- The Foundry: Conservative Policy News Blog from The Heritage Foundation - http://blog.heritage.org -
Egypt: Too Big to Fail?
Posted By Ryan Olson On March 21, 2013 @ 9:00 am In International | Comments Disabled
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.
Article printed from The Foundry: Conservative Policy News Blog from The Heritage Foundation: http://blog.heritage.org
URL to article: http://blog.heritage.org/2013/03/21/egypt-too-big-to-fail/
URLs in this post:
 Image: http://blog.heritage.org/wp-content/uploads/Mohamed-Morsi130320.jpg
 foreign reserve shortage: http://blogs.ft.com/beyond-brics/2013/02/06/egypt-reserve-decline-trouble-ahead/#axzz2Nzw8KzNf
 have fallen: http://www.imf.org/external/np/sta/ir/IRProcessWeb/data/egy/eng/curegy.htm
 free fall: http://www.oanda.com/currency/historical-rates/
 new currency regime: http://www.arabnews.com/egypt-pound-hits-record-low-under-new-currency-regime
 lacked an effective government: http://www.voanews.com/content/electionlimbo-keeps-egypt-imf-loan-on-ice/1624433.html
 offering $4.8 billion: http://www.usnews.com/news/world/articles/2013/03/12/egypt-declines-750-million-imf-rescue-loan
 Egypt ranks: http://www.heritage.org/index/country/egypt
 2013 Index of Economic Freedom: http://www.heritage.org/index
 E-BRICs: http://m.thehindu.com/news/international/world/egypts-morsy-pitches-for-ebrics/article4521608.ece/?maneref=http%3A%2F%2Ft.co%2FbKg6jwn99b
Copyright © 2011 The Heritage Foundation. All rights reserved.