Sukuks and not very halal Islamists

The Economist's Pomegranate blog writes about the travails of Egypt's sukuk law, championed by the MB but blocked by al-Azhar in one of the many unintended consequences of the shoddy constitution:

Egypt’s finance minister, Al-Mursi Al-Sayed Hegazy, says sukuk issuance could generate $10 billion a year for the country. That is highly unlikely any time soon, considering the current junk status accorded by ratings agencies to Egypt’s ordinary bond issues. But given the severity of the country’s economic situation, the protracted IMF negotiations over a possible $4.8 billion loan (which Salafists have also attacked despite a proposed interest of only 2%), and growing global demand for Islamic banking, the scholars of Al Azhar might be wise to spare the hair-splitting. Egypt right now needs every piastre of money it can find.

Sukuks are a fine investment vehicle, but I differ on the view that al-Azhar is hair-splitting. The issue al-Azhar has taken up is that sukuks, by their very nature, involved the lender taking as collateral the investment project itself. Azhar opposes their use in state projects (as opposed to private ones) because public goods would risk falling into lenders' hands. Since this is precisely the kind of situation that led to Egypt coming under British overlordship, Azhar's position is not surprising — especially considering that considering the state of Egypt's finances, a default on sukuks is not unlikely. The real problem here is that the Muslim Brothers want to change the terms of sukuks so that such collaterals are avoided in the case of public projects. Except if that's the case, in Sharia terms this is not a sukuk anymore. It's something else. The Brothers cannot have their cake and eat it too, by claiming to implement Sharianomics and then bending these supposedly holy rules.

"Burning the furniture"

Egyptian spring could be European storm -

Interesting tidbit about the recent OCI transaction here — and a good and alarming piece overall:

Foreign currency is increasingly difficult to come by in Egypt, even if you are rich by local standards. A number of the companies represented in the Cairo share index have substantial, viable, foreign operations, which the equities allow you to buy for Egyptian pounds. What is supposed by capital markets theory to be a measure of investor sentiment about the future has become a measure of half-concealed capital flight.

It could be argued that an interesting recent example of this is the Orascom Construction Industries share exchange offer. This was talked about in some quarters as “Bill Gates invests in Egypt”. Well, no. Orascom is one of the few internationally competitive Egyptian groups; I have used the group’s mobile phone providers in the Middle East. The ongoing exchange offer essentially allows an Amsterdam-based holding company to buy the Cairo-based construction company in return for a net payment of something more than $1bn to the forex department of the Egyptian central bank. Bill Gates’s family group is among the investors in the Amsterdam holdco. This would allow the central bank to make up for a few weeks’ drain of forex reserves at the current rate of loss.

So a resounding vote of confidence in Egypt’s future may actually be a case of burning the furniture. On the other hand, buying three weeks to a month may seem worth it if it’s your food ration that is being financed.

The US ambassador's speech

As I've previously written (and I'm not the only one to think so), I think US Ambassador to Egypt Anne Patterson has been too incautious in her embrace and praise of the Muslim Brotherhood in the last two years. Her recent speech in Alexandria, though, helps correct some of her recent media statements and strikes many right notes for where US policy should be. Her assessment of the economic situation is devasting, and a pointed critique of the Morsi administration's handling of this. The speech does not touch on politics much, but does hint at great alarm at Morsi's poor leadership.

I am pasting the whole thing after the jump.

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More on Morsi and the Egyptian economy

Morsi Manages Egypt’s Economic Decline - Al-Monitor: the Pulse of the Middle East — — Readability

Nervana Mahmoud's take on the Egyptian economy:

Morsi’s rush to secure political power has cost him a lot on the economic front. However, he doesn't have to save the economy to survive as president. He just has to manage its decline well enough to prevent an acute dip toward bankruptcy and default. That is why his buzzwords for 2013 will probably be “appeasement,” “loyalties,” and “subsidy cards.” It would not be a step forward for Egypt’s economy; neither easy nor pretty. Sadly, the real game is survival, and not “renaissance."

Mubarak was arguably ousted not because thousands poured into Tahrir Square, but because most elements in society were united against him. If Morsi succeeds in managing a declining economy and securing loyalties, he can avoid the same fate. That is what autocrats in Iran and Sudan have been doing successfully for decades. It is not what many brave youth aspired to achieve, but it is the ugly new reality (with a retro-’70s flavor) that they have to accept if the opposition leaders continue to be divided, elitist, and disengaged from the rural regions of Egypt.

