The year 2012 proved to be a mixed experience for Egypt and President Mohamed Morsi’s Muslim Brotherhood-led government. While Morsi received both regional and international compliments for his central role in brokering the ceasefire in the brief Hamas-Israeli war in November, the president has proved less successful in solving the economic and political chaos that has persisted since the ousting of then-president Hosni Mubarak on 11 February 2011.

Public discontent, expressed through mass opposition protests and demonstrations, reached peak levels in late November, as hundreds of thousands of protesters took to the street claiming that the president was granting himself unlimited powers, ostensibly to ‘protect’ the nation, the power to legislate without judicial oversight and for awarding Islam an overly prominent role in the constitution.⁽²⁾ The controversial constitution was, however, passed following a referendum that was concluded on 22 December, effectively consolidating Morsi’s power, at least in the short term. This will allow Egypt’s leadership to shift attention towards solving the country’s underlying challenges, particularly the economy, rather than managing riots.

This CAI paper discusses Egypt and President Morsi’s challenges in 2013. Central attention is given to the pending International Monetary Fund (IMF) negotiations, which have emerged as an essential ingredient in bringing the country’s economy back to growth. A progressive start could provide vital positive momentum for Morsi ahead of the upcoming election for the lower house parliament, which according to the new referendum, must be announced by the end of February.

A controversial referendum

Morsi has largely ignored the opposition since taking office in June 2012. The Brotherhood’s Freedom and Justice Party first consolidated its power in the country’s legislative chambers after winning just under half of the 508 seats in the lower house and nearly 60% of the 180 seats in the upper house,⁽³) at the beginning of 2012. However, the opposition remains diverse, ranging from secular, urban communities to Salafist parties. Unlike Mubarak, Morsi has yet to face a broad, united opposition as no alternative political platform has materialised. However, the upcoming parliamentary election will pit the recently formed National Salvation Front (NSF), which brings together 13 political powers from across the political spectrum, against the dominant Islamists.⁽⁴⁾

Following the December 2012 referendum, Egypt’s new constitution was adopted with a 64% majority.⁽⁵⁾ However, a voter turnout of a modest 32.9% was recorded.⁽⁶⁾ The low number was largely blamed on a 15 December amendment to Egypt’s referendum laws, which requires voters to cast their ballots only in the constituencies in which they were registered, preventing millions living or working outside their hometowns from taking part.⁽⁷⁾  For its supporters, the approval has been hailed as essential for restoring the political stability required for restarting economic growth.  Liberals, in the meantime, remain unconvinced.

On 6 January 2013, the president appointed 10 new ministers in a Cabinet overhaul. Notable changes included Mohamed Ibrahim taking position as new interior minister, replacing Gamal Eddin. Also in charge of the police, the interior minister holds a central position in Egypt’s security apparatus.⁽⁸⁾ Appointed finance minister, El-Mursi el-Sayed Hegazi, a University of Alexandria economics professor and specialist in Islamic finance, is perceived as loyal to President Morsi, but the Muslim Brotherhood denies that he is a member.⁽⁹⁾ Other appointees include Omar Salem, a law professor at Cairo University, who was named minister of legal and parliamentary affairs, replacing Mohammed Mahsoub who resigned on 27 December, while Atef Helmy, former chief executive of Oracle Egypt, replaced Hany Mahmud as minister of communications following his 25 December resignation.⁽¹⁰⁾

It could be argued that the changes provide President Morsi with increased control over domestic politics ahead of the upcoming election for  parliament’s lower house, which was dissolved earlier last year on a court order, due by end of February (within 60 days of the ratification of the constitution).⁽¹¹⁾ Meanwhile, the appointments of several candidates with affiliation to the Brotherhood has stirred up controversy, particularly among Morsi’s more secular critics fearing an increasing Islamist influence in Egyptian politics.  The majority in the new House of Representatives will form the Cabinet, which is set to pass a number of vital laws to restructure state institutions, as laid out in the Constitution. Thus, this parliament will be of great significance, as it will set the tone for Egypt’s future political and economic development.⁽¹²⁾

An economy in crisis

The possible end to the constitutional crisis opens up possibilities for continuing negotiations with international financial institutions. A US$ 4.8 billion loan that Cairo requested of the IMF is seen as crucial to easing Egypt's budget deficit, and to lifting an economic slump caused by the turmoil that followed the popular uprising that ousted autocratic president, Hosni Mubarak, in February 2011.⁽¹³⁾ Despite having concluded an initial agreement with the IMF in November 2012, the government asked the fund to postpone the final loan agreement due to the political crisis over the country’s new constitution.⁽¹⁴⁾ The government was forced to delay a series of unpopular austerity measures that are considered necessary to get final approval from the IMF board.⁽¹⁵⁾

