The Arabist

The Arabist

By Issandr El Amrani and friends.

Posts tagged Economics
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.

Press Release  
February 10, 2013
U.S. Ambassador to Egypt
Anne W. Patterson
Rotary Club of Alexandria Mariout
February 10, 2013
Alexandria, Egypt
Thank you Dr. El-Akad, for that kind introduction.
I appreciate the opportunity to speak to you today.  The Rotary plays a critical role in civic and charitable activities in many countries, including Egypt.  In other places I have lived, I have found Rotarians to be excellent partners.   I am a member of Rotary in my home town of Fort Smith Arkansas.  Organizations like Rotary reflect values that we all hold dear: outreach in our communities, generous charitable work locally and overseas, and a forum to learn more about local and international issues. 
I will never forget sitting in a Rotary meeting in Bogota, Colombia when a big boom went off and we all thought it was a car bomb in the neighborhood, an occurrence which was depressingly familiar.  But yet these Rotarians were meeting with each other and talking about how to help the least fortunate in their country.  So I am very grateful to be asked to speak to you today.     
I want to take this time to speak about the issues facing this country and realistic steps Egypt can take to move forward.  Two weeks ago, Egypt marked the second anniversary of its 2011 revolution.  What should have been a day of celebration was marred instead by violence in the streets, which intensified in the days following.  Two years ago the world stood by in amazement as the people of Egypt took control of their future and ended Hosni Mubarak’s thirty year reign.  This year the world watched rock wielding youths face off against the police of a democratically elected government armed with truncheons and tear gas as roads and bridges were closed, vehicles were burned and a major tourist hotel was looted.  Potential tourists who represent a vital lifeline for Egypt’s economy saw not the natural and historic beauty of this country, but violence and instability.  This is the last thing Egypt needs. 
Egypt has made great strides in the two years since January 25, 2011.  Elections generally regarded as free and fair elected a new president and, despite considerable controversy over the process that produced it, a referendum endorsed a new constitution.  But while elections and constitutions are a necessary part of democracy, they are not enough.  For Egypt to complete its transition to a free democratic nation, it needs much more.
Democracy needs a healthy and active civil society.  Non-Governmental Organizations are vital – not just political NGOs, but organizations like Rotary International working in a wide range of areas.  My embassy staff and I have met with NGOs focused on improving education, creating business opportunities, promoting dialogue between members of different religions, nurturing the spirit of entrepreneurship and offering opportunities for vocational training.  These are just a small sample of what a thriving civil society can do for a country and its people, without unduly burdening the country’s treasury. 
NGOs, however, need an environment in which they can grow and thrive.  There must also be people like Rotarians who are willing to volunteer their time and resources to create and maintain the organizations of civil society.  Egypt needs a new NGO law that clarifies the role of civil society and more importantly defines a clear and simple process by which these organizations can register themselves and protects their rights.  By adopting a law that is consistent with international norms for freedom of association, the Egyptian government can create a firm foundation on which civil society can flourish.  And Egyptian organizations do not have to carry the burden alone.  They can get help from other organizations in other countries.  Egyptians can learn from the experience of others who have gone through their own political transitions.  Your government should ensure that they too can register themselves in a timely and efficient manner.
The burden for creating and nurturing civil society does not rest solely with elected officials.  Those who went to Tahrir square two years ago brought down a dictator and earned their freedom, and did so with remarkably little violence.  Their courage as they joined arms to protect the Cairo Museum and the Alexandria Library was an inspiration.  But courage needs to be combined with commitment to the hard work of building political parties and engaging in the electoral process. 
