Analysis: Change needs to be at the heart of new Egypt

Published on 14/07/2012 00:00

EGYPT’S new Islamist president and his old military foes have come out swinging in a struggle for political power, but their countrymen need them to find a way to work together to avert economic chaos.

In the two weeks since his inauguration, Mohamed Morsi of the Muslim Brotherhood has defied the entrenched military by summoning the Islamist-led parliament the generals dismissed on the eve of his election.

The confrontation risks paralysing the government, and the first casualty could be Egypt’s fragile economy, fast heading towards a balance of payments and budget crisis.

The past year-and-a-half of turmoil has frightened away tourists, sent investors packing and wrecked economic growth. Egyptians need their leaders to set aside their quarrel – fast.

“Both the military and the Brotherhood are here to stay for the foreseeable future and neither side is strong enough to defeat the other, so there has to be some compromise,” said Shadi Hamid of the Brookings Doha centre think-tank.

The army, in power for six decades, moved to limit the power of the civilian president even as voters were lining up to elect him. On the first day of a two-day run-off election last month, generals dissolved the parliament. On the second day, they issued a decree restricting the president’s powers.

Mr Morsi did not wait long to assert his own power either, issuing a decree summoning the disbanded parliament days after he took office. The lawmakers met on Tuesday. Judges, seen as allies of the generals, responded by rebuking the president.

An economy in such straits will not long survive such confrontation, said economist Said Hirsh of Capital Economics: “Months, rather than years, they can hold on like this.”

Mr Morsi, whose Brotherhood was repressed under the rule of military men, wants to whittle away at the might of the Supreme Council of the Armed Forces (SCAF) and the sweeping economic interests they control.

However, he must also address demands of an electorate desperate for jobs and security after exhausting uncertainty since Hosni Mubarak was toppled by street power in February last year.

“Confronting SCAF and improving the economy don’t always go together. Sometimes you have to make a choice to prioritise one over the other,” said Mr Hamid.

The political crisis may have cost Mr Morsi valuable time to set the economy straight, and the tasks ahead are huge. Egypt’s foreign reserves have tumbled to $15.5 billion (£10bn) , well below half the level they were at when the anti-Mubarak uprising erupted in January 2011. Interest rates the government pays have rocketed to an unsustainable 16 per cent for one-year treasury bills, their highest in a decade.

Investors will be watching closely as Mr Morsi sets up a new government.

“The formation of a legitimate government – and evidence that that government is capable of making and implementing policy – is essential if investors who believe in Egypt’s long-term prospects are to be persuaded that they can begin to deploy capital now,” said Simon Williams, HSBC economist in Dubai.

Mr Morsi must convince the International Monetary Fund that he has enough control of government and broad political support to implement austerity measures the IMF is expected to demand to open the way for a loan facility, last put at $3.2 billion (£2bn). He may win breathing space with donations. He visited wealthy Saudi Arabia this week in his first trip abroad since taking office.

The west – fearful of instability in the first Arab state to make peace with Israel – also will not want to see Egypt fail. But Saudi or American handouts will not earn much respite.

Egypt needs to win over investors further afield, ranging from Western bond buyers to multinational firms, which until Mubarak’s overthrow poured in cash and delivered growth and jobs – even if Egyptians complained only the rich benefited.

A western diplomat said Egypt is always likely to find a way to avert catastrophe, but that alone would not be enough to deliver on the hopes of people who expect a better future. “They will always find a way to muddle through, but the prize is to do something different,” he said.