Tuesday, July 10, 2012

Egypt's Economy Creates Power Vacuum

This week Bloomberg's Businessweek reports on how 'Egypt's power vacuum threatens the economy'. [1]  The author of this article, Alaa Shahine, quotes a number of economists who make the claim that it is the ensuing power struggle between political factions and doubt over the new president's ability to govern that may herald a 'disorderly devaluation' and big problems with Egypt's economy in general.

However, the basic question of how anyone could govern Egypt in its current economic context which is:
*  soaring and unsustainable borrowing costs, now at 16%
*  capital flight along with the abrupt disappearance of more than half of Egypt's foreign reserves
*  denial/delay of an IMF loan
*  massive privatisation of public assets
*  inflation of global food prices 

is never asked.

Egypt, alone, cannot stabilise its economy.   High levels of financial and commercial integration exist between it and the rest of the world.  It cannot, for example, choose its interest rate.  Egypt appears to have no means to enjoy a stable exchange rate and this nation also holds very little protection from capital flight by foreign investors.

An astute observer might say that it is the very structure of Egypt's economy that has created the basis for the power vacuum that exists there now.  Not the other way around, as this Bloomberg article asserts.

[1]  Egypt’s Power Vacuum Threatens the Economy
Bloomberg Businessweek, 2nd-8th July 2012.  Pages 37-39

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