Struggling Economy Huge Challenge for New Egyptian Government

With the Muslim Brotherhood claiming victory in the important first round of parliamentary elections in Egypt, observers are already itemizing the severe challenges ahead for the country and its new government.

It seems clear that there will be a power struggle between the Brotherhood’s Freedom and Justice Party (FJP) and the military. After the caretaker military government said it will preside over the constitution-writing process, the Brotherhood withdrew from a constitutional advisory council for civilians set up by the military. There is also worry among liberals and non-Muslims (and the West) about how inclusive the future Egypt will be.

But probably the most important task for the new government, if it hopes to instill some measure of stability, will be kick starting the floundering Egyptian economy.

Hailed as an “emerging success story” by the International Monetary Fund as late as 2007, the Egyptian economy is now in deep crisis. Some of it is a direct result of the revolution and the last year’s unrest, such as the serious decline in the tourism industry and foreign investment.

Before the revolution, one Egyptian in seven worked in the tourism industry, accounting for 10 percent of the country’s national income. In March this year, spending by tourists had dropped by 66 percent compared to the same time in 2010. The drop in tourism in the first half of the year represented a loss of $3 billion to the Egyptian economy, according to official figures.

But much of it began before, and was part of the reason that Mubarak could not hang on to power in the wake of the global economic downturn. Too many of the 85 million Egyptians could simply not make ends meet.

According to the United Nations, 20 percent of Egyptians are below the poverty line and another 20 percent are only just above it. About 64 million Egyptians receive subsidized food, but fuel is also subsidized, and this is at the heart of the country’s fiscal problems, according to an opinion piece by economist Dalibor Rohac in the Wall Street Journal.

Reforming these subsidies will not be easy, however, and may well lead to further unrest. The caretaker military government has done little, and the Muslim Brotherhood has so far been short on specific proposals, Rohac writes. However, just before the first-round election results came in, a Supreme Council official said that the severe budget deficit may force a review of the subsidies.

In an article by U.N. news service IRIN, U.N. Resident Coordinator in Egypt James Rawley warns that a further deterioration of the economy may force a currency devaluation, which in turn might increase the commodity prices even more, making it even harder for many Egyptians to get by.

“[H]igher food prices would increase vulnerability, which can show up in many forms, including increased malnutrition, which is already a serious problem in Egypt,” he said.