Wednesday, 10 July 2013

Morsi’s deadly economic sin

The Muslim Brotherhood inherited a difficult economic situation, but their lack of coherent policies made things worse.

July 1st was the day after millions of Egyptians took to the streets to protest against the Muslim Brotherhood and their president, Mohamed Morsi. This was symbolic not because it resulted in the army’s removal of Morsi two days later, but because of the sheer scale of popular rejection of political Islam’s biggest party in the country where the ideology had been born.

The symbolism of 1 July extends beyond politics into economics. It is the first day of Egypt’s fiscal year in which the government’s new budget becomes effective. The process and the product of writing Morsi’s first (and last) budget encapsulates his administration’s approach to economic policy: an approach characterised by the absence of a clear plan and a preference for short-term fixes over long-term solutions under conditions which do not afford this luxury.

Having churned through three finance ministers during his one-year-and-48-hour term, Morsi’s budget was only approved by the Shura Council—Egypt’s upper house with temporary legislative powers—on 27 June. Despite the delay, there was no attempt to tackle the hard issues such as the persistence of large deficits (around 10% of domestic output) or the large subsidy provisions. As the table below shows, in terms of broad spending patterns and overall deficit size, Morsi’s budget (fourth column) does not look different from last year’s budget plan (second column) or last year’s actual turnout of spending (third column). If anything, his budget looks worse than his predecessor’s.

Egypt’s most urgent economic problem, namely its currency crisis, provides another example of Morsi’s economic management. For years, Egypt’s spending on imports has exceeded its revenue from exports. What prevented this from becoming a crisis under Hosni Mubarak was the inflow of foreign investments, which helped to finance the trade deficit. When these fled the country after the 2011 revolution, the Supreme Council of Armed Forces, which was running Egypt then, used up the significant international reserves to preserve the value of the currency. Morsi therefore inherited a chronic imbalance and depleted reserves, but his confused response ensured that the problem did blow up in his face.

Initially he sought the IMF’s help, reaching a preliminary agreement in November 2012. Presumably as a step towards implementing the agreed programme, he introduced consumption tax hikes on 9 December only to abandon them hours later. From that point onwards, he ceased to take the IMF option seriously despite other Egyptian officials’ repeated claims to the contrary.

Instead, he resorted to borrowing from Turkey, Libya and, especially, Qatar to finance the country’s foreign currency needs. As with the budget, he chose to coast along rather than face the fundamental problems heads-on.

There is a common theme running through these two examples and indeed others such as the ones highlighted by Rebel Economy. The Muslim Brotherhood inherited a difficult economic situation, but their lack of viable plans and reluctance to tackle difficult issues made things worse.

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