Egypt currently suffers from a number of interrelated economic problems: an ever-widening budget deficit, swarming public debt and alarmingly dwindling foreign reserves. All three threaten the economy with deeper recession and higher unemployment. Even though these problems came to the fore following the January 25 revolution, none of them is new or recent. Deficit, debt and volatile foreign currency earnings have been chronic structural problems facing the Egyptian economy for at least two decades. The political turmoil that followed former President Hosni Mubarak's ouster and the military's unskillful management of the transitional period rendered these long-standing problems urgent and pressing. Mubarak wielded enough power and skill to adapt to the chronic budget deficit through combining political repression with increasing domestic borrowing. Whereas domestic debt reached alarming levels as a percentage of Gross National Product, hovering around 85 per cent, the end of Mubarak's police state led to an explosion of social and economic demands. The immediate way out of the ongoing crisis seems to lie with foreign borrowing and attracting foreign capital via investment and aid. However, neither solution constitutes a long-term solution for the crisis, which can only be treated through higher revenues via more taxation. State revenues as a percentage of GDP have consistently declined throughout the 1990s, from 30 percent in 1990 to 20 percent in 2004. But, expenditure stood at around 30 percent, resulting in an ever-widening budget deficit. Even though state revenues increased steadily from 2005, they could not catch up with the increase in expenses. As the country's problems became more pressing, a number of economic policies have been developed. The International Monetary Fund (IMF) has come up with its all too familiar recipe of cutting down on expenses (mainly subsidies), devaluing the Egyptian pound and levying indirect taxes (mainly value-added and customs). Left-wing movements and parties have proposed less complete and far from comprehensive plans that mainly focus on taxing the rich and avoiding foreign borrowing. Egypt's problems are structural and there is a price to pay for the readjustment of the economy. The critical question is who is going to pay for it? Will it be the poorer strata or the country's rich? It is now up to President Mohamed Morsy to decide and his choice will depend primarily on the political and economic cost he is likely to incur. He seems to have three options: The first is to embrace the IMF-package through imposing austerity measures. The IMF plan clearly throws the cost of readjustment on the broader base of the middle-classes and urban and rural poor. They are the ones most likely to pay for the reduction in the energy subsidy bill through higher fuel prices as well as for the pound devaluation, which will cause higher inflation. Moreover, indirect taxation only means higher tax-burdens on the very impoverished social strata. Such a policy choice does not appear to be politically sustainable for the Brotherhood for two main reasons. The first is that the middle-classes constitute the bulk of the newly enfranchised electorate and are likely to penalize the Brotherhood in the upcoming parliamentary elections. The second is that the inflation shocks that may result may well lead to widespread rioting, given the weakness of the state security apparatus amid the rampancy of social protest. The second option is for Morsy to turn against the rich and force them to pay for the budget deficit through higher income and wealth taxes. Such a policy faces many difficulties. Morsy and the Brotherhood are struggling to win the trust of domestic and foreign capital, and it would be an unfriendly gesture to move against capitalists at a time when the government's strategy depends almost solely on attracting foreign capital and encouraging investment, local or foreign. Targeting the rich may also lead to the radicalization of the revolution in a way that a conservative merchant-led group like the Brotherhood cannot afford. The third option is not to take any decision at all, which seems to be Morsy's choice thus far. However, time is not on Morsy's side. There is no guarantee that the economy can still go on by mere inertia for the coming months. As time passes, there will be a mounting need for foreign capital that will eventually lead to the brusque adoption of painful decisions only at higher economic and political costs. Meanwhile, the Cabinet's contradictory stances on issues like subsidies, the IMF loan and currency devaluation only shows how irresolute Morsy is. It may be difficult to predict whether Egypt's poor or rich are going to pay for Egypt's readjustment. The one sure thing, however, is that the current leadership will stand to pay most dearly for either choice — exactly like a Greek tragedy where all paths lead to the hero's demise. Amr Adly is director of the Social and Economic Justice Unit at the Egyptian Initiative for Personal Rights (EIPR). He has a PhD in political economy. This article was originally published in Egypt Independent's weekly print edition.
