In Egypt, sliding toward ruin

By David Ignatius, Wednesday, March 6, 6:29 PM 2013

The Washington Post  

As Egypt’s Muslim Brotherhood government slides toward the financial cliff, what’s the right policy for the United States? That’s becoming an urgent question, as Egypt’s financial reserves decline and the country nears a new breaking point.
The economic facts are stark: Egypt’s official foreign-currency reserves in February were $13.5 billion, which would cover a little less than three months of imports. But U.S. officials say that accessible, liquid reserves total only $6 billion to $7 billion. Already, imports are harder to find, including the raw materials needed by Egyptian manufacturers. The Egyptian stock market tumbled 5 percent early this week, sensing danger ahead.
And what is the government of President Mohamed Morsi doing to halt the economic decline? Not a lot. Morsi has been dithering for a year in negotiating a roughly $5 billion rescue package from the International Monetary Fund (IMF) that Egypt desperately needs. He is delaying because he is wary of public anger at the reforms the IMF demands, including reductions in subsidies, which take 25 percent of Egypt’s budget. (Debt service and public-sector employment account for another 50 percent.)
The wolf is two or three months from Egypt’s door, top U.S. officials believe. Meanwhile, the country is facing increasing political turmoil, with riots Tuesday in Port Said that left 50 wounded. Morsi’s government sent a new proposal to the IMF last week, but it may fall short of the IMF’s reform targets, further delaying action.
Welcome to Phase 2 of the Arab Spring, which we might call the “reality check.” The United States and its allies made a bet two years ago that if the Muslim Brotherhood took power in Egypt, it would be forced to deal with the responsibilities of governing, such as negotiating loans with the IMF and adopting economic reforms to woo investors. These economic realities are now enveloping Morsi. But he hasn’t shown the leadership the United States had hoped.
So what are U.S. policy options as Egypt nears the brink? Some of Morsi’s critics argue that the United States should let him fail. That’s certainly the view of Egypt’s secular opposition, along with conservative Persian Gulf regimes. They hope Egyptians will reject Morsi and his party in parliamentary elections that begin in late April but might be delayed because of legal challenges.
U.S. policy is more supportive than “sink or swim.” The White House has encouraged Morsi and the IMF to come to a deal before it’s too late and the economic damage gets worse. One good move is a U.S. “Enterprise Fund” for Egyptian small- and medium-size businesses that will start to distribute its first $60 million this month.
When Secretary of State John Kerry met Morsi privately in Cairo last weekend, he is said to have warned that Egypt must make choices soon and that it shouldn’t expect any last-minute rescue from Washington. But it’s clear Washington wants Morsi to succeed, fearing that the alternative would be chaos or a military coup.
The Egyptian military is indeed waiting in the wings, and some generals are all too eager to intervene. The United States wisely opposes any such military takeover. In backing Morsi, the United States is improbably standing against both conservative Saudis and liberal activists in Egypt.
Morsi has been able to avoid tough decisions partly because of emergency assistance from Qatar, which has pumped about $7 billion into Egypt’s foreign-currency reserves. The U.S. message to Qatar should be: Stop enabling Morsi’s flight from economic reality.
The Obama administration’s continuing bet on Muslim democracy is evident in Turkey as well as in Egypt. Kerry visited Ankara, too, as part of his first diplomatic foray abroad, and he bluntly criticized Prime Minister Recep Tayyip Erdogan for his “objectionable” attack on Zionism. It was noteworthy that the mercurial Erdogan didn’t fire back at Kerry; indeed, their discussions in Ankara are said to have included the possible path to a reconciliation between Turkey and Israel. U.S. officials hope that as Turkey contemplates the growing instability on its borders — Iran, Iraq and Syria — a revival of ties with Israel may look more attractive.
The Arab revolution rolls on, and President Obama continues his cautious embrace. Perhaps the biggest surprise is that a Muslim Brotherhood government in Egypt has a better relationship with Israel today than does Turkey, a traditional ally of Jerusalem. This may be Morsi’s best card with Washington — that whatever his failings as a leader of Egypt, he isn’t making trouble for Israel.
davidignatius@washpost.com