After public warnings that it faces bankruptcy within a few months, Egypt’s central bank has taken firm and decisive action: it has fired all of its outside directors. Al-Ahram reported on October 16 that the Supreme Command of the Armed Forces has cut the number of board members to nine from 15, all appointed by Egypt’s president. Six outside directors, five from major banks and one from the accounting firm KPMG, have been dismissed.
It is hard to get reliable data on the state of Egypt’s economy, in part because so many things have gone wrong in such a short period of time, and in part because the military government fires officials who report bad news. Egypt’s economic route calls to mind the country’s military disaster during the 1967 war, when – according to the Egyptian government’s later evaluation – the military collapsed in part because of “the army’s fear of telling [president Gamal Abdul] Nasser the truth”.
It appears at first glance that the army does not want to tell itself the truth about Egypt’s economy. The truth probably is simpler, and more sinister. The simplest interpretation is that limiting membership on the central bank’s board to flunkeys of the Supreme Command clears the way for corruption on a grand scale. When the civil societies of developing countries disintegrate, the authorities often appear to be paralyzed. In most cases, the anonymous little men in charge of big functions are hard at work, making down payments on Paris apartments and private jets.
Egypt’s trade deficit last year rose to US$26 billion, with exports at $23 billion and imports at $49 billion, according to Mahmoud Abdul Hai, a consultant to Egypt’s National Planning Institute, the news site Youm7 reported on September 26. That would put Egypt’s trade deficit at a stunning 15% of gross domestic product (GDP). The central bank’s website, by contrast, reports that the deficit during the six months through July ran at an annual rate of 9% of GDP.
The central government probably has lost the capacity to count foreign trade flows accurately. A great deal of capital flight occurs through fraudulent invoices for imports as well as black-market exports of tradable commodities. The Egyptian press from time to time runs exposes of smugglers stealing rice, or fertilizer, or diesel fuel for sale to foreign buyers, although aggregates are hard to trace.
If Mahmoud Abdul Hai of the planning institute is correct, his country’s exports have fallen from to $23 billion from $29 billion in 2009. If true, part of the decline probably represents disguised capital flight.
One example is amusing. In mid-September, Egypt banned exports of palm fronds (lulavs) for ceremonial during the Jewish festival of Succoth (Tabernacles), out of rancor towards the Jewish state. The palm fronds nonetheless arrived, as the Israeli newspaper Ha’aretz reported on October 11: “The lulav traders utilized long-existing ties with senior officials in Egypt, and succeeded to covertly purchase a large amount of lulavs. According to one of the traders in New York, a senior official in Cairo received $100,000 to aid in smuggling the palm fronds outside of Egypt.”
A quarter of Egypt’s state budget subsidizes fuel, which is the most important commodity in Egypt’s black economy. During mid-September, the Egyptian General Petroleum Corporation reported, daily demand for gasoline jumped from 14 million liters to 23 million liters. The Egyptian Gazette claims that “the rise in demand is the result of smuggling subsidized petrol to the neighboring Gaza Strip at a higher price”. If Gaza really provides the venue for gasoline smuggling on the grand scale, the Muslim Brotherhood’s Gaza branch, Hamas, might do more to destroy Egypt than anyone in Western intelligence services might have guessed.
“In the Mediterranean town of Alexandria earlier this week,” the Gazette reported on September 27, “the military police seized 4.3 million liters of diesel hidden in stores ready for smuggling.” While Egyptians faced 24-hour queues for diesel fuel at gasoline stations last summer, tankers reportedly were waiting at Port Said on the Suez Canal to pump diesel oil from storage facilities.
A black market in fertilizer has earned billions of dollars for senior officials, according to a Cairo University professor of agriculture quoted by the Egypt Gazette. The Gazette story alleges that Hosni Mubarak’s agriculture minister Amin Abaza organized the fertilizer scam. Abaza is awaiting trial on charges of illegally selling public land.
Egyptian media alleged last June that rice was vanishing from public storehouses, and that the government’s food-distribution organization was peddling the contraband grain by the container on the overseas market.
We saw exactly the same thing in Russia in 1992-1993, when unrecorded trainloads of raw materials left Russia for sale in foreign markets.
It is hard to know just how much money the central bank has on hand. The Bank of Egypt has reported its foreign exchange reserves as of the end of September at anywhere from $19.4 billion to $24 billion. The deputy governor of the Bank of Egypt, Hisham Ramez, told the newspaper al-Youm al-Sabaa on October 11, “Egypt will not go bankrupt, and is not on the verge of bankruptcy.” The Nobel Laureate and presidential candidate Mohamed ElBaradei had warned the previous week that Egypt would run out of foreign in exchange within six months.
The amount of foreign aid under discussion seems an order of magnitude too small to make a difference. Saudi Arabia on October 16 said that it would buy $500 million worth of Egyptian Treasury bills and lend another $500 billion to tide the government over, while Qatar has reportedly lent $500 million to Cairo. Considering the magnitude of sums already leaving Egypt through illegal activity of different kinds, a billion or two dollars barely will be noticed.
Egypt’s Finance Minister Hazem el-Beblawi is talking about reviving discussion with the International Monetary Fund (IMF) for a $3 billion credit. All in all, less than $5 billion in aid to Egypt seems to be in play, against a financing requirement well in excess of $20 billion. The economics of the proposed IMF loan make no sense, but split among a dozen senior officials, $3 billion goes a long way.
Spengler is channeled by David P Goldman. Comment on this article in Spengler’s Expat Bar forum.
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