A Financial Sovereignty Strategy for Egypt

By Fadhel Kaboub

Despite all the heated public debates that we have been witnessing in Egypt since the January 2011 uprisings, very little attention has been given to the root causes of the country’s deepest economic problems. Understandably, as a country moves towards democracy, it must address all the concerns about freedom of expression, religious rights, women’s rights, security and justice sector reforms, anti-corruption laws, political pluralism, elections, and constitutional reform. However, it is equally important to recognize that regardless of the political affiliation of the new government (Muslim Brotherhood, secular, or military), it must craft a long-term policy agenda to address the root causes of Egypt’s economic problems. Failure to do so will be catastrophic not only for the economy, but also for the creation of a secure and stable democratic society.

The most obvious sign of Egypt’s economic woes is the rapid decline in its foreign currency reserves, which stood at $36 billion in January 2011 and dropped to their lowest level of $13.4 billion in March 2013. This rapid decline was accompanied by a steep devaluation of the Egyptian pound, which has lost 17% of its value against the U.S. Dollar since January 2011. It is easy to blame the pound’s devaluation on the economic consequences of the 2011 uprisings, but a closer look indicates that the Egyptian pound has actually lost 24% of its value since July 2008 long before this most recent conflict.

These indicators are the symptoms of a much deeper economic problem that has been ignored by the Mubarak regime, the Mursi administration, and the current so-called “caretaker” government. All of the policy prescriptions have been aimed at fixing the symptoms rather than treating the root cause of the problem. Trying to increase Egypt’s foreign currency reserves through IMF loans and financial aid from friendly Arab governments merely provides temporary relief to the country’s perpetual external imbalances.

Egypt suffers from a structural trade deficit problem. In other words, Egypt’s exports cannot generate enough foreign currency earnings to cover the country’s imports and its foreign debt commitments (Egypt’s external debt is about $39 billion, not counting the recent $12 billion in loans and grants from Saudi Arabia, Kuwait and the U.A.E.). Addressing the root causes of this structural trade deficit is Egypt’s most important economic challenge.

Unfortunately, neoliberals have seized the moment to argue that the only solution to this “currency crisis” is to boost free market reforms (through export-led development, privatization of government-owned companies, promoting tourism, and attracting foreign direct investment) and to introduce drastic austerity policy aimed primarily at food and fuel subsidy cuts.

First, the neoliberal reforms that were implemented by Mubarak (and later continued by Mursi) have actually exacerbated economic inequality, unemployment, trade deficits, external debt, socio-economic dislocation, and the concentration of wealth and power in the hands of the elite. Second, the food and fuel subsidies have been used to buy support for the government, and at the same time, to shove serious economic problems under the rug.

Food and fuel are the two main gaping holes in Egypt’s structural trade deficit. Egypt is the world’s top wheat importer (9,000,000 metric tons) and the fifth largest corn importer of the world (4,900,000 metric tons). Furthermore, despite its vast natural gas reserves, Egypt’s growing energy consumption has pushed the country to become a net importer of natural gas and refined oil products.

Egypt could certainly continue to muddle through neoliberal reforms, austerity measures, and more external indebtedness, but this can only contribute to extending economic misery for its people, increasing dependence on foreign aid, and intensifying social and political conflict. Instead, Egypt needs a comprehensive long-term strategy for policy reforms in agriculture, alternative energy, trade, environment, nutrition, education, health, and public infrastructure.

Unfortunately, all of the economic reform debates are sticking to Mubarak’s neoliberal economic agenda and focusing on ‘Band-Aid’ loan solutions to shore up currency reserves and stop the devaluation of the Egyptian pound. It is urgent to put this alternative economic policy framework at the center of the country’s burgeoning political debates; otherwise whatever progress may be made on the democratic transformation front could quickly be undone by the collapsing economic fundamentals.

The good news for Egypt is that a social and political movement is slowly beginning to clearly articulate its economic grievances, reject neoliberal reforms, and demand alternative economic plans. The pro-democracy youth movement and the independent labor unions are starting to mature as political forces after being overwhelmed by the Muslim Brotherhood and the pro-business establishment forces. The challenge for Egyptians today, however, is to convince the military leaders that the path towards stability and prosperity is possible if they reject neoliberal policies and address the root causes of the country’s structural economic problems.

Egypt’s leaders understand the concept of “national sovereignty” (political and territorial sovereignty), but unfortunately they are unaware of the critical role played by financial sovereignty, which Egypt lacks because of its massive external debt (not to be confused with domestic debt denominated in Egyptian pounds).

This is an open invitation to all the progressives who care about Egypt’s future to focus on restoring financial sovereignty by developing a series of 5-year plans with the following core features:

1. Leverage domestic labor resources to be the engines of sustainable growth and development (a Job Guarantee program, rather than welfare and subsidies programs): focus on youth employment and university-sponsored R&D.
2. Renegotiate dollar-denominated debt: Convert loans into bonds and allow investors to use bonds to pay taxes and fees owed to the government (i.e. convert foreign debt into domestic debt).
3. Crackdown on domestic speculators who profit from Egypt’s foreign debt (capital controls).
4. Leverage the Suez Canal importance in global trade to negotiate debt cancellation and technology transfer.
5. Invest in renewable energy (both in rural and urban areas), sustainable agriculture, sustainable public transportation, and sustainable urban development.
6. Use export revenues to fund import priorities that will maximize domestic production rather than consumption.
7. Cancel Egypt’s odious debt.

I have intentionally left out “food and nutrition policies” from this 5-year plan because it requires an entire generational and cultural shift. This is more of a 50-year plan to introduce a popular gastronomy and nutrition culture that is less dependent on imported wheat products (bread and pasta), corn, sugar, and other imported carbohydrates of lower nutritional value; and to promote domestically produced food products with higher nutritional value. The resulting health benefits will also translate into lower healthcare costs and higher productivity in the long run.

The Job Guarantee program can be adopted through the democratic process as an overarching plan to restore financial sovereignty, promote full employment, sustainability, higher quality of life, and long-term prosperity. All of this is desirable, feasible, and affordable.  Those who think otherwise and yet still aspire for a democratic society in Egypt will by sorely disappointed to know that there can not be true democracy without full financial sovereignty to deliver social and economic justice for its people.

Dr. Fadhel Kaboub is an Assistant Professor of Economics at Denison University (OH) and a Research Associate at the Levy Economics Institute (NY) and the Center for Full Employment and Price Stability (MO). His research focuses on job creation programs, monetary theory and policy, and the political economy of the Middle East. For more on his work, visit www.kaboub.com