Recent violence in Cairo and other parts of Egypt sparked serious concerns about the direction of the country and the intentions of the Supreme Council of the Armed Forces. Not only did the lethal action against unarmed demonstrators shift attention away from the electoral process and the political transition, it further delays prospects for a recovery of Egypt’s rapidly deteriorating economy.
Egypt’s economy may face a severe crisis due to persistent street protests, strikes, capital flight, rising inflation, increased food prices and unemployment. Tourism has tanked, factories have shut their doors, and anyone with a job is clamoring for higher wages. The country has been hemorrhaging foreign reserves, and Egypt may run out of dollars within months.
Mahmoud Nasr, a senior army financial official, estimated that Egypt’s dollar reserves would plummet by one-third by the end of January – reaching a paltry $15 billion. An International Monetary Fund official recently estimated that Egypt would likely run out of cash in 2-3 months, which could prompt panic, further devaluation of the Egyptian pound, and massive inflation. This cash flow problem amplifies underlying distortions that will only be resolved by significant fiscal reform and the revamping of subsidy policies.
Buoyed by promises from Gulf countries of financial assistance, Egypt shunned loans offered by the IMF and the World Bank last June because – according to Planning Ministry officials – they did not want to add additional debt burden and because conditions were “incompatible with Egypt’s national interest.” But as funds from the Gulf have not been forthcoming, Egypt will likely return to these financial institutions to renegotiate aid packages.
This may help stem an acute crisis, but only as a stopgap measure with short-term benefits. What is needed is a long-term strategy – one resuscitating the Egyptian economy in a sustainable and growth-oriented way, which will not emerge from Gulf cash transfers, loans from international lending institutions, or U.S. Congressional aid. The only solution is to unleash the dynamism, ingenuity and entrepreneurial spirit of Egypt’s private sector – internationally, regionally and domestically – to revive the country’s economy.
Economic failure on Egypt’s path forward would mean a rise in radicalism, security threats, disruption of energy flows and migration pressure – and is simply not an option. The United States needs to engage with newly elected leaders from all parties and build relationships to promote the principles of democratic inclusiveness and encourage the entrepreneurial spirit essential for Egypt’s success.
While the policies of a Muslim Brotherhood-dominated Parliament remain to be seen, the Freedom and Justice Party (FJP) has been forthcoming in supporting a fairly liberal, free-market approach to Egypt’s economy. Its electoral platform advocates the kind of policies a Washington-based audience likes to read: economic freedom, enhanced global competition, rule of law to regulate economic transactions, institutional reform and the centrality of the private sector. In fact, the FJP’s economic platform is far more developed than many of the neo-liberal secular parties, many of which assert the need for social protections and more equitable wealth distribution, but do not detail specific trade and investment policies.
A healthy dose of skepticism may be warranted, however, since the FJP is in uncharted territory and has never governed. Though well developed, its economic platform supports protectionist trade policies by insulating domestic industries from international competition and reducing the import of luxury goods. Given the party’s firm commitment to an equitable (re)distribution of resources and social justice, a critical question will be how the FJP envisions the government’s role in fulfilling these principles.
Additionally, there is a growing fear that the strength of the Salafist parties will prompt the FJP to move to more extreme positions on Shariah-compliant tourism and social policies. The need to outflank the extremists may also manifest itself in populist policies to curry favor by creating new jobs, re-nationalizing industries, or increasing wages. Nour, the largest Salafist party, espouses moderate economic liberalism, but its advisers note that Shariah would prevent privatization of natural resources ( for instance water and gas). Their platform notes the necessity of tax reform, but does not specify what changes they would seek, which will be seen in the coming months.
Given this context, the U.S. and the European Union should rally all possible diplomatic and financial resources to encourage – and then help actualize – the promised market-oriented policies of these newly elected leaders. Yet in the current climate of austerity, aid packages from the U.S. and Europe will be extremely limited.
Even so, opening trade flows and leveraging the power of the private sector are both realistic and key drivers of sustainable economic growth. Considerable gains can be realized through economic initiatives that promote trade, support new business growth, and encourage investment – not only for companies in the target countries in question, but in the United States and Europe as well.
Foreign assistance can help resolve immediate financing, but the key to long-term growth and prosperity lies in mutually beneficial trade partnerships. Perhaps most importantly, the U.S. and the EU need to encourage the private sector – in the West and in Egypt – to identify barriers to trade and investment and to direct attention to specific economic sectors that could provide additional growth. The business community, not the government, is best placed to make these choices and inject a spirit of ingenuity and initiative into the economy.
In particular, the U.S. and the EU should expand Egypt’s access to American and European markets and engage Egypt on an individual basis in order to negotiate free trade agreements or deepen existing preferential trade arrangements. The Bilateral Investment Treaty with Egypt, signed in 1992, is sorely outdated as it excludes sectors that should be covered while also lacking core protections (for example intellectual property rights) that the United States now requires. Now is the time to update the treaty and initiate more ambitious agreements paving the way for a more robust trading relationship.
Recently, the EU announced it would begin free-trade talks with Egypt, Morocco, and Tunisia, and Washington should follow suit. Although the latter may be reticent to engage in negotiations while the political situation remains fluid, articulating these intentions and providing international support for Egypt’s economy is essential in order to reassure markets and offer encouragement to Egyptians who see little hope in their economic future.
Danya Greenfield is deputy director of the Rafik Hariri Center for the Middle East at the Atlantic Council.
