Tue, July 12, 2011 | atimes.com | By Spengler
When will Egypt go broke?
With demonstrators back on Tahrir Square in Cairo, Western media outlets once again are focused on the demands of urban protesters. A less tractable but more important story is: when will the Egyptian economy collapse altogether? The answer appears to be: at the very latest, when Saudi Arabia and Gulf states grow weary of paying Egypt’s bills, and probably well before then.
A May 19 report by the Middle East News Agency, an agency of the Egyptian government, allowed that the country’s hard currency reserves had fallen to just US$25 billion, from $36 billion in February, an alarming decline that described a course towards bankruptcy by late in 2011. The country’s central bank immediate denied the report in the official news outlet, averring that the real total was $28 billion. Emergency loans from Arab oil producers probably explain the discrepancy.
After the May Group of 20 (G-20) summit, where the world’s largest economies pledged $40 billion in assistance for the floundering Egyptians, it is clear that the industrial nations and the Arab oil-producers want to prevent Egypt from turning into a failed state, although it is far from clear who will pay how much and when.
In June, the Egyptians rebuffed an offer of $3 billion from the International Monetary Fund (IMF), evidently because the fragile ruling coalition could not accept even the suggestion that a foreign agency might dictate loan conditions. The IMF protested that no strings were attached to the funds, but even the smell of conditionality was too much for the military junta. Just after spurning the IMF, Egypt announced a $2.34 billion package from the Gulf states. Saudi Arabia meanwhile offered an additional $4 billion.
No matter how much aid the Egyptians obtain, it is not clear that much of it will stick to Egypt’s financial system. Jordan’s Finance Minister Mohammed Abu Hammour warned in Rome June 24, “There is capital flight and $500 million a week are leaving the Arab world.” Although Hammour did not mention countries in his talk before the Arab Banking Summit last month, most of the capital flight is coming from Egypt, and at an annual rate roughly equal to Egypt’s remaining reserves.
The Egyptian government has told the international organizations and G-20 governments that it can get by with $13 billion in assistance this year, but capital flight could erase that amount in a matter of months. It is hard to get accurate information on capital flight, and the fog of war is thickened by wild assertions.