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Since January’s ousting of Hosni Mubarak as president, Egypt’s economy has come under enormous strain. Tourism has plummeted, foreign capital has fled and domestic investment has all-but stalled. The International Monetary Fund’s $3bn budget support plan, announced on Monday, came not a moment too soon.
Even so, Egypt’s problems continue to mount. Unemployment is rising: some estimates suggest about 800,000 people have become unemployed in the past three months, while the country’s workforce amounts to only a third of its population. Labour protests across several sectors have also become a source of unease for international investors
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The biggest worry, however, is Egypt’s currency. The military caretakers are deploying foreign reserves to try and prop up the Egyptian pound, with the result that reserves have dropped from $34bn to $28bn in three months. If this trend accelerates Egypt is likely to come close to having no hard currency reserves by the end of the year. Market speculation and sales of pound-denominated holdings could then follow, plausibly leading to a currency collapse, and yet more economic and political turmoil.
Much like Mubarak before them, Egypt’s current military leaders sought a short-term fix where a long-term solution is needed. Yet their attempts to bolster the pound offer little protection against inflation, given that prices are rising because of domestic market inefficiencies. The country’s reserves are also limited, while lingering uncertainty about the political process over which the military presides continues to frighten off tourists and investors.
Only by preparing the pound to float can the military council get the country back on the right track. Floating the currency would allow prices to settle, while insulating the country from the type of shocks that prevent a return to normal employment. True, imports would be more expensive in the short term, but tourists would enjoy lower prices and exports would be priced more competitively. Supporting the pound can only delay a collapse, while a float would devalue it and preserve valuable foreign reserves.
This cannot happen on its own, especially given the way in which Egypt’s opaque new political process has failed to restore confidence. Today, the Islamists of the Muslim Brotherhood, Egypt’s most organised constituency, are pushing for early elections, while the more secular modernists want to delay until the country has agreed on a modern democratic constitution, and given all political parties enough time to create platforms. To move forward the military council must also provide a clear framework for the country’s constitution, and a time frame for elections.
The problem is that Egypt’s military leaders are monopolising the decision-making process. Without knowledge of its inner workings, the people blame the transitional government even for problems over which it has little control, instead of organising themselves to improve their positions. By opening up their decision-making, the caretaker regime can establish themselves as a legitimate source of sound policy, while also more evenly distributing the blame for the difficult economic choices any Egyptian government must now make.
Egypt’s military leaders must also recognise that they must lay claim only to that which they can actually control, in particular security and the terms on which the country’s political actors come together. Here they deserve praise for the steadily improving security situation, but with recent Salafist attacks on Coptic churches there is no room for complacency. Even so, by trying to separate itself from the messy realities of developing domestic politics, the regime may be able to strengthen its own hand.
In a country where the government has run economic policy from top to bottom for decades, relaxing controls and floating the currency will initially have unpopular consequences, but it nonetheless remains the best way forward. Egypt needs new economic institutions that its people understand and support. If its military leaders are still making short-sighted economic policies in a few months’ time, instead of carrying out a clear transition to a government that can create those institutions, they risk sparking a new round of uprisings by the hungry and the unemployed.
The writer is a senior fellow at the Foundation for Defense of Democracies and a former senior official of Egypt’s Wafd party