Now is the time to build up the political structures of the country.  Egypt’s activists need to channel their courage and effort into creating political institutions – not merely legal structures, but true institutions that are widely respected by all elements of the society and restrain leaders or groups that might seek to impose their will.  They must gather to form effective political parties, participate in the electoral process, and commit to the hard work of building grassroots support for their values.  The people who will build Egypt’s future are the ones who are best at finding reasonable compromises and building national consensus.
To build the future Egypt deserves, Egypt will need all of its people, regardless of their faith, ethnic background or gender.  For this reason, Egypt needs to ensure the protection and participation of the full breadth of its rich tapestry of citizenry.  Christians and Jews have been a part of Egypt for thousands of years.  Egypt is also home to members of other religions and denominations, including Bahais and Shia Muslims.  Many are now frightened that they will have no role, or even that they will be unsafe, in Egypt’s future.  That is a tragedy.  They need to know that they are welcome and their contributions to society are embraced and encouraged.  Similarly, women are half the population; they are strong, smart, able and fearless.  For years, they have stood side by side with men working together to build this country.  Now is the wrong time to backslide on their participation.  As Christine Lagarde of the IMF noted in Davos on January 23, all studies point to the economic benefits of full female participation in the labor force, in the economy, in society.  Societies that learn to give women the scope to fully participate in the workforce alongside men have faster economic growth.  And economic growth is something Egypt sorely needs.  It is difficult for democracy to survive alongside widespread poverty and a stagnant economy. 
Two years after the revolution, it is time to focus on the most critical economic needs of the Egyptian people.  Egypt’s numbers paint a bleak picture: Currency Reserves are at a critical level, roughly $14 billion or three months’ worth of imports.  While this has held steady since July, that is only because of the regular injections of cash by Qatar and Turkey.  These numbers do not take into account the billions that the government is in arrears to oil companies.  And more importantly they don’t highlight what Egypt is importing – basic food items and refined energy products, key determinants of social stability.  If Egypt cannot pay its import bill, her people will not be missing out on television sets and cars, but on electricity, gasoline and food.  In other words a more careful look at the reserve numbers show they are not close to what a country like Egypt needs for a smooth running economy.
As the Central Bank tries to manage a gradual depreciation of the pound to market levels, I know that the Central Bank is taking steps to reduce the black and gray markets for foreign exchange.  Black markets are dangerous because large amounts of money now move unsupervised by the authorities of legitimate institutions, weakening the legitimate banking sector and eroding respect for law.  The longer Egypt restricts access to foreign exchange, the more it will undercut investment interest in the country.  It is a simple fact of life.  Investors will not enter the market if they cannot get their money out of the country.    
The exchange rate is a key price in any economy and needs to respect fundamental laws of economics.  If not, evasion of legal exchange and stunted growth will be the result as domestic producers turn to imports and close their factories and domestic business formation is retarded.  Meanwhile, key sectors are hurting, perhaps none more so than tourism, which had seen something of a recovery in arrivals but no real recovery in receipts.  I visit Luxor occasionally, and the situation there, with some of the most incredible historic sites in the world, is heartbreaking.  Tourists who are coming to Egypt are not spending very much, and this will continue to erode the quality of the product that Egypt can offer, so that jobs are lost and communities dependent on tourism will be crippled.  
Every economy goes through bad periods, but economies only recover when they are tended.  And that means someone has to take ownership of the solutions (even if they are difficult) and lead the way out.  People must be shown a vision of how the future will reward the sacrifices of the present. 
The most catastrophic path is for the government and the political leadership of the country – whether in power or in opposition – to avoid decisions, to show no leadership, to ignore the economic situation of the country.  When management of the economy is treated as a by-product of political disputes instead of a core function of political leadership, the business community is left trying to protect itself instead of investing and growing.  The talks with the IMF need to be brought to closure.    