Qatar extends $2.5bn lifeline to Egypt -

Qatar extends $2.5bn lifeline to Egypt -

Qatar swoops in to buffer against the impact of Morsi's economic mismanagement:

Sheik Hamad bin Jassem al-Thani, Qatari prime minister, said his country had given Egypt a $500m grant and another $2bn loan to help control the currency and support the dwindling foreign reserves, a day after Cairo resumed talks for a crucial $4.5bn loan from the International Monetary Fund.

“That is a decent amount of money. It will stabilise the foreign exchange market a little bit,’’ said Mohamed Abu Basha, Egypt economist at EFG-Hermes.

“It will allow the government a breathing space where they do not have to worry a lot about the currency during the IMF negotiations.’’

The Qataris — who have pledged at least $10bn to Egypt and have now delivered some $2bn before this — mostly as deposits in the Central Bank. One day they will cash in on all of this aid.

More on Morsi's tax u-turn

Mursi’s tax U-turn casts doubts over government's competence


A dramatic U-turn by Egypt’s embattled president Mohammed Mursi over a proposed tax hike has raised serious questions about the decision-making process within the government, casting doubts over the administration’s competence and ability to craft a coherent economic policy. It has also brought into question the fate of a crucial International Monetary Fund (IMF) loan Egypt is awaiting, set to be ratified by the fund’s board next week.

Experts derided both the government’s unilateral decision to raise taxes at a time of political crisis and the president’s swift retraction of the measures in the face of public uproar.

Some feared the president’s volte-face indicated a desire to pass the Islamist-penned constitution first and then subsequently institute a tax hike. Others said his quick retraction undermined his leadership and exposed a lack of political maturity.

Morsi continues to panic

Morsy suspends tax plan, calls the increase a 'burden' on average citizen | Egypt Independent

President Mohamed Morsy has decided to suspend wide-ranging changes to the country's tax laws that had been signed earlier this week but just came to light Sunday, calling for "societal dialogue" and further consultation before implementing them.

In an announcement early Monday morning, Morsy said the taxes would amount to an "additional burden" on the average citizen.

"The president of the republic feels the pulse of the Egyptian street, and he realizes how much the citizen is bearing and struggling from his burdens in this difficult economic period," the statement said, according to the website of the state-owned newspaper Al-Ahram.

This planned increase in government revenue is an important part of the IMF agreement signed by Egypt. Suddenly, after months of negotiations in which there was no "societal dialogue" at all, Morsi decides that it won't do? The main measures were going to be an increase in top-level income tax rates and a 1% on sales tax which would have been felt more widely. The excise tax increase on things like cigarettes have happened annually for years. 

There's a confident president for you. 

Fixing Saudi unemployment — more than creating jobs

This is a guest post by Nathan Field — a little break from Egypt, Gaza and all that.

Great Tuesday Washington Post piece by Kevin Sullivan on Saudi women and unemployment. The part at the end on Saudi labor policy and the two-tier labor force is critical.

What Sullivan doesn’t address in much detail though is how the presence of so many foreign workers has distorted wages in the private sector, and causes the unemployment problem to persist in a country where there are literally millions of jobs that Saudis could be working.

Importing foreign labor was necessary initially because for the first several decades of the Kingdom’s development the Saudi labor force was not nearly large enough. Harder to understand is why the situation has been allowed to persist through the present, when despite a reasonably qualified Saudi labor force, the ongoing option of easily hiring workers from countries such as the Philippines and India still exists.

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The Iranian rial and the price of Saudi chicken

Any connection here? 

The Iranian Regime Is In Trouble - World Report

The devaluation of Iran's currency, the rial, by as much as 40 percent in the last few days has made it very difficult for the average Iranian to afford everyday food stuffs. It is no surprise that protests have broken out in Tehran's central bazaar and its surrounding streets. The bazaar is a critical pillar of support for the Iranian regime. The loss of confidence among Iran's merchant and business classes could shake the foundations of the Islamic Republic.

