Egypt “On the Verge of Bankruptcy”

By David P. Goldman, JINSA    

“The country is on the verge of bankruptcy,” Egyptian opposition leader and Nobel Laureate Mohamed ElBaradei told the newspaper al-ArabiyaDec. 23. Unable to reduce subsidies that account for most of a budget deficit that now exceeds 14 percent of GDP, and unwilling to raises taxes, it seems most likely that the Muslim Brotherhood government of Mohamed Morsi will instead take the path of least resistance and allow a steady devaluation of the Egyptian pound. During the past two weeks, central bank intervention to support the pound’s value on the foreign exchange market has stopped and the currency has fallen sharply.

Goldman Graph 3

Central bank intervention in support of the pound is shown clearly on the chart of daily values for the Egyptian pound’s exchange rate against the U.S. dollar during the year to date. The spikes in the exchange rate reflect central bank activity. The sharp drop in the pound’s exchange rate during the past two weeks reflects an absence of central bank intervention.


In the advent of last week’s referendum on a proposed new Islamist constitution, the Morsi government postponed negotiations for a $4.8 billion loan from the International Monetary Fund, out of fear that the austerity measures required by the IMF would elicit a wave of political opposition. As Andrew Bowman wrote in the Financial Times:


The loan is conditional on some very unpopular tax increases and fuel subsidy cuts to reduce the deficit to 8.5 per cent during the financial year starting July 2013. The government is loathe to take these on at this moment in time with its authority fragile and new elections looming in 2013. Indeed, when it tried to introduce new taxes on consumer goods a few days before the constitutional referendum, it removed them within a few hours following public outcry. Its loan request has been postponed until January and the delay may entail renegotiation.


The Morsi government’s failure to secure the IMF loan also jeopardizes other expected loans, including a $500 million credit from the African Development Bank. This is a crisis of governance, of the sort I analyzed on this site in September. Morsi cannot get a popular mandate without reneging on essential economic reform measures, but he cannot obtain the financing that Egypt requires to avoid bankruptcy if he reneges on reform.


That leaves Egypt’s central bank with cash reserves of just $7.1 billion (out of total reserves including gold of $15 billion), enough to cover just over two months’ worth of the country’s $36 billion annual trade deficit, equivalent to about 16 percent of Egypt’s GDP. Against this enormous trade deficit, Egypt has


1) Tourism revenues that peaked at $12.5 billion in 2010 before falling to only $9 billion in 2011, and now may be running as low as $6 billion a year, according to one estimate in the Egyptian press;


2) Suez Canal revenues of somewhat less than $5 billion a year; and


3) An indeterminate volume of workers’ remittances, estimated at anywhere between $7.7 billion and $18 billion;


4) Whatever Egypt can borrow, which at the moment is essentially nothing.


Remittances almost certainly have risen since 2009, when the central bank estimated the flow at $9.5 billion, although a major source of those remittances-the 2 million Egyptians working in Libya-dropped sharply after the Libyan civil war. 1.7 million Egyptians work in Saudi Arabia, 500,000 in Kuwait, and 500,000 in Jordan. Their repatriated earnings are in many cases the main support of their families at home.


Egypt’s dependence on remittances, though, makes a devaluation of the Egyptian pound an especially dangerous exercise. As long as Egyptians overseas expect the national currency to keep falling, they are likely to delay sending money home as long as possible. That in turn will worsen the central bank’s foreign exchange position and make devaluation more likely, in a vicious circle. It seems clear from the earlier intervention pattern that the Egyptian central bank hoped to prevent devaluation. Since the collapse of the IMF loan negotiations, though, it may have concluded that it has no other alternative.


The position of Egypt’s foreign workers, moreover, is fragile. King Abdullah of Jordan warned at a private meeting (cited by the news siteAI-Monitor) that Jordan might use the 500,000 Egyptians now working in in his country as “bargaining chips” against the Muslim Brotherhood, which he denounced as part of a “new extremist alliance” in the Arab world. Jordan’s monarchy has been under pressure from the Muslim Brotherhood during the past year, and it seems clear that the Hashemites will not sit on their hands. A major Jordanian complaint is the interruption of piped Egyptian natural gas, at an estimate cost to the Jordanian government of 5 billion Jordanian dinars. The same pipeline through which Egypt supplied Israel also met four-fifths of Jordan’s gas requirements.


According to a Dec. 17 report in Egypt’s Official Gazette, cited by theEgypt Independent, Egypt will import gas from international companies in Qatar at a cost of U.S. $14 per million BTUs. Qatar’s government sells gas at $9 per million BTUs, and Egypt is contractually obligated to sell gas to Jordan at $5.50 per million BTUs. The unfavorable terms suggest that something else is at work: Egypt may be overpaying for Qatari gas to amortize Qatar’s $2 billion emergency loan to the country’s central bank last fall. Qatar has given the Morsi government indispensable support. Announcement of this loan Aug. 12 coincided with President Morsi’s dismissal of the old-line Egyptian military leadership, and the funds have allowed Egypt to maintain wheat stockpiles at adequate levels during the past several months. It appears, though, that Qatar’s aid comes with a price tag, and that Egypt’s import costs will rise as a result.


The country’s foreign exchange reserves, meanwhile, are so squeezed that banks are refusing to provide financing for food imports (other than wheat bought directly by the government) because importers have not had access to hard currency to pay their arrears, the Food Industries Association warned Nov. 27. The importers’ association warns that food imports may drop by 40 percent during coming months as a result.


