Egypt — On Saturday, Mohammed Morsi became the Arab world's only democratically elected leader. There is, however, little time to savour the accomplishment. Morsi's leadership is going to be tested from the word go by Egypt's formidable economic woes.
When he addressed Tahrir Square on Friday, Mohammed Morsi promised he would fulfil the demands of the revolution. The revolution, glorious as it was in its inspiration of a global movement of defiance, was not centred around the downfall of a regime alone. Authoritarianism was the ugly face of structural problems in Egyptian society - dwindling economic opportunities and a deteriorating quality of life. Emphasising the structural imbalances of Egyptian society, one of the most popular chants of the uprising was, "Freedom, liberty and bread" - or, in another translation, "Freedom, social justice and bread." But it's not that simple. Freedom in theory is one thing, but Morsi's sternest challenge will be delivering bread to the Egyptian people.
People want to see real change in their livelihoods, and though Morsi does seem to realise this, the state of Egypt's economy means it will be some time before any change, for the better at least, will be felt.
Egypt is mired in significant economic challenges. In the last year, growth plunged from a robust 5.1% in fiscal year 2009/10 to 1.8% last year. For this fiscal year, growth is projected at a meagre 1.5%, falling far short of job-creating capacity. A striking 80% of Egypt's population is under the age of 30, and unemployment is estimated to be as high as 25% among them. In the last year, unemployment rose still further and foreign direct investment came to a screeching halt.
Tourists also shunned Egypt last year. Revolution, you see, has not been good for Egyptian business.
The United Nations estimates that some 40% of Egyptians live below the poverty line and 14 million Egyptians subsist on less than $1 a day.
Morsi has been admirably eager to deliver the demands of the revolution, but he will need time to make good on his promise. Ultimately, his success may not lie in his success in delivering "bread" to the homes of Egyptians, but rather the ability of the Egyptian people to have faith in his promises and patience with his rate of delivery. But, that said, patience is a tall order when people aren't being fed.
Right now, the greatest challenge to Morsi is the deterioration of Egypt's raw financial strength. As the number of tourists carrying foreign currency dropped off, so too has the Egypt's ability to import goods and pay its international debt. Foreign exchange reserves, excluding gold, dwindled from US$36 billion last year to $15.5bn in May.
By the reckoning of these numbers, Egypt is only capable of covering close to three months of imports - well below the usual danger point of six months' cover. On Sunday, Egypt signed an agreement with the Saudi-based Islamic Development Bank (IDB) that will see Egypt receiving $1 billion to finance energy and food imports. The loan is a small boost for the flailing foreign currency reserves, but it is only a temporary reprieve. For the long term, Morsi will be looking towards the International Monetary Fund (IMF).
Throughout the presidential campaign, Morsi's Muslim Brotherhood pledged to reach a rapid accord with the International Monetary Fund to protect the value of its pound. The interim government, led by the military, has over the last year held sporadic talks with the IMF regarding a possible $3.2 billion loan to help it bridge fiscal shortfalls while restructuring the economy. But the IMF has repeatedly said Egypt needs a permanent government in place to agree to the loan programme, stressing that it needed a consensus from the country's various political currents to approve the loan.
Yet more debt may not sit well with Egyptians, who believe previous strangleholds on the economy to qualify for other international loans achieved little except greater poverty and social inequalities. The interim military government raised money by selling bonds to Egyptian investors - but at rising interest rates, with the yield on the one-year bill reaching a dizzying 16%. The new government will have to repay or roll over some $4 billion in short-term borrowing over the next six months.
Egyptian media reported on Sunday that IMF chief Christine Lagarde had already spoken with Morsi over the telephone on Thursday to congratulate him on his election victory and the best way for the IMF to help remedy the situation. According to her spokesperson, Lagarde said "the IMF stands ready to support Egypt and looks forward to working closely with the authorities."
But before the IMF releases any funds, Morsi will have to put in place a stable government and adhere to a slate of reforms. The longer this takes, however, the greater the risk to the Egyptian economy. British banking giant Barclays cautioned in a June 18 report that a prolonged political transition posed significant risks to the economy: "Egypt has to repay more than USD2bn in debt maturities over the next three to four months, which could increase pressure on already thin FX reserves and on the EGP (Egyptian pound) The short-term outlook is likely to be volatile, and we reiterate our recommendation to remain underweight Egyptian assets," it said.
The military government's addition to the country's debt has swollen the fiscal deficit to more than 10% of GDP. And it looks likely to swell yet further. The deficit could, of course, be cut significantly if fuel and food subsidies that were used as a populist calming mechanism by Mubarak were removed. But Morsi is not likely to toy with the subsidies. The subsidies have been described as essential insurance against civil unrest in Egypt. It has not proven to be very reliable insurance, though, and the challenge for Morsi and his government is to direct them better at those most in need. Analysts point out that 90% of the subsidies benefit the wealthiest 20% of Egyptians. Morsi's challenge will be to fashion the subsidies into an income support programme for the people who actually need it. But it will take at least two years to redirect the subsidies - time that Morsi can ill afford.
Morsi's rate of delivery to the people - the rate at which a young people feel an expansion in economic opportunities - is inextricably linked to how well he is able to solve problems like fiscal deficits and dwindling foreign reserves. But he will do well to balance his attention to the economy between the highbrow decisions he must make and the demands of the people he has promised to fulfil. He needs time, yes, but how much time are the Egyptian people willing to give him?