Chicken price rises lead Saudis to tweet -

Saudi Arabians are forgoing one of their favourite foods as a Twitter campaign against high poultry prices spreads.

The “Let it Rot” campaign urges Saudis to refrain from eating chicken to punish traders who they say have raised prices by about 40 per cent in the past two weeks.

Saudi Arabia is a leading supplier of chicken, a staple in the country, to neighbouring countries and an export ban imposed this week in an effort to defuse the anger is likely to trigger regional shortages.

One would think not if Saudi chicken are domestically produced. Still, there's much schadenfreude about the troubles of the Iranian economy (which appear not to target regime officials, as "smart sanction" advocates argued, but ordinary people in the hope that this will put pressure on the government — something that led to a disaster in Iraq) and much less about Saudi Arabia's.  

Here's an argument that the rial's devaluation is not as serious as might appear, because the government itself is the main foreign currency earner. The conclusion:

Does all this mean that Iran’s economy is on the verge of collapse, as Israel’s Finance Minster reportedly said?  The answer is no, because most of the economy is shielded from this exchange rate, though not from the ill effects of the sanctions, which will continue to bite for a while. Would it cause sufficient economic pain that would push the Iranian government to make concessions in its nuclear standoff with the West?  The answer is not likely.  The multiple exchange rate system, as inefficient as it is, will protect the people below the median income, to whom the Ahmadinejad government is most responsive.

Update: Paul Mutter has a round-up of the issue of the Iranian rial at PBS' TehranBureau

On the IMF and Egypt

IMF U-Turn in Jordan Shows Egypt Need to Engage Public on Policy

Alaa Shahine and Mohammad Tayseer, reporting for Bloomberg:

Mohammad al-Sheikh was among hundreds of Jordanians who joined protests against an increase in fuel prices, pushing King Abdullah II to scrap a policy aimed at meeting pledges to the International Monetary Fund.

“The government increased the prices in secret, like it was afraid of something,” al-Sheikh, an air conditioning salesman, said in an interview in Amman, explaining why he joined a street protest for the first time in his life. “This is provocative. We have the right to know.”

Al-Sheikh’s comment signals the new engagement among Arab citizens after the protests that brought down governments last year. A consequence is that the fiscal restraint backed by the IMF and investors is harder to implement without the kind of broad support that requires a public debate. That’s especially resonant in Egypt, where talks with the IMF on a $4.8 billion have been on and off for more than a year.

Mohamed Mursi, Egypt’s first freely elected president, already faces near-daily strikes by labor groups empowered by last year’s uprising. After campaigning on the promise that he had a detailed plan to end Egypt’s worst slump for a decade, Mursi is coming under fire for stalling on the specifics of what his government will commit to in return for IMF money.

“If I were the government I would start talking in a language that the average man on the street would understand,” said Mohamad Al-Ississ, assistant economics professor at the American University in Cairo. “A quick solution is going to bring down the government with it.”

International financial institutions cannot reveal their own demands without the approval of the government. So there has to be more pressure on the government to reveal the terms of the loan — and sell it to the public — than before.

The irony about the current situation is that for much of 2012 the IMF did not want to go ahead with the loan (unlike the World Bank) because parliament was contesting it as part of the MB-SCAF-Ganzouri cabinet fight. But now that there is no parliament but an elected president, the IMF appears satisfied that there is consensus! The Qandil government might be better than the Ganzouri one — in fact it almost certainly is more coherent, at least — but the current negotiations are essentially taking place with one political group (the Brothers) and the technocrats at the Ministry of Finance, whereas at least beforehand there has been consultation with the broader political spectrum.

Yes, there is a risk that this simply become about the politics rather than the merits of the plan — after all the MB itself opposed the plan under a certain set of political circumstances but now unreservedly endorses it, even dropping ethical objections to the fact that IMF loans are not disbursed under Islamic finance principles. But surely that was the point of making a fuss about democratic accountability and consensus in the first place, no?

U.S. Prepares Economic Aid to Bolster Democracy in Egypt

U.S. Prepares Economic Aid to Bolster Democracy in Egypt

Important piece in the NYT by Steven Lee Myers, about the US going ahead with $1bn debt forgiveness (out of $3bn, mostly low-interest Food for Peace loans):

Mr. Morsi and his Islamic movement, the Muslim Brotherhood, have since made it clear that the struggling economy is their most urgent priority, brushing aside reservations about American and international assistance and outright opposition to it from other Islamic factions.

