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  • Egypt: Too Big to Fail?

    MANAN VATSYAYANA/AFP/Getty Images/Newscom

    As President Obama visits Israel, one of the biggest elephants in the room is the ongoing financial crisis just across the desert in Egypt.

    Since the Arab Spring uprising, Egypt’s economy has deteriorated. The country’s most immediate crisis is a foreign reserve shortage. Stocks of the country’s foreign currency reserves have fallen to dangerous lows, and the Egyptian pound has been in a free fall since New Year’s Day after a new currency regime was instituted. The Central Bank’s nearly two-year action to prop up the pound has drained its foreign reserve coffers, and traditional sources of foreign currency have been severely reduced since the revolution. This means that soon Egypt may not have the money to buy basic food and fuel from abroad.

    The source of these troubles is home grown. First, the political system has been at a standstill. Egypt has lacked an effective government since 2012, when the Supreme Court dissolved the parliament. Elections scheduled for April 2013 have again been delayed by the courts. Without a government, international lenders like the International Monetary Fund, which is offering $4.8 billion in financial support, have found it impossible to reach an agreement.

    Second, Egypt’s economy has been poorly mismanaged from the beginning, particularly so under President Mohamed Morsi. Subsidies on energy drain huge sums from the state budget and reserve accounts. While ostensibly for the poor, these payments mostly benefit rich, car-owning city dwellers. Central bankers should also have moved the currency to a float sooner. By letting the pound depreciate, they could have preserved the hard currency they now find lacking.

    To get back on track, Egypt needs to return to the principles of economic freedom. Thanks to poor rule of law and closed markets, Egypt ranks below average for the region and the world in The Heritage Foundation’s 2013 Index of Economic Freedom.

    Morsi claims he wants to transform the BRICs (Brazil, Russia, India, and China) into the E-BRICs, with Egypt at the head. If he can turn back to the principles of economic freedom, he could do just that.

    Posted in International [slideshow_deploy]

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