January 16, 2013

Six months into his presidency, Mohammed Morsi is about to make a public policy decision similar to one that ultimately helped to bring about his predecessor’s downfall. Out of economic necessity, Morsi will likely sign a deal with the International Monetary Fund. But the incoming loan will be accompanied by a set of fiscal conditionality that could make the already precarious president and his Freedom and Justice Party even less popular. Unless the Muslim Brotherhood manages to find a religious, privatized coping mechanism.

In 1991, under pressure from massive fiscal and current account deficits, then-President Hosni Mubarak signed on to an IMF loan and IMF-sponsored structural adjustment program. The following years saw the economy open up to foreign investment, the removal of tariffs that protected small farmers, and the widespread privatization of publicly held enterprises, often in corrupt deals. At the same time, the government cut the top tax rate and slashed spending on subsidies while social spending remained largely stagnant. The reforms contributed to consistently impressive GDP growth, with the IMF singing the Mubarak regime’s praises for creating a "better business climate." Many Egyptians, meanwhile, noticed that their situation wasn’t improving. Between 2000 and 2005 alone, when GDP growth averaged around 5 percent, the percentage of Egyptians living in absolute poverty rose from 16.7 percent to 19.6 percent. The inequality exacerbated by the 1990s; structural adjustment helped provide the impetus for the revolution.

While activists and politicians have good reason to campaign against the IMF based on Egypt’s previous experiences with structural adjustment, an infusion of foreign currency is at this point needed to prevent economic catastrophe. Foreign direct investment has shrunk by around 75 percent since January 25, 2011, and tourism revenues declined by around 30 percent. Egypt is facing a full-on balance of payments crisis. Almost 60 percent of the Central Bank’s foreign reserves have been spent trying to prop up the pound in the last two years—and with limited success. Late last month, the Central Bank moved to an auction system to slow the devaluation of the pound, which dropped by more than 6 percent since the start of the revolution.

If Egypt is to avoid a situation in which it can no longer pay for crucial imports—including staple commodities like wheat and oil—money has to come in from outside. Since the summer of 2011, a loan from the IMF has been under negotiation in fits and starts. The agreement was ready to be inked in November when political instability due to Morsi’s constitutional declaration forced it to be postponed. This month might finally be the one when it goes through, though. Minister of Planning and International Cooperation Ashraf Al-Araby told Al-Arabiya last week the deal would be finalized before parliamentary elections in February. The $4.8 billion IMF loan—with a fairly generous 1.06 percent interest rate—will help clear the way for an infusion of other loans and grants that could stop the pound’s precipitous depreciation.

But as it often does, the IMF is requiring the debtor to get its fiscal house in order, in this case requiring Morsi’s government to rein in the budget deficit that currently stands at almost 10 percent of GDP. In December, Morsi offered an idea of what IMF-backed austerity could look like when he used his temporary legislative powers to introduce a raft of changes to the tax code, including steep tax hikes on cigarettes, cooking oil and other basic goods in addition to raising income taxes on high earners. Another part of the austerity plan involves cutting the energy subsidies that are widely viewed as ineffectively targeted but crucial for many poor Egyptians. Further budgetary adjustments could lay down the road, though the military budget, which equals about 2 percent of GDP will likely go untouched.

The subsidy cuts and tax code changes will inevitably lead to higher prices. Coupled with an increasing costs of imports due to the devaluing currency—in particular wheat, around 50 percent of which comes from abroad—poor Egyptians will once again feel the pain of adjustment. The political consequences of this could be catastrophic for Morsi. In 1977, President Anwar Sadat cut subsidies on bread, rice, sugar and other staples at the urging of the IMF. That move triggered riots across the country that left scores dead and hundreds injured and were only quashed once the army was deployed on the streets—and the subsidy cuts were reversed. With, to put it mildly, a vibrant culture of street protests since the start of the revolution and many Egyptians already opposed to Morsi’s presidency (as evidenced by the major protests at the presidential palace in November), a severe economic shock could undermine the little credibility that Morsi and the Brotherhood have with the general public, maybe even leading to the so-called "revolution of the hungry."

Or maybe not. For decades the Muslim Brotherhood in Egypt built its popularity on its ability to provide social services where the state failed. Brotherhood-run hospitals provided higher quality medical care at affordable prices than was available in shoddy, ill-equipped and underfunded government-run hospitals. Special food markets sold meat and staple goods at low prices subsidized by Brotherhood donations. These provisions helped the Brotherhood recruit members and gain good will among Egypt’s impoverished majority. The Freedom and Justice Party’s good fortune in the three rounds of elections so far—more than 30 percent of last year’s parliamentary election, a victory for Morsi in the presidential election, a 60 percent approval of the Brotherhood-backed constitution—may have resulted partially from the Brotherhood’s years of charitable works.

Muslim Brotherhood charities could potentially help offset the social costs of economic restructuring and maintain some positive sentiment for Morsi, the Freedom and Justice Party and the Brotherhood in the wake of IMF-backed austerity. Goods sold at discount Brotherhood-sponsored markets could help compensate for the rise in prices for some poor people, for example. Why would the ruling party rely on a non-governmental social movement to deal with effects of public policy? It may sound counterintuitive but it is in some ways consistent with how the Brotherhood has operated so far, as when Muslim Brotherhood members attacked, and violently interrogated protesters outside the presidential palace in November, acting as a parallel security force.

Such a policy is, moreover, consistent with the Muslim Brotherhood’s ideological vision. The group’s leaders have made clear from early on that they support a free-market economy for Egypt with a more limited role for the state. In meetings with foreign governments and foreign investors, Brotherhood leaders have repeatedly reiterated their commitment to the free market. At the same time, some Brotherhood members have floated the idea of making zakat, or Islamic alms giving, legally compulsory. (A greater reliance on private charities is not uncommon for religious economic conservatives. George W. Bush’s administration promoted the growth of "faith-based initiatives.") The Brotherhood’s left-wing opponents, such as Nasserist politician Hamdeen Sabahi, have a radically different vision for Egypt’s social welfare, one in which the state—not the mosque—is responsible for guaranteeing basic economic security. This disparity between the left and the Muslim Brothers underscores that the divisions between their views on economics and religion are not coincidental.

After a revolution demanding bread, freedom and social justice, severe austerity will be a challenging sell, no matter how much religious charities try to mitigate the effects. How the pound’s devaluation, the IMF loan, and the austerity program will play out remains completely unknown. As has been the case in all of the political situations in Egypt in the past two years, the political winds are constantly shifting. The current economic situation is a dire one and Morsi and the Brotherhood will undoubtedly be looking for whatever support they can muster it.

Max Strasser is the former news editor of the Egypt Independent. His articles have appeared in Foreign Policy, the New Statesman, the Nation and elsewhere.