Egypt post-election: now what?

Egypt’s Islamists have long prayed for a constitution around which to build their Muslim paradise. Now they have their constitution and the country’s money is fleeing. Morsi kept saying things would get better once the constitutional referendum was passed. They only got worse, profoundly worse.

Everyone seems to understand the Islamically-controlled government will crack down on loaning at interest: it’s haram, a sin. There are ways to crack that nut but none of them are trivial.

Egypt does have a central bank, its foreign currency reserves now woefully depleted. It conducted a foreign exchange auction market, offering 75M USD, in roughly 11M USD chunks to Egyptian banks. It was a pitifully inadequate auction: this won’t even support them through the winter.

What are the implications of this currency flight and what could Morsi do to fix this?

Morsi, as I have said elsewhere, has alienated everyone who might have helped him through this crisis. The Muslim Brotherhood (MB) has only sustained its popularity by massive subsidies to Egypt’s poorest, haranguing them with harum-scarum. The poor of Egypt believed them as long as the subsidies continued. They will shortly end.

Egypt’s economy is going down the drain. Morsi is begging people to ration their foreign currency. But most of that foreign currency comes from millions of expatriate workers: the Egyptian pound (EGP) is currently sinking below the auction threshold of 6.2526, now at 6.1890 to the USD. EGP is projected to sink another 15%.

These expatriate workers represent what little hope remains for Egypt’s economy. They’re currently remitting about 10B USD into the Egyptian economy. Morsi assiduously courted them during the election, offering them silly things such as the option to buy land in Egypt and the opportunity to buy dollar-denominated bonds. But Egypt’s embassies have a terrible track record of supporting their expatriates, especially in KSA and the Gulf States, where they’re treated horribly, their passports confiscated and their wages taxed against benefits they’ll never receive.

Don’t look for the expats to view Egypt as a wonderful investment opportunity. Egypt is the Middle East’s version of Mexico, a huge, populous nation but so badly governed everyone with a clue leaves as quickly as possible.

And Egypt’s being stupid about its own foreign workers. Of the roughly 1M expats in Egypt, about half have left, never to return. Egypt would be a fine place to do the sorts of things now done in China, in some ways a far better place: it’s the Middle East’s largest marketplace and a efficient nexus to the entire Mediterranean region. There’s also Egypt’s proximity to the Suez Canal. Egypt’s trying to give preferential treatment to their own citizens, which is a reasonable goal. But they’re driving out the skilled workers necessary for foreign corporations to set up shop in Egypt. It’s bad enough that the Egyptian economy is in trouble but it’s worse that Egypt is so xenophobic. During and after the revolution, expats have been barred from Tahrir Square. It’s even hard for NGOs to get into Egypt.

There’s a deeper problem buried at the heart of Egypt’s economy: it doesn’t have a long track record of privately held firms. Mubarak, whatever else he did wrong, and that list of wrongs is long, did privatise many of Egypt’s state-held corporations. The roots aren’t deep enough to sustain those firms through this currency collapse. Furthermore, the owners were mostly friends of Mubarak: they were part and parcel of Mubarak-era corruption and they are no friends of the MB. They’re the people now exporting the money. They would like nothing better than to see Morsi and the MB fail.

What could Egypt do to turn this situation around? Morsi is the worst sort of technocrat, the useless technocrat. He should stick to engineering, he understands superconductor theory and might be a capable leader for electrification, a serious problem in Egypt. Morsi has shown he is no politician. ElBaradei is a politician with far more extensive connections into the outside world. Morsi should form a coalition government with ElBaradei. As for his Salafi allies, there’s an important role for them, eliminating corruption. They’re tailor made for that task.

But Morsi is trapped. He created his power base with handouts to the poor. Egypt’s bonds are in the same tranche with Greece. He has no leverage. If Morsi takes the 5B USD the IMF is offering, austerity terms will come with that deal. The newly-minted constitution he backed seems to give him great powers but the Islamists have the final say on pretty much everything. Morsi is in a cleft stick of his own making.

Morsi has made a dog’s dinner of what little mandate he ever had. While he continues to tolerate the worst of the Islamists, Egypt’s economy, already in serious trouble, will continue to bleed out. Morsi’s only viable option is to bring ElBaradei into government and send him abroad to court foreign investment. Meanwhile, Morsi ought to be set to the task of taming his pride of hungry Islamist lions, demanding of them some Islamic system compatible with modern banking and finance. If Morsi can get the Islamists to buy into economic reforms, they will preach it to their illiterate faithful. Now is not the time for MB to be so stupidly majoritarian. Morsi was elected with a mandate for reform. So reform, already.