The current system of fuel and energy subsidies is unsustainable.  This needs to be discussed openly and the public needs to debate the solutions.  A way must be found to bring the cost of the energy subsidies down while protecting Egypt’s poorest citizens, but possible solutions require an open public discussion – a discussion that is not taking place.  
The engine for future growth in Egypt is small and medium enterprises, the kinds of firms that can innovate and grow more rapidly than the rest of the economy.  The government needs to streamline the process for getting into business, reducing red tape, forms, fees, taxes etc.  Research into innovative new ways of doing things, new crops for the Delta, allowing the private sector to take advantage of all the efficiencies promised by high speed internet, and assuring that good ideas can get financing are all vital.  And these are things SMEs do well. 
One thing that has come through to the Embassy loudly is the banks have not been willing to lend to small and medium enterprises.  SMEs are not able to prosper when banks refuse to finance them, even when money is available.  The government and the Central Bank need to find a way to make financing for small and medium enterprises available and affordable or the ability of the Egyptian economy to “take-off” into sustainable high rates of growth will be severely constrained.
Egypt has a great economic future.  It has a diverse economy, a large internal market, and an enviable strategic location.  It has a well-respected financial sector and abundant growth potential.  And even as bad as the economy has become, it is still growing at about two percent.  Egypt’s economy is, in a word, remarkably resilient.  It has withstood a lot of tribulation over the last two years, and it is a credit to the country’s private sector and to its diversity that it is still standing at all. 
More than that, we know there are foreign investors who still have an eye on this country.  Last September, Egypt hosted the largest American business delegation to visit in the Middle East in history; many of the giants of the U.S. business world – Google, Boeing – enthusiastically attended.  We talk to portfolio managers regularly who want to know when it will be time to get back into Egypt.  We know of major multinationals that have plans for significant additional investments once stability returns to the economic space.  And it will be key not just to attract foreign investors, but also to lure back Egyptian investors who have left out of fear or uncertainty.      
No individual has all the answers, but there are three key things Egypt must do without delay to restart the engines of growth:
First, Egypt needs to conclude a credible agreement with the IMF.  Reaching agreement will unlock IMF funds and financing from other sources, including the U.S. Government, and more importantly will send a strong signal to the investment community that Egypt is committed to reforming its economy.  The IMF agreement’s biggest impact will be as a catalyst, encouraging additional lending, and sparking interest from short-term portfolio investors, then perhaps longer-term portfolio investors, and then eventually a return of badly-needed Foreign Direct Investment.
Second, Egypt needs to fix its energy sector, fundamentally overhauling a simply unsustainable subsidy program that costs billions of dollars every year.  The money saved can repay its arrears and once again secure the credit terms it needs for imports.  And in the longer term, Egypt will be able to make critical infrastructure improvements, expansions, and modernizations that will lead to greater efficiency and cost-savings while ensuring the country can meet the energy needs of a growing population.
Finally, Egypt needs to make peace with its past.  It needs to provide clear public assurances that investors are safe from arbitrary acts.  Contracts no matter when signed or under what circumstances will be honored except when they are found illegal by a due process of law in an impartial judicial system.  A framework of law must be in place making clear that contracts will be honored.  Those who invested in Egypt in the past cannot be threatened with jail or severe financial penalties years later because that forces investors to invest elsewhere.  When investors are confident they will be treated fairly, they will return to the opportunities Egypt presents in droves.  New investment is the foundation for economic growth; it must be nurtured, not disciplined. 
Are these decisions easy?  Absolutely not.  Leadership is hard.  It sometimes means sacrificing short-term gain for the greater good of the country.  But by building a stronger Egypt, it ultimately brings benefits to all of Egypt’s people, and that’s what leadership is all about.