American officials say they have been surprised by how open Mr. Morsi and his advisers have been to economic changes, with a sharp focus on creating jobs.

“They sound like Republicans half the time,” one administration official said, referring to leaders of the Muslim Brotherhood, which was long banned from office under the former president, Hosni Mubarak, a close American ally.

Hoping to capitalize on what they see as a ripening investment climate, the State Department and the U.S. Chamber of Commerce will take executives from nearly 50 American companies, like Caterpillar and Xerox, to Cairo beginning Saturday as part of one of the largest trade delegations ever. The officials and executives will urge the government to make changes in taxation, bankruptcy and labor laws to improve the investment climate.

“It’s important for the U.S. to give Egypt a reason to look to the West, as well as the East,” said Lionel Johnson, the chamber’s vice president for the Middle East and North Africa.

The Brotherhood has spoken a language on the economy that Americans like to hear for a while now: entrepreneurship, liberalization, public-private partnerships etc. In reality I suspect we will continue to see some protectionism in the Egyptian tradition (on pharma, some agricultural produce, price controls for steel, cement etc.) that is perfectly understandable. But what's interesting here is how things are being framed as a need to "balance" the East — the GCC countries of course with their easily spent cash, but also China. Makes Morsi's trip there and supposed $4-6bn in contracts look smart. 

The Virtues of a Low(er) Tech Future in Egypt

This commentary was contributed by Nathan Field.

There’s a growing school of thought that promotion of entrepreneurship is an effective solution to the socio-economic problems facing many Arab countries, especially Egypt. In Thomas Friedman heaped praise on Oassis500, a high-tech accelerator in Jordan that provides startup money and training to budding internet companies.  A prominent American investor recently profiled FlatLabs6, a similar effort in Cairo.  And the pilot version of the State Department’s Global Entrepreneurship program offers mentorship to young Egyptian entrepreneurs, mostly in the tech and IT space.

The case for promoting entrepreneurship as a solution in Egypt is strong. Why?  A solid argument can be made that the single most important cause of the 2011 uprising was economic — or, in other words, lack of economic opportunities. 

There are more Egyptian university graduates than ever before, with higher aspirations than any previous generation, yet, in an increasingly competitive and liberal global economy, the government has to this point been unable to generate anywhere near enough jobs that meet their expectations. Thus, in February 2011, that discontent — probably exacerbated by the effects of the post-2008 global financial crisis — caused the ranks of Egypt’s previously passionate but relatively small opposition to reach a critical mass, and sweep away the Mubarak regime. 

Friedman and company’s approach is sound.  However, what should not be overdone is the implicit assumption that “startup” means (or should mean) “tech” and especially “internet company.” Virtually every article covering this trend in the Arab world focuses exclusively on web-based companies.  Certainly, they have a place, but an equal, if not greater focus should be on the development of new lower-tech, labor-intensive firms, because they are more likely to make an impact in addressing Egypt’s un and underemployment problems.

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"Failure to fix Egypt's economy could lead to second revolution"

That's the conclusion of a new paper by Jane Kinnimont for Chatham House [PDF], which argues that too much of what politicians promise is vague and without basis, that the Muslim Brothers could find themselves soon at odds with labor movements, that the subsidy system now in place is both failing to address inequality and costing the government too much, and much more. 

It's worth reading alongside this piece on the lingering confusion over when the IMF rescue package for Egypt will be approved by the government, and what string are attached, as well as whether the next government will be expected to carry the same kind of "austerity measures" we've seen in Greece over the last year (in my opinion, this would be a disaster) — and if not, how it will finance expenditures. In the meantime, a few days ago Saudi Arabia became the first country since last year not to wait for the IMF deal to start disbursing loans and grants to Egypt, for a total of about $1.5bn.

Periodic reminder to freak out

… about Egypt's economy — generally, with all the excitement about politics, it just isn't done enough. Just spent some time working on this today — not only has Egypt spend about $20bn of its reserves defending its currency since January 2011, it also spend several billion in a secret stash and maybe up to $10bn in an account at the National Bank of Egypt. Total: $35bn or so. Ay khidma?

