat and continued by Mubarak (albeit from a much weaker position of followership rather than partnership). This will decide on the nature of their relationship with other key players in the region like Saudi Arabia and Israel. Their other option is to seek a more independent or even confrontational relationship with the US, and try to compensate with stronger ties with Russia and China, which would constitute a very risky drift in such a turbulent time, and would exacerbate Egypt’s economic crisis. Third, they need to decide on their domestic economic agenda. So far, they are implementing a new-liberal economic policy that is identical to Gamal Mubarak and Youssef Boutros Ghali. They need to decide if they will remain on this side, or if they will shift to the center-left to accommodate labor and social demands, both on the policy level and the rhetorical level. What choices will they make will be obvious in the next weeks.
Thomas Friedman had a very insightful quote, when asked if Egypt may evolve into a theocracy like Iran or Saudi Arabia or follow the Turkish path. He said, “Iran and Saudi Arabia are political Islam with oil, Turkey and Egypt are political Islam without oil.” The economic pressures and constraints that the new regime is facing will limit and moderate its ability to coopt the state and take it into a full-fledged theocracy. It will put pressure on the MB to cooperate with other forces in the society, and limits their ability to undertake a dramatic socially conservative agenda. These economic pressures will also force the MB (and eventually, the Salafi movement) to moderate their political agenda, especially on the social dimension, and will help their evolution into a normal conservative party, not unlike the Republican Party in the US (more on this in a following blog!).
My prediction is that they will maintain the long-term alliance with the West and the US, albeit with a more independent rhetoric. They will continue to try to do it alone until the next parliamentary elections, where the results will give a clear indication if the public mood has shifted against them enough to justify creating a broad coalition, or if they still maintain enough of a plurality to govern alone. They will also maintain their neo-liberal pro-business economic policies, while displaying a more social rhetoric. Eventually, the MB will evolve into a right-of-center Party not unlike the US Republican Party.
Having said that, there is one major risk that we may face (a black swan scenario). As the social and economic pressures on the MB mounts, and more conservative elements within the organization refuse to give political concessions and include other forces in the society, the MB regime may resort to radical tactics to cement its control. This includes creating a large scale crisis that would give them stronger control, help them silence opposition, and justify the use of violence. A typical scenario would be by igniting a military conflict. This is exactly the scenario that Iran’s mulla’s pursued to consolidate their power and eliminate the other more political movements after the Iranian revolution of 1979. The war with Iraq gave them a chance to increase the level of polarization in the country, and to use forces of nationalism and patriotism to create a sense of national unity and urgency. This remains an unlikely, yet possible scenario. It is unlikely because the MB understand well the risks of being “the government that took Egypt to war” and also the lack of readiness of the military for any major action.
To end on a positive note, I would offer three conclusions: (i) the MB regime needs to perform, economically, otherwise, their reign over Egypt will be short lived; (ii) It is not a fait accompli that they have taken over Egypt, as a state, for the long term; and (iii) the economic pressures that they are currently facing will have moderating and constraining effect over their short term actions.
Amin Elmasry. 21 September 2012.