Saturday, February 05, 2011

As Mubarak clings to power, Egypt suffers

By Leila Fadel and Howard Schneider
Washington Post Foreign Service
Saturday, February 5, 2011; 9:53 PM

CAIRO - Nearly two weeks of political turmoil has taken a toll on Egypt's infrastructure and economy, with most businesses shuttered, banks closed and tourists avoiding the country as the crisis drags on.

Before the turmoil began, Tahrir Square was the busy center of this capital. But pro-Mubarak forces and anti-government demonstrators have turned the famed plaza into their battleground, as a global audience watches.

The district that includes Cairo's famous pyramids, an area usually bustling with nightclubs, casinos and shops, was ransacked by vandals and looters, who set fire to some of the establishments.

Egyptians have not been paid, and many are in need of cash.

While foreign investment is rising, the demonstrators took to the streets because many could not afford food in a country where opportunities are reserved for the elite. Almost half of Egyptians live at or below the poverty line.

But analysts say President Hosni Mubarak's strategy relies on allowing chaos to continue so that Egyptians will yearn for the stability that his iron-fisted and sometimes brutal style brought.

"The longer the demonstrations go, the bigger the risk that regime elements will undermine the revolution," said Shadi Hamid, an Egypt expert at the Brookings Doha Center. "They have total momentum, but they can't keep it up indefinitely."

In a small deli in the upper-class neighborhood of Zamalek, a group of friends debated what comes next for Egypt. This island in the Nile River has been largely untouched by the chaos taking place on the other side of the bridges that connect it to downtown.

"I'm really lost. I don't know what's wrong and what's right," said Nada Nassar, 25, who works in advertising and hasn't been paid since the crisis started. "I wanted [Mubarak] to leave, but now I don't know if things will be worse if he does."

"After 30 years of oppression, this is just a small price to pay," added Karim Khater, 30, wearing an argyle sweater and eating french fries. Mubarak "has a divide and conquer strategy. He managed to split the people's opinions."

The economic fallout may start to become clear Sunday when banks reopen for the first time in a week. Analysts said the country could face a flight of capital as investors and others pull money out of an unsteady system. The country has about $35 billionin foreign reserves, probably enough to keep the value of the Egyptian pound from falling too far, too fast - at least in the short term.

But protracted political paralysis or further violence could alienate foreign investors. Egypt attracted close to $10 billion in foreign direct investment last year and had based its economic plans on receiving a similar amount in 2011 and the years ahead.

That's now unlikely, and revenue from tourism and other sources is bound to dry up. The country needs to grow about 6 percent a year to handle the number of young people entering the work force, but recent events may lead to a year or more of stagnation. Egypt's credit rating and economic outlook were downgraded because of the unrest. Credit Agricole bank now projects that Egypt's growth forecast is 3.7 percent compared with its earlier prediction of 5.3 percent.

Both Egypt and Tunisia, where mass protests also challenged an entrenched regime, have been growing below their potential and below the levels needed for the poor and middle class to feel the benefits, said George Abed, director of the Middle East Department at the Institute of International Finance.

Egypt has received low marks in corruption and transparency indexes. Promised reforms in banking and other key sectors were never carried out. With government deficits high and the price of food and other staples rising, the financial pressure on any new government will be immense as it tries to show it can make a quick improvement in people's lives.

"There will be a lot of pieces to pick up," Abed said.

The destruction is evident across the streets of the capital. The stock exchange building is empty, except for a few security guards outside. It will remain closed for at least the next two days. Most ATMs have run out of cash. A street leading to the pyramids is filled with military tanks and hotel and restaurant owners cleaning up the debris.

At least 300 looters descended on the area last week, and human rights activists, demonstrators and some business owners think they were hired thugs loyal to Mubarak's government.

Near the pyramids, the manager of the Abul Houl Palace surveyed the damage. He went to the front of the building where there once was a door and glass windows. Now there is a gaping hole.

"We couldn't stop them. Who knows if we can recover," he said, slumping into a plastic chair.

A fire has left the lobby jet black. Everything is gone except for a yellow guest book. At least $30,000 was taken from the safe.

But for many of the demonstrators camped out in Tahrir Square, the economic toll of the turmoil was of little concern because the banking sector and stock market never benefited them.

Mohammed el-Safdi, 32, sat inside a makeshift hospital in the square, his arm in a sling and a bruise on his face where he was hit with a brick during clashes with pro-Mubarak forces last week. He laughed bitterly about Egypt's future economic problems.

"You think we have money in the bank? We don't have money to eat," he said, his laughter quickly turning to tears. "Mubarak destroyed us for decades."

fadell@washpost.com schneiderh@washpost.com

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