Economic Priorities for Egypt: macro-stabilization and corruption control

Mohamed Morsi of the Muslim Brotherhood (MB) has been elected president of Egypt after a long period of uncertainty as the announcement of official results kept being postponed. The chaotic post-election scene was a reflection of the absence of credible democratic institutions as well as the absence of a culture of democracy in a country that has been for all practical purposes under military rule for 60 years. Mr. Morsi’s election is just the beginning of what appears to be shaping up as a long and difficult transition that may be occasionally marred by political instability. Egypt is sharply divided between Islamists and secularists, it has no constitution, and no one knows exactly what Mr. Morsi’s prerogatives will be. The country has a very strong military establishment that wields enormous powers and its first ever freely elected parliament was recently disbanded by the constitutional court. Under such circumstances, democracy and stability can only be achieved gradually as the institutions that are crucial for democracy (the constitution, the judiciary, free press, civil society, political parties, etc.) are strengthened and in some cases built from scratch.

In the meantime, it is dangerous to continue neglecting the economy. Over the last year and a half, economic growth has virtually come to a halt (real GDP growth this year is projected at 1.5 percent). Official unemployment has increased to 12.4 percent from 9 percent before the revolution. The problem is especially acute for young people whose unemployment rate is estimated at more than 25 percent. About 20 percent of Egyptians live below the poverty line. The country’s budget deficit is now about 10 percent of GDP with the public debt rising to nearly 80 percent of GDP. As a result, the interest rate on government Treasury bills has increased to 16 percent and the rating agencies have downgraded Egypt’s debt. On the external side, capital flight and a sharp decline in tourism revenue have led to a fall in the country’s foreign reserves from about $43 billion (8 months of imports) before the revolution to some $15 billion (3 months of imports) today.