The signal everyone is waiting for to start helping Egypt: a deal with the IMF, which would open up the taps elsewhere. But also force some reserve targeting at the Central Bank, which means there'd be less defense of the EGP. So a gradual devaluation is the best case scenario. Check out what the FT's Beyond BRICs blog thinks is the worst:

With money in the kitty for less than three months’ imports, the finance ministry boldly intervened on Monday by announcing (not for the first time) a deadline for securing agreement on the $3.2bn IMF loan which could be followed by $7bn from other donors.

But Said Hirsh, an economist with Capital Economics, told beyondbrics: “This isn’t necessarily the last word. Just look at the previous statements."

Citigroup estimates that Cairo could get by until the end of September.

Although it is likely to be tight and the room to manoeuvre extremely limited, we think the government will just about be able to muddle through until September, and then reach an agreement with the IMF. However, the downside risks will remain considerable. Moreover, the problem is that, by attempting this course, if events do blow the economy off track in the coming months then there are few options for the government and it really could potentially face the prospect of an uncontrolled devaluation.

So if there’s no IMF deal, there’ll be a foreign exchange crisis. But if there is to be a deal, there has to be compromise between the ruling military council and the opposition forces. The currency markets are signalling that time’s running out.

What's blocking an IMF deal is the MB's refusal to approve a deal while Ganzouri is PM, and the IMF's reluctance to make a deal with a government that will only last another two months or so and is likely to be replaced by a MB-led one. The MB may be right to demand that the government give an indication of how it wants to spend the money, and of next year's budget (which will have to be approved by parliament by June) more generally. But one suspects the MB is also using this issue as part of its wider recent confrontation with SCAF.

The government now says it expects a deal by May 15 but frankly, who knows?

Who knows what could happen between now and then!?

More on Egypt's "Military Inc."

Great piece with more detail on the nature of the Egyptian military-industrial complex and its internationalization than I've seen anywhere: Egypt's Generals and Transnational Capital, by Josh Stacher and Shana Marshall. An excerpt but do read the whole thing for the details:

Much of the speculation over the Egyptian military’s role in the economy has been misleading. The generals’ antipathy for Gamal Mubarak led many to assume they also disdained all neoliberal projects. The guessing similarly obscured the fact that, in an era of transnational capital, the army’s footprint is found in many places outside the formally state-owned holding companies. The military has broadened its portfolio by launching joint ventures and executing share purchases in private operations, exploiting its monopoly over lucrative sectors and granting exclusive access to foreign companies in order to burnish its pro-business bona fides. While the SCAF’s lust for direct political power is in doubt, the centrality of military-run industries to Egypt’s economic future is not. The generals have had nearly 12 months in which to anchor their enterprises so firmly as to make them immovable.

From the moment of Mubarak’s resignation, it was apparent that the SCAF was no disinterested arbiter of the political transition. The furor over the obscene wealth of Mubarak’s private-sector cronies presented the military with a golden opportunity to eliminate rivals. The SCAF proceeded to shape the electoral field to advantage those politicians who would not infringe upon the military’s economic prerogatives. Chief among its tactics was a showy, but highly selective anti-corruption campaign. By jailing big businessmen like Ahmad ‘Izz, an intimate of Gamal’s, and unpopular officials like the former housing minister, Ibrahim Sulayman, the SCAF channeled the public’s demand for justice. Not surprisingly, civilian businessmen with strong links to military companies were passed over by prosecutors—another signal to politicians to accept the military’s role in the economy or be shut out altogether.

How SCAF is seeking to resolve corruption cases behind closed doors

The following post, on legislation dealing with economic corruption recently decreed by SCAF, was contributed by Shereen Zaky, a lawyer in Cairo. 

On January 3rd, SCAF discreetly passed an amendment to the Investment Law essentially permitting the settlement of economic corruption crimes via financial reconciliation, as well as designating an extra-judicial process for the settlement of disputes regarding government contracts. Published only a few days before parliament was due to convene, the timing is significant both in terms of circumventing parliament’s assumption of legislative power and because the amendment could escape scrutiny, overshadowed as it was by greater events.

