Egypt's economy is a serious problem

John Kerry was in town yesterday, and he's scared about the state of the economy, according to Reuters:

CAIRO (Reuters) - Egypt urgently needs a massive cash injection and should strike a deal with the International Monetary Fund as soon as possible to reassure investors, said John Kerry, chairman of the U.S. Senate Foreign Relations Committee.

Speaking after meeting military and civilian leaders in Cairo, Kerry said he was hopeful that Egypt would emerge as a strong democracy following the unrest and uncertainty that has followed the toppling of Hosni Mubarak in February.

But he said the main priority should be to strengthen the economy.

"The most significant challenge right now is the economic challenge," Kerry told reporters at the weekend.

"It is very important for Egypt to work with the IMF and undertake to come to an agreement with the IMF for an immediate infusion of money," he said.

Kerry added that Field Marshall Mohamed Hussein Tantawi, who heads the military council temporarily governing Egypt, had indicated that there were "compelling reasons" for outside help given the state of Egyptian foreign reserves.

In a different Reuters report, a SCAF member indicated that they still did not want to borrow from abroad during the transitional period, unless there is "extreme need". Considering the contradictory statements from SCAF these days it's hard to know what to make of this.  

As I noted at the end of last month, an economic crisis is looming in Egypt. Not just the existing crisis of high unemployment and low growth rates — a much more serious fiscal crunch and imbalance in the banking sector. To recap:

• Egypt's reserves are going down at an alarming rate, with SCAF members saying that they might reach $15bn — only a few months of imports — by the end of January. They were at $35bn in January 2011.
• The reserves are being used up by government spending and the Central Bank of Egypt defending the Egyptian pound, which has just broekn the LE6/$ barrier. There will be a devaluation of the pound in 2012 — when and how much depends on how much the CBE wants to keep spending to secure a smooth transition.
• The contraction of the Eurozone has many complicated ramifications, but one clear one is that Europeans will have less money to import from Egypt or spend their holidays there.
• Egypt has spent the last six months after it turned down an IMF/WB package with interest rates of around 3.5% borrowing from the domestic banking market at rates of up to 15%. The local market is tapped out and the foreign buyers of sovereign debt will not return until they see an adjustment in the currency.
• Nine months after the uprising the government still seems to be in emergency mode, increasing spending on budget items such as civil service salaries but not yet thinking long-term — job creation programs in infrastructure, for instance.
• Inflation is going up again, jumping from 7.1% to 9.1% between October and November because of hoarding behavior, supply shortages in some commodities (notably the extremely socially sensitive butane canisters), and political unrest.

The next president, government and/or parliament are going to inherit this situation. No major party has proposed any concrete economic plans. The global context is unfavorable, as major European states and the US are more concerned with their own economic problems and electoral schedules. The Gulf states are delivering on their financial aid pledges in an ad hoc manner (with some $8bn outstanding at least), and many states that promised to help Egypt are simply not delivering at all.

The question now is, if the SCAF really intends to postpone an IMF/WB to that the new president can take responsibility, can the country afford to wait that long? And will the Egyptian public — distrustful of international financial institutions despite the decent terms of the deal and the strings attached to other sources of hard currency — approve?