Egypt cannot afford further delays in reaching an agreement with the IMF. The Egyptian pound hit a record low of almost 6.5 to the United States (US) dollar in the first week of 2013, having declined by over 4% since 29 December 2012.⁽¹⁶⁾ The decline has raised fears of a balance of payments crisis. While government has taken steps to “manage foreign exchange reserves and facilitate a managed devaluation of the pound,” the costly attempt to maintain a managed float around 6.1 to the US dollar is predicted to have incurred foreign reserve losses of US$ 20 billion.⁽¹⁷⁾ Meanwhile, Egypt’s budget deficit increased by 38% to 80.7 billion pounds (US$ 13.1 billion) in the second half of 2012.⁽¹⁸⁾

Although President Morsi has repeatedly stressed that he is not worried about the depreciation in the pound against the US dollar and other major currencies,⁽¹⁹⁾ the sharply declining currency reserves are increasingly diminishing the Central Bank’s ability to maintain stable exchange rates. In December 2012, the Central Bank allowed the Egyptian pound to depreciate for the first time since the revolution.⁽²⁰⁾ Meanwhile, banks have imposed US dollar withdrawal restrictions, taking a further toll on an economy dependent on importing basic goods, including oil, iron, cement, poultry and flour.⁽²¹⁾ International analysts estimate the Central Bank’s reserves to be US$ 15 billion, the equivalent of two months’ imports.⁽²²⁾

On 24 December 2012, Standard & Poor’s downgraded Egypt’s long-term credit rating to B- due to “elevated” political tensions.⁽²³⁾ Particular emphasis was given to the weakened institutional framework and the “increasingly polari[s]ed political discourse,” which have effectively crippled policy making.⁽²⁴⁾ The uncertainty has further increased Cairo’s dependency on external support. In September 2011, Turkey provided US$ 2 billion to Egypt to boost its currency reserves and fund infrastructure projects.⁽²⁵⁾ On 8 January 2013, Qatar announced that it had doubled, to US$ 4 billion, its dollar loans  to the Egyptian Central Bank, while increasing grants to the government to US$ 1 billion from the US$ 500 million initially promised, providing government with some breathing space in which to negotiate the final deal with the IMF.⁽²⁶⁾ This immediately took Egypt’s EGX30 index to 5804 points, its highest levels since October 2012.⁽²⁷⁾

Complex IMF negotiations

Following the meeting of IMF representatives, Prime Minister Hisham Kandil, some ministers and the Central Bank governor in early January 2013 to discuss the request for the US$ 4.8 billion loan,⁽²⁸⁾ both parties remain positive over the progress. Masood Ahmed, head of the IMF’s Middle East and Central Asia Department, has expressed “‘firm commitment’ to implementing a ‘macroeconomic program[me] that enjoys broad support.’”⁽²⁹⁾ A presidential spokesperson claimed that no new IMF conditions had been presented.⁽³⁰⁾ The IMF will send a technical team to Cairo once Egyptian authorities have updated an economic programme attached to the loan agreement.⁽³¹⁾

It is essential that an agreement is reached sooner rather than later. A successful negotiation outcome would not only provide access to IMF funds, but will also release funding from other donors not convinced of Cairo’s abilities to move beyond the economic and political turmoil without external agreements in place. Tied up funding includes US$ 2 billion from the US, the refinancing of loans from Germany, US$ 500 million in African Development Bank funding for Egyptian projects and funds earmarked for an EU-French Cairo subway system expansion project.⁽³²⁾

Conclusion

While the economy is once again Cairo’s most pressing challenge, 2013 will see President Morsi at a crossroads for building domestic support and public confidence in himself and his Islamist-dominated government. It will be vital for Morsi to regain support from the middle class, seen as essential for building an image of the Brotherhood as moderate or progressive.⁽³³⁾ To achieve this, Morsi must restore Egypt’s status as an attractive emerging market, avoiding potential domestic or external investors transferring their capital out of the country. Any positive indicators in the near future would boost investor confidence, but the IMF’s loan conditions remain controversial. The president will have to balance reducing the national deficit with maintaining public support to avoid further riots ahead of the parliamentary election in April.

In November 2012, the president voiced opposition towards any reforms entailing substantial austerity reforms, tax hikes or cuts in fuel and food subsidies in line with the IMF’s demands.⁽³⁴⁾ Having passed the constitution, President Morsi now enjoys more flexibility than before, making reforms increasingly feasible. The implementation of reforms is crucial as reaching a deal with the IMF is essential for rebuilding the country’s ailing economy, the first test to President Morsi’s ability to bring Egypt forward in 2013.

