Egypt’s Economy Near Collapse and No Relief in Sight

Egypt’s struggling economy stands at the brink of bankruptcy. Revenue from virtually all of its sources of foreign exchange are falling and will be off by more than $1 billion in the coming year, Western economists here say.

Egypt has been hard hit by the continuing slide in oil prices, by a dramatic decline in revenue from tourism and money sent back by workers in the Persian Gulf states, and by a recession that is causing a banking crisis as private-sector debtors default on loans.

At the same time, payments on international loans incurred a decade ago are coming due. Egypt’s foreign debt is estimated at about $36 billion, more than a quarter of it owed to the United States. Servicing this debt will cost Egypt $3.5 billion this year, substantially more than it receives in foreign aid.

The crunch is expected to come later this year when Egypt’s available sources of foreign exchange will, by most experts’ reckoning, not be enough to meet commitments. Central Bank reserves currently total $1 billion, enough to cover only six weeks of essential imports.

Predictions about the foreign exchange shortfall that Egypt faces this year range from a conservative $1.5 billion to as much as $5 billion, if oil prices remain depressed.

Technically Bankrupt

“Technically,” a Western banker observed, “this place is already bankrupt.”

The government of President Hosni Mubarak has been squirming over this economic dilemma for months. There is, for the first time, talk about seeking agreement with creditors on a formal rescheduling of the debt.

But the United States, which gives Cairo more than $2 billion a year in assistance, and the International Monetary Fund and other foreign lenders are reluctant to pump more money into Egypt until it agrees to begin reforming what virtually everyone sees as major structural flaws in its economy.

Foremost among these is a massive and complex system of state subsidies--direct commodity supports and indirect payment of some fuel costs for state industries and consumers--that costs the government about $7 billion a year.

Nearly all Egyptians--97% according to U.S. Embassy estimates--have ration cards entitling them to buy essential commodities such as rice, sugar and cooking oil at heavily subsidized prices.

A net food exporter 15 years ago, Egypt must now import more than half of its food to support a population that has doubled in 30 years to 50 million, and is still growing at the rate of 1 million people every nine months. Food imports cost Egypt $8 million a day, yet the subsidy system has resulted in price distortions that make bread so cheap that much of it is thrown away or fed to animals in place of more expensive fodder.

Poorly Administered

The subsidy system, poorly administered and subject to much abuse, has grown so large that it appears to be on the verge of collapsing under its own weight. Shortages are chronic and panic buying is common at the government cooperatives where subsidized foods are sold.

“Whenever I get sugar, the housewives come and buy it out in a day,” the manager of one of the co-ops said. “Then they take most of it to the free market and sell it for several times more than they paid.”

According to Ali Lutfi, an economist whom Mubarak appointed prime minister last September, the subsidy system benefits the rich more than the poor. Citing the example of bottled cooking gas, Lutfi told a business seminar recently that a poor family buys one bottle of gas a month while a rich family may buy as many as five. Since the government sells the gas for three Egyptian pounds ($2.20) less than it actually costs, “the poor family gets a three-pound subsidy while the rich family gets 15, five times as much,” Lutfi said.

The government has already introduced a number of reforms. It has cut back drastically on public sector imports, recently raised customs duties on private-sector imports and is cautiously pushing up the prices of many subsidized commodities.

The cost of gasoline and electricity, for example, has gone up substantially in recent months. The one-penny loaf of bread, the staple of most Egyptian peasants and virtually all their livestock, has been replaced, gradually though unofficially, by better-quality two- and five-penny loaves.

The budget for the fiscal year that began July 1 anticipates added revenue of $365 million from higher customs and excise duties, a savings of $180 million from reduced subsidies and a 20% increase in tax revenue from more-efficient collection and a crackdown on tax evaders.

Still Not Enough

But most economists, Egyptian as well as foreign, agree that this is not enough.

“Their reform program falls short in a lot of ways,” a Western economist said, adding that the IMF, which has withheld standby credits to Egypt pending the drafting of credible reforms, “is not impressed.”

Nor, it seems, is the United States. Two delegations, one headed by Defense Minister Abdel-Halim abu Ghazala and the other by Planning Minister Kamal Ganzouri, went to Washington last month for tough and not very productive talks on their request for more economic aid and better repayment terms for outstanding military debts.

A sympathetic but vague expression of support by the State Department, along with an agreement to release a scheduled $110-million grant a month early, papered over the differences. But no action was apparently taken on a request to convert another $500 million in development assistance into a cash grant, and U.S. officials made it plain that there was little they could do to lower the interest rates on $4.5 billion in military loans made to Egypt in the 1970s.

Mubarak had better luck last week when he visited Rome, Paris, London and Bonn to talk about new standby credits and rescheduling of Egypt’s debt. He received assuranaces of support from French Prime Minister Jacques Chirac and British Prime Minister Margaret Thatcher.

Still, said a diplomat in Cairo, giving more money to Egypt in the absence of serious reforms is like dropping money into a black hole.

“They know what the problems are,” he said. “They know what the solutions are. But if they won’t implement them, why should we keep pouring money into a bottomless pit.”

In fact, officials have been talking for years about the need to lower subsidies, and a political, if not a social, consensus finally appears to be shaping up toward this end. But the government, still mindful of the riots that erupted in 1977 when a similar attempt was made to reduce some subsidies, remains deeply divided over how best and quickly it should do this.

Wants Gradual Change

“We have learned the lesson of 1977,” Ahmed Dersh, a government economist, said. “We are doing what we can. But any change in economic policy must be phased in gradually.”