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.

With the option of hiring cheaper foreign workers so readily available, employers have become addicted, and a perverse situation exists where many firms can not afford to hire Saudis but most Saudi nationals can not make even a modest living wage in their own private sector.

The Saudi trucking sector perfectly illustrates this point. Until the 1970s, the overwhelming majority of truck drivers in the Kingdom were Saudi nationals, but over the ensuing decades they have been gradually replaced by workers from some of the poorer parts of the Indian subcontinent or often oftenthe Horn of Africa. $400 to $500 per month is far more than they can earn at home, so there is no shortage of those willing to work these jobs.

On the other hand, $500 is hardly enough to support even a modest lifestyle, much less a family, for a Saudi national living in Saudi Arabia where the cost of living is much higher. Not surprisingly, most don’t want to work in these companies.

This is why, Nitaqat, the new policy that Sullivan briefly mentions on page 3 is so important, because its an indirect attempt to implement a minimum wage that would undo some of these distortions to the labor market that cause the unemployment problem to be so persistent.

Previously, if there were two equal candidates for a job, an expatriate willing to work for $500 and a Saudi for $800, basic business logic suggests the employer will choose the least expensive option. Now, with the minimum wage that is gradually coming into place, there is no theoretical cost advantage of hiring the expatriate over the Saudi.

One of the really important and often overlooked points here is that Saudization and the minimum wage issue is to a large extent a zero-sum game between the interests of private sector firms (the employers) and citizens (the employees) as a whole. And the issue of imposing a minimum wage needs to be understood as an attempt by the government to secure full regulatory control of the labor market - which it hasn’t had due to the power of private sector employers.

A useful historical comparison here might be with US firms before the New Deal. Until the 1930s, the balance of power between employers and employees stood firmly in favor of the former (see The Jungle). Business was generally powerful enough to beat back any government attempt to increase regulation of work conditions.

Only with the crisis of the Great Depression was public opinion so strongly siding with the workers that FDR had the ability to increase the state’s control in this area with policies like a minimum wage, unemployment insurance and to ignore complaints from businessmen which were largely anti-New Deal.

Is Saudi Arabia in a similar situation today with the Arab Spring? Does this give the government enough cover to go after the interests of business, the way FDR did in the 1930s? ** **Maybe. But as we mentioned above, the government and the people in this situation, have different interests than employers, and not everyone can ultimately be happy with the Nitaqat policies.

In general, the costs of doing business for companies will inevitably rise. With higher wages, profits will decrease, and since many of the newly hired Saudi nationals will be younger and less experienced, managers will have to spend more time on training instead of running their businesses, and productivity will theoretically decrease. Ironically, one consequence of a government policy intended to increase employment is that some firms might be less likely to hire new workers in general or will try to get by with fewer.

There are, however, good business reasons why Saudi firms can and should adopt the minimum wage. One obvious benefit is that it would increase employee loyalty. And for big firms hoping to win government contracts (and who can more easily absorb the new costs), voluntarily adopting the minimum wage will likely give them a marketing edge compared to those who drag their feet. But most importantly, as the majority of business persons seem to understand, no one will make any money if the system collapses because of rRevolution due to long-term high unemployment.

Like the US private sector during the New Deal, many (although not all) Saudi private sector firms are complaining about Nitaqat, which they see as unwanted intrusion into their affairs, which will have negative economic consequences for their businesses, and maybe even force some to close their doors. It is probably true, as the government apparently acknowledges but that seems to be a goal if its it bankrupts companies who are only employing low-cost foreign labor.

From the government’s perspective, such a hard-line is necessary to show their resolve on Saudization. The country’s firms already enjoy a fairly significant advantage by not having to pay taxes, so the government sees it as reasonable - and essential for the Kingdom’s long-term stability - to take a stand against those who also refuse to hire Saudi nationals.

For Arabist readers, the implementation of Nitaqat should be viewed as more than just an isolated question of Saudi labor policy. It needs to be seen in the context of ongoing reforms throughout the region as a result of the Arab Spring. There might not be elections or drafting of new constitutions in the Kingdom like there is in Egypt, but the balance of power between workers and employers is shifting - at the government’s initiative - more in favor of the people, and this is an important reform trend that is no less meaningful.

Nathan Field is the co-founder of Industry Arabic. Contact him at

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.

The primary issue with internet-based “startups” in this context is that they rarely produce significant numbers of jobs. For all the media attention they receive, the combined workforce of Facebook, Linkedin, Twitter and Groupon, for example, is less than 20,000 people so it is unlikely that Egyptian web-based companies, especially those based on the development of computer apps, would make a major impact on the job creation front.

Moreover, just as Facebook’s IPO created a few hundred new super-rich, if any of the profiled Arab internet companies make it big – and some probably will – the financial rewards will go to a few already wealthy investors, or the generally high-skilled computer programmers, who already have plenty of employment opportunities.  This is not a value judgment – they would deserve it, for sure, since they took the initiative and the risks. But the question here is what does Egypt need more: millions of “middle class” jobs or a few hundred tech millionaires?

