Analysis – #Egypt relies on #Gulf aid for economy: Then what?

Egypt is engaged in a high stakes gamble, using billions of dollars from Gulf Arab allies to stimulate the economy and keep its politically charged streets calm in the hope that investors and tourists will return.

The biggest Arab country’s finances are in a precarious state with a massive deficit but the government, armed with billions of Gulf petrodollars, has rejected the conventional wisdom of IMF-prescribed austerity measures.

If the plan fails, a new government expected to be elected early next year could find itself deep in debt, its currency overvalued and an economy in crisis.

“Now we are living on a ventilator, (with) aid from neighboring countries and that is understandable in the midst of a meager tourism industry and reluctance of direct foreign investment,” Sherif Samy, Egypt’s Financial Supervisory Authority head, said.

Saudi Arabia, Kuwait and the United Arab Emirates pledged more than $12 billion in aid to Egypt after the army toppled Islamist President Mohamed Mursi of the Muslim Brotherhood on July 3 following mass protests against his rule.

“Nobody can live, in the long term, on aid,” Samy said. “It is not sustainable.”

Since the 2011 uprising that toppled Hosni Mubarak, Egypt has burned through $20 billion dollars in foreign reserves, borrowed billions from its allies and racked up billions in debts to foreign oil companies to prop up its currency.

AVOIDING PAINFUL MEASURES

The Mursi government worked out an agreement with the International Monetary Fund (IMF) that would have included austerity measures, higher taxes and a reduction of subsidies that eat up a quarter of the budget. It was never implemented.

Egypt is going a different way from many European countries such as Greece whose cash-strapped governments have enforced repeated rounds of austerity measures, squeezing households, to rein in huge budget deficits.

The army-backed government, well aware that IMF conditions could cause a huge popular backlash before elections, has avoided austerity measures.

In a country where protests have forced out two presidents in three years and sent the economy into a tailspin, the interim leaders, appointed after Mursi’s ouster, have internalized this risk.

“The government is faced with a big challenge, especially as it faces coming elections within months,” Samy said.

“They must not be excessive with the social subsidy programs and wage and pension increases that might titillate the feelings of ordinary citizens in the short term but have a severe impact on the state budget and on the deficit.”

Western powers want a return to democracy in Egypt, which has a peace treaty with Israel and controls the strategic Suez Canal, a global trade route.

What happens in Egypt could have a ripple effect on the rest of the region, which has also suffered from political and economic turmoil since the Arab Spring uprisings.

The government says it is still on track to rewrite the constitution and hold parliamentary and presidential elections in early 2014, part of a political roadmap the army announced after it removed Mursi.

http://www.chicagotribune.com/news/sns-rt-us-egypt-economy-analysis-20131110,0,1900659.story

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