Egypt Premier Returns to Cage He Escaped Facing More Clashes

The last stint in government for Egyptian Prime Minister Hazem El Beblawi ended in November 2011 when the entire cabinet resigned after security services used deadly force to break up a protest without its knowledge.

The former finance minister now takes office days after clashes between Islamists and the army left more than 50 supporters of deposed President Mohamed Mursi dead. El Beblawi’s ability to stem violence, control the military and police, and bring money into the economy will determine whether Egypt escapes the turmoil that has plagued the nation since the revolution that toppled Hosni Mubarak two years ago.

“The more this instability endures the more unlikely that tourists will come to Egypt and the more unlikely that investments come to Egypt,” said Yasser el-Shimy, an analyst in Cairo at the International Crisis Group, which compiles reports on conflicts. “This will make it always present in the mind of the world and Egyptians that things are not working out.”

Backed by $12 billion of aid pledges from Gulf nations and with a line-up of ministers including a former World Bank economist, El Beblawi’s first challenge is how to placate a population whose desire to improve living standards is matched only by divisions about how to do so.

Healing a divided nation is already complicated because Mursi’s backers refuse to recognize the new government and vow to remain on the streets until the ousted leader is reinstated.

High Expectations

For their part, investors have welcomed the political transition and the influx of aid pledges, which HSBC Holdings Plc says covers this year’s estimated current-account deficit and almost half of the budget shortfall.

The perceived risk of Egypt reneging on its debt has waned, with the cost of credit-default swaps plunging from 925 basis points the day before Mursi was ousted on July 3 to as low as 655 on July 12, according to data compiled by Bloomberg. They traded at 725 basis points today. The benchmark EGX 30 stock index has gained more than 7 percent in the same period.

“Expectations are sky-high,” said Samir Radwan, a former finance minister who was also approached for the premier’s job before the selection of El Beblawi, 77 this year. “The management of these expectations is part of this government.”

Violent Clashes

The new cabinet was sworn in yesterday in Cairo, hours after pro-Mursi demonstrations degenerated into violence, leaving seven people dead and hundreds injured. Islamists greeted the government formation with protests and clashes outside its building in central Cairo.

The army removed Mursi one year into his presidency after mass protests against record unemployment, security breakdown, fuel shortages and what opponents said was his attempt to tighten the grip of Islamists on power.

Interim President Adly Mansour, chief justice of the constitutional court, laid out a timeline for constitutional amendments, followed by parliamentary and presidential elections. The Muslim Brotherhood, from which Mursi hails, and other Islamists have spurned offers to join the cabinet.

El Beblawi selected Ziad Bahaa-Eldin, a former lawmaker and regulator of financial markets, as deputy premier. Ahmed Galal, who spent 18 years at the World Bank, is finance minister, while Ashraf El-Arabi was named planning minister, a post he held under Mursi. Mohamed Ibrahim, who was named by Mursi as interior minister and later supported his ouster, retained his job.

Military Reins

Previous prime ministers failed to clip the wings of the interior ministry and assert control over the military, two institutions that had traditionally answered only to Mubarak, a former air force commander. A prolonged street mobilization by Islamists, the same tactics their opponents had used, risks more clashes with security forces, said El-Shimy.

El Beblawi likened being in government to a cage, according to a book on his time in office.

The last administration he served in failed because its “biggest concern became responding to street demands instead of leading it,” El Beblawi wrote. “The street is always concerned with its immediate needs, but the government’s responsibility should be ensuring the future as well as the present.”

The new government inherits a budget deficit that may widen to 12 percent of economic output this year, the highest in the Middle East, according to the estimates of 11 analysts on Bloomberg. Economic growth may slow to 2 percent, near the worst pace in two decades, while the rate of inflation, at 9.8 percent in June, is the highest in two years.

Needing Money

“The bottom line is that Egypt, even in a good year, can barely generate enough revenue to support the welfare state the population was told that it would receive,” said Crispin Hawes, head of the Middle East program at New York-based Eurasia Group. “El Beblawi, who is a competent economist, understands the extent of the problem. Ultimately, where we are today, is much worse than where we were two and a half years ago.”

Policy will focus on attempts to restore security, ease political polarization, revive economic growth and “make gains in the issue of social justice,” Bahaa-Eldin, the deputy premier, said by phone July 15. It will leave “significant policy changes” to elected officials, he said.

Circumstances are not conducive to restart talks with the International Monetary Fund to conclude a $4.8 billion loan agreement, Planning Minister El-Arabi said. Talks with the IMF were stuck amid Mursi’s reluctance to impose measures such as raising taxes and cutting energy subsidies.

Gulf Money

The aid package from Saudi Arabia, Kuwait and the United Arab Emirates leaves “very little incentive to introduce the necessary reforms,” according to Said Hirsh, a partner at London-based economic consultants Volterra Partners. As a result, Finance Minister Galal has little scope to trim the budget deficit, he said by e-mail.

While the cash will give the government breathing space, it “will by no means suffice to cover Egypt’s funding gap over the coming two years,” said Mohamed Abu Basha, an economist at Cairo-based investment bank EFG-Hermes. Relying on “stop-gap” funding will erode investor confidence further, he said.

During El Beblawi’s tenure in that job, he sought to restrain spending, reduce energy subsidies for the wealthy and set a cap for government wages. In the book on his four months in the “government’s cage,” he cast then-premier Essam Sharaf as “too polite” of a leader.

Galal, in a paper published two years ago, urged resisting the temptation to widen the budget deficit to placate protesters. He said the government can take short-term measures to create more jobs such as providing temporary holiday on payroll taxes to private employers.

Now in government against the backdrop of violence and economic hardship, El Beblawi and his team have little room for error, according to Radwan, the former finance chief.

“In a highly explosive situation, you don’t pour oil on the fire,” he said by telephone. “You have to be extremely careful. People are tired.”

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