Egypt is facing the possibility of a spiraling economic crisis after the country’s Muslim Brotherhood-linked government on Tuesday declined an emergency loan from the International Monetary Fund. Cairo requires the assistance in order to bolster an increasingly severe shortfall in its currency reserves, which recently fell below critical levels:
[R]eserves remain under $15 billion, a figure that would cover just three months’ imports. “Egypt’s foreign exchange reserves are still extremely low and below what the central bank previously called a critical minimum level,” said William Jackson, an economist from Capital Economics. “At the moment they are managing to stem the decline in reserves by tightening capital controls but this is unsustainable in the long run,” he added.
Egypt reportedly rejected the loan due to IMF conditions requiring that Cairo implement austerity-based financial and economic reforms. The decision comes despite an announcment from Qatar that it will not be providing near-term assistance to Egypt, which itself came after Germany threatened to suspend financial support due to concerns over civil liberties.
Cairo’s calculations highlight a fundamental catch-22 that now threatens to send Egypt spiraling into economic crisis.
The Morsi government has seen its political legitimacy erode in recent months, the result of a combination of factors including power grabs by Morsi himself and the controversial passage of a new constitution by Egypt’s Islamist-dominated constitutional assembly. The government is now reluctant to risk slashing popular commodity subsidies, which are among the steps called for by the IMF as a prerequisite for securing further loans.
Economic instability, meanwhile, is one of the core sources of unrest that is eroding the government’s political standing.
The Morsi government, having squandered political legitimacy via early illiberal policies, now finds itself without the ability to institute the reforms needed to stabilize Egypt’s economy. The government’s inability to stabilize the economy, in turn, is preventing it from restoring its political legitimacy.
[Photo: Gigi Ibrahim / Wiki Commons]