Is Egypt going broke?

Is Egypt running out of money?

Financial woes add an extra layer of drama to one of the most important stories to watch in 2012.

Egypt’s reserves have dropped for 11 straight months, to almost half of what they were before the Arab Spring began. By the end of January they are expected to fall to as little as $15 billion, only enough for two months of imports given that $5 billion is already committed for other international obligations.

This reflects the broader strains of a sputtering economy:

The instability has hit the tourism industry hard, scaring visitors away from the country’s historic monuments and sunny beaches. Foreign investment has stalled as investors in energy projects, construction and other sectors wait to learn whether the military leadership will remain in power or be overthrown in a “second revolution” that activists called for last month. Although parliamentary elections are underway, and a presidential election is expected by June, it remains unclear which party will govern the country, what its economic policy will be and how much power the military will cede.

“The light at the end of the tunnel is not clear yet,” said Magda a-Sayyid Kandil of the Egyptian Center for Economic Studies. “We are still going through a period of instability.”

Unemployment has reached 11.9 percent, its highest rate in 10 years, and analysts say the true figure is much higher.

Some economists are now predicting that unless Egypt comes up with some form of external financing soon, it will face both a currency and a budget crunch in the first quarter of 2012.

The country’s problems are not unique. All the Arab countries that have faced tumult over the past year share them to varying degrees. Even Tunisia, which has had the easiest transition, is struggling to right its economy:

But as the national economy festers dangerously, the new government’s main challenge will be to tackle rising unemployment and sagging revenue from tourism.

Things are much worse in Yemen and Syria. Both will see more bloodshed in the coming months. Neither is likely to stabilize in 2012.

In Egypt’s case, the government will resist the reforms necessary to bring its finances into line. The army will not want to further reduce its sagging popularity during the fraught political transition, especially given its desire to retain a dominant position in the country.

Reducing the government’s massive budget deficit, now running at about 11 percent of GDP, requires cutting the huge amount of money it spends subsidizing the basic necessities—most notably bread, but also rice, sugar, cooking oil, and fuel—that most people depend on. Three quarters of Egypt’s 80 million people buy subsidized loaves of bread, costing the country $5.5 billion in fiscal year 2010-11 alone.

The result will not be pretty. As one diplomat in Cairo said:

The political situation will not be conducive to fixing the economy. We quite possibly will have people back on the street. It will be hard to take austerity measures. The political hit for any austerity in the next six months would be pretty big.

If the looming crisis forces the government to bring in the IMF, it may weaken the military’s position in its negotiations with the Muslim Brotherhood after the elections. Whoever controls power after these will in any case have to concentrate on rebooting the economy and attracting foreign tourists and investment, limiting their ability to push an overly Islamist agenda, at least in the economic and foreign policy spheres. Such conditions may also force Egypt to act leniently with former President Mubarak, as this would probably increase Saudi aid.

The economy is unlikely to see a dramatic turnaround as long as protesters prevent a return to stability, which partly explains why the recent rallies have much less support in the country than those of a year ago.

There is no easy way out. As Richard Haas, president of the Council on Foreign Relations, wrote in a recent op-ed:

As difficult as it can be to oust a repressive regime, it is far harder to put something better and enduring in its place. History is replete with deposed leaders whose immediate or ultimate successors were as bad or worse. The Soviets who succeeded the czars come to mind; so, too, do the ayatollahs who came after the shah in Iran. For all the flaws of the ousted, it is hard if not impossible to argue that the alternative left the country’s citizens or neighbors better off. . . .

We don’t know if this will happen in those Middle Eastern countries that overthrew their longtime rulers in 2011. Tunisia has carried out relatively fair and peaceful parliamentary elections with a strong showing by Islamist parties; how they will rule is unclear. Libya has the challenge of building national institutions where none existed. Complicating the future are tribal frictions and the availability of weapons; the potential for oil revenue makes future prospects more promising. Egypt will be the most important test. . . .

Certainly, democracy for the region is a worthy goal. But outsiders would be wise to place at least as much emphasis on protecting and establishing the prerequisites of democracy — the rule of law, a constitution with true checks and balances, robust civil society, open markets — as they do on elections. . . .

Can anyone add some on-the-ground reporting from Egypt? How do people feel a year after the overthrow of Mubarak?