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Political Power Struggle Could Result in Turmoil for the Egyptian Economy.

Egypt’s fragile economy faces a potentially debilitating test as political confrontations increase in severity.

Two weeks ago President Mohamed Mursi of the Muslim Brotherhood was inaugurated. Since then he has recalled the Islamist-led parliament dismissed by generals immediately before his election. This open challenge to the entrenched military could send the government into freefall, which could in turn prove disastrous for an economy already speeding towards a budget crisis.

Within a year Egypt’s foreign reserves have plummeted to 15.5 billion U.S. dollars, well below half their previous level. Meanwhile, government paid interest rates have grown to the highest in a decade to an untenable 16 percent for one-year treasury bills.

After six decades of authority the Egyptian Army was quick to limit the power of the new leader, acting even before the civilian president had been elected. Over the course of a two-day run-off election parliament was dissolved and a decree, detailing restrictions to the president’s powers, was issued by generals.

Mursi wasted no time in making a counter strike, issuing his own decree and reassembling parliament in the days immediately following his taking office. However, Mursi must learn to balance the public demand for employment growth and financial security with his own agenda of reducing the power of the Supreme Council of the Armed Forces (SCAF).

Said Hirsh of Capital Economics expressed the opinion that with the economy in such a tenuous condition a long confrontation could see its collapse: ‘Months, rather than years, they can hold on like this.’

As Mursi sets up his new government investors will be watching closely. As HSBC economist Simon Williams states ‘The formation of a legitimate government – and evidence that that government is capable of making and implementing policy – is essential if investors who believe in Egypt’s long term prospects are to be persuaded that they can begin to deploy capital now’.

The International Monetary Fund (IMF) must be convinced that Mursi is in control and has the breadth of political support needed in order to implement the required austerity measures. Only then will the way be paved for a loan facility of 3.2 billion dollars.

Although external aid, in the form of Saudi and American handouts, may provide Egypt with some respite, attracting investors from further afield remains essential.

The recent turmoil has seen many investors up sticks and a significant reduction in economic growth and tourist visitation. If Egypt hopes to avoid being sucked further into the global economic downturn its political leaders will need to rapidly overcome their differences.