After public warnings that it faces bankruptcy within a few months, Egypt's
central bank has taken firm and decisive action: it has fired all of its
outside directors. Al-Ahram reported on October 16 that the Supreme Command of
the Armed Forces has cut the number of board members to nine from 15, all
appointed by Egypt's president. Six outside directors, five from major banks
and one from the accounting firm KPMG, have been dismissed.
It is hard to get reliable data on the state of Egypt's economy, in part
because so many things have gone wrong in such a short period of time, and in
part because the military government fires officials who report bad news.
Egypt's economic route calls to mind the country's military disaster during the
1967 war, when - according to the Egyptian government's later evaluation - the
military collapsed in part because of "the army's fear of telling
[president Gamal Abdul] Nasser the truth".
It appears at first glance that the army does not want to tell itself the truth
about Egypt's economy. The truth probably is simpler, and more sinister. The
simplest interpretation is that limiting membership on the central bank's board
to flunkeys of the Supreme Command clears the way for corruption on a grand
scale. When the civil societies of developing countries disintegrate, the
authorities often appear to be paralyzed. In most cases, the anonymous little
men in charge of big functions are hard at work, making down payments on Paris
apartments and private jets.
Egypt's trade deficit last year rose to US$26 billion, with exports at $23
billion and imports at $49 billion, according to Mahmoud Abdul Hai, a
consultant to Egypt's National Planning Institute, the news site Youm7 reported
on September 26. That would put Egypt's trade deficit at a stunning 15% of
gross domestic product (GDP). The central bank's website, by contrast, reports
that the deficit during the six months through July ran at an annual rate of 9%
The central government probably has lost the capacity to count foreign trade
flows accurately. A great deal of capital flight occurs through fraudulent
invoices for imports as well as black-market exports of tradable commodities.
The Egyptian press from time to time runs exposes of smugglers stealing rice,
or fertilizer, or diesel fuel for sale to foreign buyers, although aggregates
are hard to trace.
If Mahmoud Abdul Hai of the planning institute is correct, his country's
exports have fallen from to $23 billion from $29 billion in 2009. If true, part
of the decline probably represents disguised capital flight.
One example is amusing. In mid-September, Egypt banned exports of palm fronds (lulavs)
for ceremonial during the Jewish festival of Succoth (Tabernacles), out of
rancor towards the Jewish state. The palm fronds nonetheless arrived, as the
Israeli newspaper Ha'aretz reported on October 11: "The lulav traders utilized
long-existing ties with senior officials in Egypt, and succeeded to covertly
purchase a large amount of lulavs. According to one of the traders in New York,
a senior official in Cairo received $100,000 to aid in smuggling the palm
fronds outside of Egypt."
A quarter of Egypt's state budget subsidizes fuel, which is the most important
commodity in Egypt's black economy. During mid-September, the Egyptian General
Petroleum Corporation reported, daily demand for gasoline jumped from 14
million liters to 23 million liters. The Egyptian Gazette claims that "the rise
in demand is the result of smuggling subsidized petrol to the neighboring Gaza
Strip at a higher price". If Gaza really provides the venue for gasoline
smuggling on the grand scale, the Muslim Brotherhood's Gaza branch, Hamas,
might do more to destroy Egypt than anyone in Western intelligence services
might have guessed.
"In the Mediterranean town of Alexandria earlier this week," the Gazette
reported on September 27, "the military police seized 4.3 million liters of
diesel hidden in stores ready for smuggling." While Egyptians faced 24-hour
queues for diesel fuel at gasoline stations last summer, tankers reportedly
were waiting at Port Said on the Suez Canal to pump diesel oil from storage
A black market in fertilizer has earned billions of dollars for senior
officials, according to a Cairo University professor of agriculture quoted by
the Egypt Gazette. The Gazette story alleges that Hosni Mubarak's agriculture
minister Amin Abaza organized the fertilizer scam. Abaza is awaiting trial on
charges of illegally selling public land.
Egyptian media alleged last June that rice was vanishing from public
storehouses, and that the government's food-distribution organization was
peddling the contraband grain by the container on the overseas market.
We saw exactly the same thing in Russia in 1992-1993, when unrecorded
trainloads of raw materials left Russia for sale in foreign markets.
It is hard to know just how much money the central bank has on hand. The Bank
of Egypt has reported its foreign exchange reserves as of the end of September
at anywhere from $19.4 billion to $24 billion. The deputy governor of the Bank
of Egypt, Hisham Ramez, told the newspaper al-Youm al-Sabaa on October 11,
"Egypt will not go bankrupt, and is not on the verge of bankruptcy." The Nobel
Laureate and presidential candidate Mohamed ElBaradei had warned the previous
week that Egypt would run out of foreign in exchange within six months.
The amount of foreign aid under discussion seems an order of magnitude too
small to make a difference. Saudi Arabia on October 16 said that it would buy
$500 million worth of Egyptian Treasury bills and lend another $500 million to
tide the government over, while Qatar has reportedly lent $500 million to
Cairo. Considering the magnitude of sums already leaving Egypt through illegal
activity of different kinds, a billion or two dollars barely will be noticed.
Egypt's Finance Minister Hazem el-Beblawi is talking about reviving discussion
with the International Monetary Fund (IMF) for a $3 billion credit. All in all,
less than $5 billion in aid to Egypt seems to be in play, against a financing
requirement well in excess of $20 billion. The economics of the proposed IMF
loan make no sense, but split among a dozen senior officials, $3 billion goes a
Spengler is channeled by David P Goldman. Comment on this article in
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