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

 

Remarks

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.