Dersh shares the widely held view here that any sudden, large-scale lifting of subsidies would lead to rioting on the scale of 1977, or worse. Privately, many Egyptians express the fear that riots may erupt anyway, because of the economic downswing of the past few years and the double blows of a recession and nearly 20% annual inflation on living standards.

The riots in February by several thousand poorly paid police conscripts may have been just a foretaste of what lies ahead, some think. At the time, the government was quick to assert that the rioting was spontaneous and not connected with alleged conspiracies by the militant Muslim fundamentalists, whose influence is on the rise.

In a way, however, the government’s explanation makes the situation look even worse. If the rioting, by members of a supposedly disciplined sector of society, was truly a spontaneous response to adverse economic conditions, then what is the potential for violence among civilian sectors?

Not everyone, of course, sees things in such bleak terms. Some cheer was derived, for instance, from the fact that few civilians joined the police on their three-day rampage. During the security vacuum that existed for at least 24 hours before the army was fully deployed, there was no appreciable rise in crime and few instances of looting.

Moreover, the brink of bankruptcy is more or less where Egypt’s teetering economy has always stood. There have been debt crises before and somehow Egypt has always managed to pull back just far enough from the brink to keep from falling over.

Lately, however, so many things have been going so wrong that a more pessimistic view is winning converts.

Management Is Problem

“Unless they get a grip on the economy, instead of relying on manna from heaven, the picture is not going to get any better,” a Western banker said. “Management, not money, is the real problem.”

It is a complaint that is voiced with increasing frequency, not only by diplomats and foreign businessmen but by Egyptian officials, who say that as the problems get bigger, the government’s capacity for managing them and for making decisions seems to be getting smaller.

“A sense of hopelessness seems to pervade so much of the Establishment now,” a senior Egyptian official said. “People seem to be asking, ‘What good does it do to look for solutions if the problems are insoluble?’ ”

In part, this indecisiveness reflects a lack of strong and charismatic leadership under Mubarak. Although he is given high marks for his personal integrity and his commitment to democratic reforms, the image he projects is that of a well-meaning but not particularly confident man who, like his country, just muddles along.

“He is like a Jerry Ford or a Jimmy Carter at a time when Egyptians want a John Kennedy or a Ronald Reagan,” one analyst said. “He doesn’t say, ‘Let’s do it.’ He says, ‘Let’s call in the opposition parties and debate it.’ ”

More than this, however, the lack of confidence seems to reflect what many social scientists feel is a deeper malaise that has been creeping over Egyptian society since the late President Anwar Sadat divorced Egypt from the rest of the Arab world to make peace with Israel in 1979.

Sadat told Egyptians that with peace would come prosperity and a reawakened sense of pride as other Arabs once again followed Egypt’s lead by making peace with the Jewish state. But seven years later, Egypt is more deeply in debt than ever, and still isolated from the Arab world, without even diplomatic relations with most of the countries that used to look to it for leadership.

Vision Turned Bleak

Worse, what was in 1979 a golden vision of prosperity now seems to many to be as unattainable as a desert mirage.

Housing is still in critically short supply, the ancient infrastructure of Egypt’s crowded cities continues to crumble faster than it can be rebuilt, and the universities yearly churn out thousands of graduates who cannot find jobs.

In this environment, and especially on the campuses, militant Islamic fundamentalism is gaining ground as the only available alternative to a Western-oriented system that has created high expectations but failed to fulfill them.

The fundamentalists now control the student associations of virtually all Egyptian universities, and they have recently made impressive inroads into most of the professional societies, including lawyers’, doctors’ and pharmacists’ associations.

In the past few months there has been a growing number of strikes, most recently by railroad engineers demanding higher pay. There has also been a series of arson attacks, believed to have been carried out by fundamentalists, against video clubs and shops selling liquor. A state of emergency imposed after Sadat’s assassination by fundamentalists in 1981 was recently extended.

Whether Egypt can shake off its malaise and pull out of its debt crisis is of crucial importance to the United States. Although its ability to shape the diplomacy of the Arab world may have diminished, Egypt is still the key state in the region, the anchor of American interests here and a bulwark against the extremist trends that would threaten those interests.

Yet relations with Washington have not gone well lately, in part because of what is perceived here to be a pro-Israeli, anti-Arab attitude on the part of the Reagan Administration.

Disappointed at Washington

Worse, in the view of many senior Egyptian officials, has been the Reagan Administration’s reluctance, compared with previous administrations, to become actively involved in the search for a comprehensive Middle East peace. Few Egyptian officials, when speaking candidly and off the record, do not express deep disappointment with what the Egyptians regard as Washington’s lack of interest in the peace process, which began foundering earlier this year.

The issue is of paramount importance to Egypt because the peace that it made with Israel was never meant to be an end in itself. Without tangible economic benefits from the peace treaty, Egypt has in the long run only two choices, a Foreign Ministry official said.

“Either we succeed, with the help of the United States, in the search for a broader peace, or we look for a way out,” he said. “The former alternative is still our preference, but we can’t remain in limbo forever.”

Already, the voices of those opposed to the peace treaty and Egypt’s pro-American tilt are speaking out with increasing stridence on the campuses and in the opposition press. The fundamentalists would abrogate the peace treaty on the grounds that it is the Arabs’ sacred duty to “liberate” Jerusalem, a holy city of Islam.

They are asking why all the promises have gone unfulfilled, why some are rich while most are poor, why Egypt has forsaken its Muslim brethren for a relationship with a superpower whose leaders often seem indifferent to Arab interests and sometimes hostile toward them.

In the current atmosphere of social malaise, diplomatic stagnation and economic crisis, the moderate, pro-American government of Hosni Mubarak seems to have no answers to these questions.