March 8, 2013 | Policy Brief

A Political Solution to an Economic Problem

March 8, 2013 | Policy Brief

A Political Solution to an Economic Problem

Two years after the uprising that toppled long-time President Hosni Mubarak, Egypt is still struggling with a revolution that seemingly won’t end. Since late November, protests and casualties have become almost a part of daily life, from Cairo and Port Said to Mansoura and Suez. The volatile environment has hammered the economy. National consensus now appears to be the only way to avert a pervasive economic recession or depression.

The Freedom and Justice Party (FJP), the political arm of the Muslim Brotherhood, has gained a monopoly on power, unleashing a nation-wide non-Islamist protest movement.  This has led to a precipitous drop in tourism and foreign investment, two of the main sources of hard currency. The country’s foreign currency reserves are dwindling, the Egyptian pound is losing value (20 percent, so far), and the prices of basic commodities and services are skyrocketing. If these trends continue, Egypt risks a new uprising by Egyptians who can’t afford their basic needs.

According to Egypt’s largest daily newspaper, Al-Ahram, the Council of Ministers’ Information Center just released a study showing that 57.5 percent of Egyptian families don’t earn enough to survive. At the heart of the crisis is the fact that the plummeting pound is leading to an increase in the price of basic commodities such as wheat, fava beans, and fuel.

In February 2011, the Mubarak regime had $35 billion in foreign reserves. Today, that amount has dwindled to barely $13 billion. The only conceivable ways to increase those reserves are tourism, foreign investment, and smart economic policies.

For a moment, it appeared that the International Monetary Fund would serve as Egypt's lifeline.  The Fund agreed to float Egypt a $4.8 billion loan. But the deal was put on hold in November when, amidst protests against Egypt's Islamist-drafted constitution, President Mohammed Morsi failed to enforce the terms of the loans, which required decreasing or removing subsidies on commodities while increasing taxes.

To be sure, American aid will arrive. And so will assistance from other Western states. But with a population of 85 million, Egypt’s economy is simply too big to be saved by a handful of friendly countries. Egypt needs a multi-national aid regime. More importantly, it needs political consensus and a government strong enough to carry out vital economic and financial reforms.

To reach that political consensus, the constitution must be modified to include the demands of the secularists, women and minorities. This will pave the way for greater inclusiveness in the decision-making process— a much needed step at both the national and local levels. Only then will there be sufficient calm in the streets to once again draw tourists and investors. And only then will the government be strong enough to tackle the issue of subsidies and taxes without sparking additional instability and chaos.

Khairi Abaza is a senior fellow at Foundation for Defense of Democracies.