Written by Anders Brudevoll ⁽¹⁾

NOTES:

(1) Contact Anders Brudevoll through Consultancy Africa Intelligence’s Africa Watch Unit ( africa.watch@consultancyafrica.com). This CAI discussion paper was developed with the assistance of Claire Furphy and was edited by Nicky Berg.
(2) Kirkpatrick, D., ‘Backing off added powers, Egypt’s leader presses vote’, The New York Times, 8 December 2012, http://www.nytimes.com.
(3) Fadel, L., ‘Muslim Brotherhood’s political party consolidates power in Egypt parliament’, The Washington Post, 28 February 2012, http://articles.washingtonpost.com.
(4) Halawa, O., ‘National Salvation Front rifts threaten electoral gains ahead of key vote’, Egypt Independent, 17 January 2013, http://www.egyptindependent.com.
(5) Sabry, B., ‘Egyptians pay price for tumultuous year’, Al Monitor, 30 December 2012, http://www.al-monitor.com.
(6) El-Tablawy, T. and Fam, M., ‘Egyptians back constitution as opponents dispute results’, Bloomberg, 25 December 2012, http://www.bloomberg.com.
(7) Sabry, M.,‘Morsi amends referendum law to limit opposition votes’, Al Monitor, 11 December 2012, http://www.al-monitor.com.
(8) ‘Egypt swears in new cabinet ministers’, Al Jazeera, 6 January 2013, http://www.aljazeera.com.
(9) El-Tablawy , T., ‘Egypt appoints 10 ministers in cabinet overhaul’, Bloomberg, 6 January 2012, http://www.bloomberg.com.
(10) Daragi, B. and Allam, A., ‘Morsi reshuffles cabinet’, Financial Times, 6 January 2012, http://www.ft.com.
(11) El-Tablawy, T., ‘Egypt appoints 10 ministers in cabinet overhaul’, Bloomberg, 6 January 2012, http://www.bloomberg.com.
(12) Halawa, O., ‘National Salvation Front rifts threaten electoral gains ahead of key vote’, Egypt Independent, 17 January 2013, http://www.egyptindependent.com.
(13) Saleh, Y., ‘Egypt's Mursi to meet IMF aide on $4.8 billion loan request: Newspaper’, Reuters, 5 January 2012, http://www.reuters.com.
(14) Daragahi, B. and Saleh, H., ‘Egypt’s Morsi preaches optimism for 2013’, Financial Times, 1 January 2013, http://www.ft.com.
(15) ‘Egypt must conclude $4.8bln IMF loan talks - Van Rompuy’, ArabianBusiness.com, 14 January 2013, http://www.arabianbusiness.com.
(16) Bowman, A., ‘Egypt: IMF pledges support as Qatar doubles up’, Financial Times, 8 January 2013, http://blogs.ft.com.
(17) Ibid.
(18) El-Tablawy, T. and Fam, M., ‘Egypt opposition vows to overturn Islamist constitution’, Bloomberg, 24 December 2012, http://www.bloomberg.com.
(19) El-Tablawy, T., ‘Egypt’s Mursi not worried about currency’s slide against dollar’, Bloomberg, 31 December 2012, http://www.bloomberg.com.
(20) ‘The crisis of government isn’t over’, The Economist, 5 January 2012,  http://www.economist.com.
(21) Daragahi, B. and Saleh, H., ‘Egypt’s Morsi preaches optimism for 2013’, Financial Times, 1 January 2013, http://www.ft.com.
(22) Hankir -, Z., ’Egypt’s shares rise on step to guard reserves; Saudi petchems Gain’, Bloomberg, 30 December 2012, http://www.bloomberg.com.
(23) ‘S&P downgrades Egypt credit rating on “elevated” tensions’, Straits Times, 24 December 2012, http://www.straitstimes.com.
(24) Ibid.
(25) ‘Egypt: Turkey to provide $2 billion in aid’, Stratfor, 16 September 2012, http://www.stratfor.com.
(26) Bowman, A., ‘Egypt: IMF pledges support as Qatar doubles up’, Financial Times, 8 January 2013, http://blogs.ft.com.
(27) Ibid.
(28) Ibid.
(29) Ibid.
(30) Ibid.
(31) Rastello, S., ’IMF to visit Egypt for loan talks before month’s end’, Bloomberg, 19 January 2013, http://www.bloomberg.com.
(32) Daragahi, B. and Saleh, H., ‘Egypt’s Morsi preaches optimism for 2013’, Financial Times, 1 January 2013, http://www.ft.com.
(33) Sabry, B., ‘Egyptians pay price for tumultuous year’, Al Monitor, 30 December 2012, http://www.al-monitor.com.
(34)‘IMF aid comes with bitter pill for Egypt’, Euronews, 8 January 2013, http://www.euronews.com.