With demonstrators back on Tahrir
Square in Cairo, Western media outlets once again
are focused on the demands of urban protesters. A
less tractable but more important story is: when
will the Egyptian economy collapse altogether? The
answer appears to be: at the very latest, when
Saudi Arabia and Gulf states grow weary of paying
Egypt's bills, and probably well before then.
A May 19 report by the Middle East News
Agency, an agency of the Egyptian government,
allowed that the country's hard currency reserves
had fallen to just US$25 billion, from $36 billion
in February, an alarming decline that described a
course towards bankruptcy by late in 2011. The
country's central bank immediate denied the report
in the official news outlet, averring that the real
total was $28 billion.
Emergency loans from Arab oil producers probably
explain the discrepancy.
After the May
Group of 20 (G-20) summit, where the world's
largest economies pledged $40 billion in
assistance for the floundering Egyptians, it is
clear that the industrial nations and the Arab
oil-producers want to prevent Egypt from turning
into a failed state, although it is far from clear
who will pay how much and when.
In June,
the Egyptians rebuffed an offer of $3 billion from
the International Monetary Fund (IMF), evidently
because the fragile ruling coalition could not
accept even the suggestion that a foreign agency
might dictate loan conditions. The IMF protested
that no strings were attached to the funds, but
even the smell of conditionality was too much for
the military junta. Just after spurning the IMF,
Egypt announced a $2.34 billion package from the
Gulf states. Saudi Arabia meanwhile offered an
additional $4 billion.
No matter how much
aid the Egyptians obtain, it is not clear that
much of it will stick to Egypt's financial system.
Jordan's Finance Minister Mohammed Abu Hammour
warned in Rome June 24, "There is capital flight
and $500 million a week are leaving the Arab
world." Although Hammour did not mention countries
in his talk before the Arab Banking Summit last
month, most of the capital flight is coming from
Egypt, and at an annual rate roughly equal to
Egypt's remaining reserves.
The Egyptian
government has told the international
organizations and G-20 governments that it can get
by with $13 billion in assistance this year, but
capital flight could erase that amount in a matter
of months. It is hard to get accurate information
on capital flight, and the fog of war is thickened
by wild assertions.
Professor Niall
Ferguson of Harvard University for example told a
conference sponsored by the Israel Democracy
Institute June 20, "The magnitude of capital
flight from Egypt right now is roughly 10 times
the aid promised to Egypt by the United States and
Europe combined," or $130 billion a year, more
than twice the capitalization of Egypt's stock
exchange, according to the Jerusalem Post,
recalling an old joke about Massachusetts
Institute of Technology types who can't read and
Harvard men who can't count.
Capital
flight takes many forms, including the theft of
diesel oil, rice, and other basic commodities from
public stores for sale overseas. Arab language
journalists and bloggers claim that theft is
endemic, as I reported recently (Humpty
Obumpty and the Arab Spring, Asia Times Online,
June 1, 2011), although it is hard to quantity the
problem. But the more one digs into the details of
day-to-day food supply and the government's
efforts to ameliorate conditions, the more fragile
Egypt's position appears.
Egypt's national
food distribution company is now issuing ration
cards for cooking oil, sugar, rice and pasta, but
this stopgap effort to ensure food deliveries to
the poor has created its own set of problems.
Cheap sugar is the government's provision of last
resort; 64 million Egyptians are supposed to have
ration cards entitling them to buy 2 kilograms of
sugar apiece at prices well below market. That is
important because the 33 kilogram of sugar per
capita that Egyptians consume each year comprises
roughly a fifth of the country's total caloric
consumption, by my back-of-the-envelope
calculation.
The Minister of "Solidarity
and Social Justice", Dr Gouda Abdel Khalek,
pledged June 10 to import enough rice to honor the
claims of ration card holders. According to Al
Ahram, Khalek "confirmed that the crisis in rice
supply the result of corporate monopoly of rice,
in addition to the smuggling of rice out of the
country in containers through sea ports". That
will no longer be a problem, Khalek added, because
"the armed forces have invented a new device to
detect the smuggling of rice to other countries,
and this device has been deployed in sea ports,
which led to a big decline in rice smuggling".
In fact, the Social Justice Ministry
announced June 13, Egypt had seven months' supply
of sugar, as well as precisely five months and 10
days worth of wheat, along with three-and-a-half
months worth of cooking oil. Apparently these
announcements were intended to inspire confidence
in the country's capacity to feed its people.
Egyptian bloggers, meanwhile, complain
that ration cards are stolen from post offices
before they reach recipients, and that stores
refuse to honor them, preferring to sell to cash
payers under the table.
The country's
central bank reported July 10 that year-on-year
food price inflation in May was only 19%, compared
to 19.8% the previous month, but it is evident
from context that the official price index has the
ontological status of a pink elephant. It is a
measure of the credulity and indolence of the
mainstream financial press that fabrications of
this sort are circulated without a second glance.
Egypt's government does not have the
internal cohesion or popular credibility to
negotiate financial support from the West, even
though Western donors are willing to look the
other way at corruption and capital flight, as it
did for years in the case of the Palestine
Authority. It appears to be using its existing
reserves and what support it can glean from the
oil producers to offer stopgaps against incipient
starvation, although corruption and bungling limit
their effectiveness. And the constant drip of
capital flight threatens to exhaust the
government's slim margin of flexibility in
addressing a potentially catastrophic situation on
the ground.
That is all in the short term;
in the long term, Egypt will have to find a way to
deal the 45% of its population who are illiterate
subsistence farmers, so unproductive that the
country must import half its caloric consumption.
Aid from the oil producers probably will delay
Egypt's descent into state failure by a few
months.
Spengler is channeled by
David P Goldman. Comment on this article in
Spengler's Expat Bar forum.
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