Law 4 of 2012 permits the General Authority for Investment and Free Zones, the regulator of investment and companies in Egypt, to settle with investors who have committed either in person, or as an accomplice of a government employee, embezzlement, theft, illegal acquisition or misuse of public funds and property, harming the public welfare, and similar offences, while undertaking any of the investment activities covered by the law, provided they restore the disputed amounts or reimburse the state for their approximate value at the time the offence was committed. The settlement can take place any stage before a defendant is convicted by the final court of appeal.

Essentially, this could allow the likes of Ahmed Ezz and other corrupt businessmen to slip neatly out of prison, as well as many other regime figures. It seems like one of SCAF’s now-familiar counter-revolutionary gambits, designed to protect their corrupt cronies and conceal their own implication in crime, but with a little adjustment it would actually be a reasonable means of protecting Egypt’s collapsing economy.

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And now for a radical neo-Marxist economics break

☞ bnarchives - The Asymptotes of Power

I have dissected, step by step, the national income accounts of the United States, from the most general categories down to the net profits of the country’s largest corporations. I have shown that, from the viewpoint of the leading corporations, most of the redistributional processes – from the aggregate to the disaggregate – are close to being exhausted. By the end of the twentieth century, the largest U.S. corporations, approximated by the top 0.01%, have reached an unprecedented situation: their net profit share of national income hovers around record highs, and it seems that this share cannot be increased much further under the current political-economic regime.

This asymptotic situation, Bichler and I believe, explains why leading capitalists have been struck by systemic fear. Peering into the future, they realize that the only way to further increase their distributional power is to apply an even greater dose of violence. Yet, given the high level of force already being exerted, and given that the exertion of even greater force may bring about heightened resistance, capitalists are increasingly fearful of the backlash they are about to unleash. The closer they get to the asymptote, the bleaker the future they see.

It is of course true that no one knows exactly where the asymptote lies, at least not before it is reached. But the fact that, over the past decade, capitalists have been pricing down their assets while their profit share of income hovers around record highs suggests that, in their minds, the asymptote is nigh. 

From the Israel-Canadian economist Jonathan Nitzan, whose book (with Shimshon Bichler) The Global Political Economy of Israel is quite interesting, with a radical new ecomomic model that should be applied to elsewhere in the region. Most of it is above my head, but a key concept in their work is differential capital accumulation — i.e. that capitalist actors compete not on absolute terms but in terms of how well they do compared to each other and the average. Fascinating stuff — for radicals and liberal democrat centrists alike, because of how it speaks to the current malaise in advanced capitalist societies, which while in many respects thriving fear that they are losing social gains made in the last century and standing on the edge of a precipice — beyond which are societies with extremely skewed distribution of both economic wealth and political power, like most of those in the Middle East.

The Egypt economy/aid debate

Over at the NYT's Room for Debate, the discussion is How Allies Can Help Egypt Get Back on Its Feet. I agree with Shadi Hamid that aid must be made conditional on clear benchmarks and with Khaled Fahmy on the need for transparency and accountability (which often is not given by the donors themselves). Ellen Lust makes excellent point that money can create new problems, what she calls the "bifurcation". As for Emad Shahin, who wants aid with no strings attached (here I think he means punitive neoliberal "reforms"), I've disagreed with him in the past. My bottom line: no completed transition, no aid.

Egypt's passive-aggressive begging

Does this give you confidence about handing over money to the government of Egypt?

Egypt to ask US for clear position on economic assistance - al-Masri al-Youm

Egypt will ask the US government to clarify its stance on support for the Egyptian economy, Minister of Industry and Foreign Trade Mahmoud Issa has said, adding that the US is aware of how much it has benefited from its strategic partnership with Egypt.

Issa, who will visit the US on Sunday, said the decision making process in the US tends to take time since it depends on data analysis, but the current situation in Egypt requires swifter action.

Of course, decision-making in Egypt does not depend on data analysis — in fact it is totally independent of facts, reality, or indeed accountability. 

The background of this is accusations that the US is leaning on Gulf states not to give Egypt money (presumably until some conditions, or at least a more coherent approach to the international financial institutions, are met). I certainly hope US decision-makers wait until Issa — and actually, the entire Ganzouri government and SCAF — is no longer in power. Why throw good money after 30 years of bad? And where do they get off thinking that they are owed this money?

Give it all to Tunisia, I say.