RUTHFULLY YOURS

Prospective economic ruin has energized Egypt’s political crisis since the fall of Hosni Mubarak in January 2011. Mohammed Morsi’s Islamists and the opposition are not battling in the streets of Egyptian cities about economics, to be sure, but about how to govern a country that cannot meet the basic needs of most of its citizens. Egypt’s pound dropped suddenly on the foreign exchange market Thursday as the country’s central bank announced a drop in foreign exchange reserves during November. If the pound collapses–and it is hard to see how this can be avoided–the cost of necessities will soar and the crisis will deepen.

Egyptian Pounds to US Dollar

Egyptian news media are reporting signs of crumbling as the country’s cash runs out. Western media have focused on the politics and the street fighting, but have reported almost nothing about the breakdown of economic life. Arab-language media, though, are full of alarming news. A few examples:

• The Food Industries Association warned Nov. 27 that lack of foreign exchange to purchase food commodities may reduce food imports by 40% during the next several months. Egypt imports half its total food consumption. Upper Egypt already is suffering a drop in food supplies (I presume other than state-subsidized bread) by 40%. Banks are refusing to provide financing for food imports because importers are already deeply in arrears.
• The Misr Beni Suef Cement company shut five plants due to a natural gas shortage.
• An epidemic of bird flu threatens to destroy Egypt’s chicken population because of a lack of natural gas to heat poultry farms.
• Egypt’s government electricity company warned that the provision of power is in danger because government agencies are 15 billion Egyptian pounds (US $2.5 billion) in arrears on their electricity bills.
• Gas and diesel supplies at filling stations are down 70% from normal levels since President Mohammed Morsi’s constitutional declarations.
• Shortage of fertilizer has cut agricultural exports by 10%, according to the Agricultural Export Council, and it is likely that overall production has fallen by a similar margin.

In thirty-five years of following debt crises in emerging economies, I have never seen anything like this. Latin American economies suffered from hyperinflation during the 1970s and 1980s, but no-one went hungry, because the economies in question all exported food, while Egypt imports half its food. The difference between Egypt and a banana republic is — the bananas.

Since the onset of the misnamed Arab Spring, I have argued that the economic collapse of the non-oil-exporting Arab countries and the continuous threat of food shortages was the prime mover in Egypt’s political breakdown (“Food and Failed Arab States ,” Feb. 2, 2011). After President Morsi failed to suppress riots against the US Embassy in mid-September, I asked “Is Egypt Governable?” in an essay for the Jewish Institute for National Security Affairs. I warned that the crisis:

Is an opportunity for Morsi to consolidate power-a government that determines who eats or cooks or drives by issuing ration cards has life or death power over a poor population-but it is also a very dangerous one. Morsi’s government is new, and it is taking enormous risks by imposing a brutal belt-tightening on a poor and long-suffering people.

Even Islamists have to eat. Some senior Israeli policy analysts believe that Morsi will do everything possible to distract the Egyptian people from the growing misery of their material circumstances. Morsi may attempt to justify an Egyptian annexation of oil-rich Libya, and might fight Sudan for control of the Nile’s limited water supply. And he may encourage Islamist extremists to vent their frustrations against the United States.

This is a dangerous policy, but perhaps a tragic one, in the classic sense of the term: Morsi may pursue a destructive and self-defeating course because circumstances compel him to do so. The dissonance between the reality on the ground in Egypt and Washington’s narrative has already become grating. In the coming weeks it is likely to become intolerable.

Morsi demanded dictatorial powers last week in large part because the exigencies of Egypt’s economic position–a $36 billion trade deficit, equivalent to an astonishing 16% of GDP, and a budget deficit of 11% of GDP–required cuts in subsidies for necessities, which take up nearly half of the country’s budget. A $4.8 billion loan from the International Monetary Fund was supposed to give Egypt breathing room until the Morsi government could persuade private investors t meet the gap, presuming that Morsi could get the gigantic deficits under control. It appears that Morsi’s attempt to gain the political leverage needed to address the deficits has blown up in his face, and prompted capital flight. The country’s stock market has fallen by 25% since mid-September. That is a less than perfect indicator, given that the market capitalization of the whole Egyptian stock exchange index is less than that of Starbucks.

Egypt Stock Market ETF (EGPT)

If Morsi succeeds in crushing the opposition, Egypt is likely to become a sort of North Korea on the Nile in which a totalitarian one-party state rations a dwindling supply of food. A more likely outcome is a prolonged period of instability with spreading hunger.

What should the United States do?

• First, we should recognize that there are some disasters beyond our capacity to fix. Egypt is the victim of sixty years of mismanagement and corruption.
• Second, we should not throw good money after bad. American taxpayers are under no obligation to pour money down the drain.
• Third, we should actively support the secular opposition led by Mohamed al-Baradei. I do not believe that al-Baradei could govern Egypt more effectively than Morsi, but anything–including prolonged chaos–is better than the consolidation of a totalitarian state under the Muslim Brotherhood.

And finally, we should severely reduce military aid to a country whose political leadership cannot be expected to act responsibility in a crisis.