Morsi’s hold on political power is fragile after the mass protests that preceded this month’s constitutional referendum and the opposition’s unwillingness to concede legitimacy to the government’s narrow victory. Prior to the referendum, Morsi showed himself unable to reduce subsidies or raise taxes in order to control a domestic budget deficit and a trade deficit that are both running at close to a sixth of GDP. If he takes the path of least resistance and allows the Egyptian pound to depreciate severely, as the local market evidently expects, it may be difficult for the hard-pressed Egyptian pound to find a stable bottom, for reasons noted earlier: fears of devaluation will delay remittances and provoke capital flight, worsening the central bank’s already dire cash position.


The danger is that Egypt will descend into banana republic-like inflation, but without the bananas. We have witnessed many cycles of devaluation and inflation in Latin American countries, but all of those cases involved food exporters. Egypt by contrast imports half its food.


The government’s likely response will be to employ state controls in a heavy-handed but haphazard fashion: imposing foreign exchange controls, rationing essential items, raiding alleged speculators, and stirring up have-nots against supposed haves. If the opposition is unable to unseat Morsi, he is likely to lead Egypt to an extreme degree of statism-a sort of North Korea on the Nile.


It is not clear where he can turn. President Morsi is at a stalemate in discussions with the international financial organizations. The Gulf States are even more hostile to the Muslim Brotherhood than before Egypt’s political crisis, and less inclined to help. Even Qatar, it appears, is extracting payment for its previous help on a cash-and-carry basis through the energy market. The most likely outcome will be austerity through devaluation rather than tax increases or subsidy cuts, with deleterious consequences for the already-failing Egyptian economy. On the strength of the available evidence, we would have to answer our question of September-“is Egypt governable?”-in the negative.


David P. Goldman, JINSA Fellowwrites the “Spengler” column for Asia Times Online and the “Spengler” blog at PJ Media. He is also a columnist at Tablet, and contributes frequently to numerous other publications. For more information on the JINSA Fellowship program, click here.


December 31, 2012 | 9 Comments »

Subscribe to Israpundit Daily Digest

Leave a Reply

9 Comments / 9 Comments

  1. Egypt is a loosing proposition for IL.
    Poverty will be an excuse to turn against IL with the financial assistance from the international finance and if they make money they will use it to increase their weaponry to “attack” IL. All this for who U know! A…h!

    @ Mickey Oberman:
    and cool!

  2. I don’t think so, Max. Obama has been working to reelevate America’s middle class whose achievements built the stability and success that made America the great country it is. There are too many Americans who have too much money that is not being spent on the country’s behalf. I recently read an article about investor Richard Cohen, who is being investigated for insider trading for the past several years. He sticks in my mind because he’s the fellow who spent $8M several years ago to buy the work of “art” by Damien Hirst that is a 13 foot shark body in a tank of formaldehyde. He makes money for himself and investors by making money on their own money. No productive results come from it. Of course, this is America, and as long as he doesn’t break the law, he is free to buy as many etherized sharks as he wants. But geez….

    You see the battle going on in the U.S. Congress right now, where there is no consensus on how the budget should be structured. These Republicans just waste time. I don’t think history will be kind to them.

    I’m far from being an economist, but I think Egypt should concentrate on farming. This keeps hands busy and feeds the people. There is acreage to be prepared, perhaps canals to be dug, but at least the people would see some progress. There are many agencies who could help them, including the Jews. Poor Egyptians are well aware they’ve been suckered again. Dare I even say this that it could come down to selling some of the Pharaohs treasures?

  3. The Egyptians got what they deserve. Mubarak
    may not have been the greatest leader, but he
    is better than what they voted for, including
    the Muslim Brotherhood. As for America, we
    need to stop helping the MB or whatever else
    in their dangerous regime, and help our
    Americans at home.

  4. @ Eric R.:
    Actually the Muslim Brotherhood is the Arab branch of the Nazi party. They were established during WWII for that purpose. Then again, there really is no difference between Nazis and Communists other than verbiage.

  5. As is obvious the analysis is just words and refers to nothing real in terms of production. Egypt like most other countries is most likely gotten richer due to technology.

    What the “bankruptcy’ means is that there is a transfer of wealth and power to the elite – just like in North America.
    But here in Egypt the rich elite managed to take advantage of the ‘chaos’ to grab a greater share of the wealth so… “tough luck guys – you the rank and file” the 99.9 percent with less than 2 percent of the wealth are going into “bankruptcy”.

    By dis-empowering the masses financially the elite, most likely an Islamist elite? will entrench their power and political direction on the people.

    Before ye all smirk too much at the poor fools misled and ‘hoist by their own petard’ – look ye to the West where the exact same thing has happened (with the exact same manipulation process) and is happening. America has become Stalinist – ruled by a rich elite just as Egypt is.

    “We the people” are more like them than not.

  6. “The most likely outcome will be austerity through devaluation rather than tax increases or subsidy cuts, with deleterious consequences for the already-failing Egyptian economy. On the strength of the available evidence, we would have to answer our question of September-”is Egypt governable?”-in the negative.”

    “Those who curse you [Israel], I shall curse them.” Looks good on the anti-Jewish bastards. May the rats eat their mail.

  7. The Muslim Brotherhood is an Islamic version of the Communist Party. It only cares about totalitarian control and achieving their mythical worldwide Umma, not about the welfare of the Egyptian people.

    Just like Stalin, Mao, Pol Pot or the Kims, they will kill millions, either by shooting them (Stalin), or letting them starve to death (Mao, the Kims) or both (Pol Pot) in order to keep the masses in line and retain total power.

    This is what the Egyptian people wanted; they voted for it – therefore, if 10 million of them die, why should I feel sorry for them? It means ten million fewer Islamonazis to try and exterminate Jews.