EDITORIAL: Egypt’s economic imperative

Newly elected leader must embrace reform

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Egyptian President Mohammed Morsi’s claimed victory Saturday on a new Islamist-backed constitution will be pyrrhic if his economy continues to languish. Egypt’s recent request to delay a $4.8 billion loan from the International Monetary Fund (IMF) shows that, at least for now, Mr. Morsi is unwilling to take the steps necessary to reduce the budget deficit and re-attract foreign investment. That needs to change.

Economic growth ground to a halt after the overthrow of Hosni Mubarak in February 2011, and there are no signs of recovery. The tourism sector, which accounts for up to 10 percent of the economy, is suffering. Poverty is on the rise. The country’s debt-to-gross-domestic-product (GDP) ratio is, by some estimates, at an unsustainable 80 percent. Foreign reserves are at $15 billion, which is half of what they were two years ago.

For all of his faults, Mr. Mubarak was able to move the economy away from the statist model favored by the Nasser regime of the 1960s. He cut taxes and eased regulations, although he mainly favored big-business cronies and the military. Nevertheless, he enjoyed an impressive 7 percent GDP growth rate between 2005 and 2008. The current sluggish pace of the economy, at about 2 percent, is nowhere near enough to absorb the millions of Egyptians entering the labor force. Reducing the budget deficit now will require phasing out the array of subsidies for fuel and food products, which account for a fifth to a third of Egypt’s federal budget.

It also means taking on the military, as Egypt’s armed forces control a vast array of nonmilitary enterprises — accounting for more than 30 percent of the economy, by some estimates. These businesses are rife with corruption and bureaucratic inefficiency. Egypt’s government may move forward with the IMF package early in the new year when and if the current political turmoil subsides. Under the plan, subsidies would be rolled back, the tax base would be broadened, and taxes would be raised on high-income earners and on capital gains. This ought to sound familiar.

As the current experience of “austerity” in Europe shows, raising taxes impedes economic growth and rarely raises significant revenues, especially in developing countries where tax compliance is spotty because of a weaker rule of law. Any reform plan will have to be more heavily weighted toward phasing out subsidies (and better targeting existing programs toward the poor instead of filling the pockets of the rich). It also means cutting back the bloated bureaucracy, privatizing state-owned and military-run enterprises, reducing import tariffs, streamlining regulations on both small and large businesses, and issuing clear guidelines on monetary policy and the banking sector.

Such economic reforms no doubt would provoke a backlash, but these are the things Mr. Morsi would have to do if he ever expects to see his economy recover. Absent change, Egypt’s debt will keep growing and foreign exchange reserves will keep diminishing. This could spark a painful devaluation of the Egyptian pound and further anger a populace already suffering economically. An even more radical Islamist government could gain power, turning Egypt into another Iran.

The Washington Times

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