Egypt: To fail, or not to fail? That is the question

‘Let Egypt fail!’ This is the message relayed by some analysts and policymakers in Western capitals. It is countered by another message from other analysts and policymakers: ‘Egypt is too big to fail!’ Advocates of the ‘Let Egypt fail’ approach argue that there is no reason why Western democracies should help prop up a government dominated by the Muslim Brotherhood. Egyptians have only themselves to blame for the mess because they replaced the despotic Mubarak regime with an obscurantist one. Those who say Egypt is ‘too big to fail’ have little sympathy for President Mohamed Mursi. Their argument is that Western powers need not worry about Egypt. I think both views are misplaced. Let us start with the second, the claim that Egypt is too big to fail. Although Egypt is nowhere near economic meltdown, red lights are already flashing. Inflation is around 10 percent, which, although half that of the rate in Iran, is already biting into the average Egyptian’s living standard. Since more Egyptians live on the edge of poverty, any increase in inflation has a bigger impact than the same would have in Iran with its larger middle class. Rising fast, Egyptian unemployment is around the 13 percent mark. At first glance, that does not appear too worrisome when compared with the 23 percent rate of joblessness in Spain, for example. However, the effect of joblessness in Egypt is much harsher than it is in Spain. Egypt lacks the social safety net available in Spain through help from the European Union. Neither do average Egyptians enjoy the level of savings their Spanish counterparts would have built up over the years. Egypt’s national debt now amounts to over 70 percent of its annual GDP, lower than such countries as the United States, Great Britain and France, not to mention Japan. But here, too, comparisons are misleading. Despite recent falls in their credit ratings, the US, Britain, France and Japan service their debts at historically low interest rates. A dollar borrowed by Egypt costs more than the same dollar borrowed by major economic powers. Another red light concerns the drop in Egypt’s foreign reserves, from around USD 40 billion in Mubarak’s final year to under USD 13 billion as we approach the end of Mursi’s first year as president. Since Egypt imports much of its food and almost 70 percent of its energy, the fall in foreign reserves could produce massive shortages. One effect of that is a move towards dollarization, in which businesses and individuals sell their Egyptian pounds to buy foreign currencies. This has resulted in a 20 percent fall in the value of the Egyptian currency. Again, that may not seem dramatic when compared to the Iranian rial, which has lost almost 70 percent of its value in the past 12 months. But here, too, comparison would be misleading. The Iranian rial could appreciate when oil prices rise. The Egyptian pound, on the other hand, cannot count on such external factors. More importantly, perhaps, Iran has virtually no foreign debts to repay; with its currency shrinking in value, Egypt needs larger sums to pay foreign creditors. Egypt is also facing massive capital outflow, as many companies and individuals take their money out of the country while foreign direct investment has fallen to its lowest in 20 years. The hemorrhage is not fatal, but the fact that capital flight has topped USD 5 billion is not good news. The sharp drop in the number of foreign tourists and the freezing of investment in businesses manufacturing consumer goods are depriving Egypt of its two main sources of foreign revenue. To make matters worse, the Mursi administration has demonstrated remarkable nonchalance in the face of the gathering economic storms. It has tried to limit imports, thus squeezing the poorest Egyptians further, while increasing social spending, which widens the budget deficit. No, Egypt is not too big to fail—but should we endorse the calls to let Egypt fail? Those who support that call are partly motivated by ideological considerations. They are unhappy that Egyptians have voted a Muslim Brotherhood figure into the presidency. They want Egypt to fail so that they can claim that Mursi and the Muslim Brotherhood have failed. That is a shortsighted, not to say mercenary, view of things. It tells Egyptians that they risk being punished because they did not choose the government that Western powers like. Rather than watching as Egypt plunges into economic crisis, the major democracies have every interest in helping it through a tough transition. After the Second World War, the United States helped Western European nations build a new market-based economy to sustain democratic structures. That was a win–win strategy: the two shores of the Atlantic emerged as each other’s major economic partners. A Marshall Plan for Arab Spring nations may sound like a tired cliché, but it is also good long-term strategy. People who take their fate into their own hands often make terrible mistakes and end up paying the price, but they should not be deliberately punished for their rejection of arbitrary rule. So far, the US has offered an aid package of USD 190 million, while the IMF has put some USD 4 billion on the table. Several oil-rich Arab states have promised a similar package. However, all that would be little more than an attempt at stopping the hemorrhage with bandages. What is needed is a grouping of major powers and regional allies, a ‘Friends of Arab Spring’ club, to offer massive and well-targeted aid in the context of a clear economic and political strategy to Egypt and other Arab countries looking for a different future. --- The views expressed by the author do not necessarily represent or reflect the editorial policy of Arabstoday.