Two Economic Priorities for Post-Election 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.

In the short run, Egypt needs to develop and implement a credible program to stabilize the economy while taking serious steps to improve economic governance and control corruption. Such a stabilization program will certainly require making some hard choices that would affect public spending, subsidies, taxes and the exchange rate. However, it is necessary to avoid a meltdown (as public debt and foreign reserves have reached worrisome levels) and to set the stage for a resumption of growth. At the same time action can be taken to control corruption. Controlling corruption is necessary to achieve shared growth and social justice. It can be done at a very low financial cost, and it will bring huge political benefits.

Three successive post-revolution finance ministers felt the need to reach an agreement with the International Monetary Fund on a macro-stabilization program, but their efforts were thwarted by politics. During the spring of 2011, the finance minister at the time negotiated and agreed on a program with the IMF but was stopped from signing it by the political leadership and a few weeks later left the cabinet. Opponents of the program argued that they did not want to increase Egypt’s foreign debt especially since an IMF loan does not finance productive projects. The cost of this decision was that other donors stayed away, capital flight continued, the government increased its domestic borrowing – which resulted in raising interest rates and crowding out private actors –, and the country’s foreign reserves dwindled. The next finance minister also realized the importance of an IMF-sanctioned stabilization program and worked on convincing other political leaders of the need for it. However, by that time Egypt’s economic situation had greatly deteriorated and reaching agreement had become more difficult. The current finance minister built on his predecessors’ work and obtained leadership support for an IMF program, but it was too late. The IMF, predictably, preferred to wait until after the presidential elections.

Controlling corruption is a key demand of the Egyptian revolution. According to the Worldwide Governance Indicators (WGI), in 2009 Egypt was in the bottom half of all countries surveyed in terms of corruption control. It ranked at the 41st percentile, doing worse than South Africa which ranks at the 60th percentile, Brazil at the 56th percentile or India at the 47th percentile. After the revolution, several political and business leaders from the Mubarak regime were jailed on corruption charges, but this does not constitute a comprehensive anti-corruption program. Of course wrongdoers should be punished and no one should be above the law. However, this is only part of the solution. A comprehensive program would include measures to enhance the transparency of government decision-making, as well as measures to empower citizens and to give them more voice to hold the government accountable for its actions. Initiatives to enhance transparency could include freedom of information laws, public disclosure and public debate requirements for all laws before their passage, as well as improved financial management and procurement practices. Reforming and professionalizing the civil service would also be an important step toward controlling corruption.

Under the Mubarak regime Egypt rated particularly poorly in the area of voice and accountability, which is necessary for controlling corruption. According to WGI, in 2009, Egypt ranked at the 15th percentile, doing much worse than South Africa at the 66th percentile, Brazil at the 62nd percentile or India at the 60th percentile. This rating will probably improve now as a result of the revolution and the ensuing political opening. Nevertheless, it is starting from a very low base and Egypt can draw some lessons from other countries’ experience in this area. The Indonesian experience is particularly pertinent. After the fall of President Suharto, the new Indonesian rulers introduced changes to make government more accountable and to involve citizens in economic policymaking and fighting corruption. Key reforms included: (1) creating the Partnership for Governance Reform between civil society and government to lead the fight against corruption; (2) passing new laws allowing the police to investigate corruption and the establishment of a Corruption Eradication Commission; (3) passing a decentralization law to bring public services closer to citizens; (4) supporting the growth of civil society organizations and a vibrant press that provide a voice for citizens and hold rulers accountable; and (5) creating an independent Socioeconomic Monitoring and Research Unit to provide objective analysis of social and economic conditions in the country. In addition to beginning a process of corruption control, these reforms proved to be highly popular and appreciated by Indonesian citizens.

It is understandable that Egypt’s new leaders will continue placing a high priority on the task of institution building. However, experience from other developing countries like Brazil and Indonesia indicate that building institutions is a long-term endeavor and that transitions to democracy take many years to succeed. It is important that economic issues are not neglected during this transition. Over the next few months, Egypt’s new leadership will need to tackle macro-stabilization and fighting corruption in order to avoid an economic crisis and lay the ground for a resumption of growth that will be more equitable than in the past.