Secondly, while these computer programmers are nobly developing apps that address serious social problems, such as providing vetted taxis to women in a country where sexual harassment is a problem, or to provide traffic alerts in one of the world’s most congested cities, the benefits will primarily go to the  already well–off.  In a country where less than 50% of the population uses the Internet at all, only 10-15% of the population at most can afford access to smartphones, where they would use these apps?

By all means,  the creation of mini-Silicon Valleys in Egypt should be encouraged, but to the extent that promoting the development of new “startup” companies is a solution to the country’s problems, at least as much focus, perhaps  more, should be on the development of traditional, low-tech, labor intensive firms, because they are much more likely to create new jobs. 

In a country as large as Egypt, there is no shortage of areas where smart and resourceful entrepreneurs could set up profitable firms, that provides good “middle class” jobs at all skill levels, from MBA types, to mid-level project managers, to unskilled laborers.  Three immediately come to mind.

Garbage collection and disposal is one opportunity. Cairo, a city of over twenty million people, has at best, mediocre trash collection services. Part of the problem seems to be a lack of competition. Introducing more alternatives would not only improve quality of life, it is labor intensive, so it would require lots of manpower, nor does it need huge amounts of startup capital, and in a city this size, there will always be demand for great trash collection services. 

Facilities maintenance is another potential niche. In general, standards in this area in Egypt are not great and many building are in terrible condition because of decades of systematic neglect.  But  building maintenance is not exactly a luxury – it’s a necessity – and like trash collection there will never be a shortage of potential clients. If someone could step in with a company that develops a reputation for high quality and responsiveness they could feasibly build up a decent sized business fairly quickly.

The biggest opportunity, however, might be in the education sphere. A major cause of socio-economic disparity in Egypt is the winner-takes-all university entrance exam. Since – and this is not an exaggeration – a young student’s entire life trajectory depends on their test score, families feel forced to pay huge fees to tutors (at rates that would be high even in the United States).  As success on the test is often directly related to the quality of one’s tutor, those who can afford it, get good instruction, get into the good schools etc, whereas those who can not, are simply unable to compete. 

An Egyptian entrepreneur that could recruit the right group of teachers could probably find a way to set up high-quality group instruction that charge students half the price they are currently paying, but has virtually unlimited potential for scaling up given that there are several million test takers each year.

Finally, at the state level, the new government could have an impact by promoting more of an entrepreneurial mindset in the development of some form of manufacturing.  As Thomas Friedman pointed out, correctly, there is no reason why Egypt should be importing Ramadan lamps or tourist souvenirs from China, where the cost of labor is much more expensive. 

To be sure, in a brutally competitive global economy, it will be difficult for Egypt to make manufacturing inroads against China or Europe, but with a serious focus, there is no reason why it couldn’t match Saudi Arabia’s efforts to develop car manufacturing facilities.  

At the very least, even if not profitable, it would be a good investment. After all, what is a better use of money?  Increasing social welfare spending as a response to the revolution, which, aside from being unaffordable, will further increase dependence on the government? Or to use that same money to build up lower level manufacturing facilities, which will at least create jobs and improve the skill level and confidence of the younger generations (if proper training is involved)? 

Even in a best-case scenario, the new government will have a hard time doing better than the Mubarak regime in creating new jobs and opportunity.  So the single most important thing it can do is to develop a new culture of entrepreneurship, and promote a new generation of “startup” companies, because, as the history of modern business suggests, private initiative is almost always more effective at creating jobs than massive government bureaucracies.  

At the same time, the linkage between “startup” companies and internet companies should not be overdone. The biggest impact on the jobs creation front will come from lower-tech, labor intensive firms, and these deserve equal focus in any program that aims to promote entrepreneurship as a solution to Egypt’s problems. 

Nathan Field is the co-founder of Industry Arabic. Contact him at

"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!?