July 25 (Bloomberg) -- A year ago, it became clear to me that the Arab Spring would not succeed in Egypt unless a deadlock between the Islamists and secularists was broken. That didn’t happen, and now something more is required: a new social contract that includes a moratorium on further protests.
Time magazine recently described my country as torn between the “World’s Best Protesters” and the “World’s Worst Democrats.” It was a depressingly apt description. Former President Mohamed Mursi failed to create an inclusive democracy during his year in office. Now the call by Defense Minister Abdelfatah Al-Seesi for Egyptians to take to the streets on July 26 to give him a mandate “to confront the potential violence and terrorism” risks further clashes.
This is the third phase of Egypt’s revolution. It is possibly more threatening than those that went before, because it diminishes any hope of improving the economy, which was the primary driver for both the 2011 uprising against former President Hosni Mubarak and this year’s revolt against Mursi.
Much of the blame for the dire state of the economy belongs to Mursi’s Muslim Brotherhood government. Growth was just 2.2 percent in 2012, a meager rate for an emerging market with a young population such as Egypt’s. And there is little sign of improvement; the economy contracted by 3.7 percent between the last quarter of the year and the first of 2013.
By June, Egypt’s foreign-currency reserves were less than $15 billion, sufficient to cover less than three months of imports. Both domestic and foreign debt increased, with the latter reaching $50 billion, according to central bank figures. The budget deficit has risen to almost 12 percent of gross domestic product, mainly due to the increase in energy and other subsidies, which swallow 29 percent of total government expenditures. Tourism and foreign direct investment have come almost to a standstill, while the number of people in poverty is rising.
The response to this dismal performance has been an unprecedented wave of protests by workers and others. There were more than 3,800 demonstrations in Egypt last year, of which more than half were staged by workers and 36 percent by government employees, according to the Egyptian Center for Economic and Social Rights. No wonder Standard & Poor’s has progressively downgraded Egypt’s sovereign credit rating, which is now CCC+.
Significantly, though, S&P has said it might upgrade Egypt again “if Egypt’s political transition strengthens the social contract, and a sustained increase in net reserves provides evidence of external pressure easing.” This is Egypt’s path out of the crisis, and what happens on July 26 may decide whether it can be reached.
If the protests that both Al-Seesi and the Muslim Brotherhood have called for mark the starting point for deeper polarization and violence, then Egypt’s transitional government will be able to achieve little or nothing on the economy. Egypt’s slide into chaos would continue. Several steps are required to avoid this.
The first of these would be to negotiate a reconciliation package that assures Islamist groups they won’t be excluded from any future political, economic or social arrangements. In exchange, they would need to renounce violence, agree to separate religion from politics, and respect the rights of women, Christians and other minorities. This is an admittedly optimistic scenario and would require finding interlocutors interested in reconciliation on both sides, as well as international mediators.
Once the situation in the streets is stabilized, the transitional government should design a new social contract in which the basic grievances of the protesters -- reflected in their calls for “bread, freedom and social justice” -- are met. In return, they must go back to work and agree to a one-year grace period free of demonstrations. The return to work should include the 4,600 enterprises that, according to Egypt’s Center for Trade Union and Workers’ Services, have remained closed since January 2011. These should be reopened now with financial aid from the government.
This new social contract must be the subject of a genuine dialogue within society and should be signed by representatives of the labor unions, business leaders and civil society groups, including the Muslim Brotherhood and leaders of protest groups such as Tamarod.
Secondly, the government should produce an emergency one-year recovery plan that would include a major revision of the state budget for the 2013-2014 fiscal year that would start reducing the deficit and subsidies; a massive effort to re-establish security that encourages foreign tourists and investors to return to Egypt; and a national job-creation program focused on boosting small and medium-sized enterprises in the private sector.
All of this would require a quick return to negotiating the International Monetary Fund’s proposed $4.8 billion loan for Egypt. An IMF deal is essential to endorse the government’s economic policies and persuade other donors and investors to return.
A third priority is to work out a medium-term plan for the next five years, aimed at restoring rapid growth and job creation for young men and women. This should include at least one large national project, such as developing industry in the Suez Canal corridor, and a program of public-private financed projects to boost private-sector investment.
All of this is contingent on some wisdom prevailing on July 26 and in the days that follow. Little could be more urgent. Otherwise, Egypt may slip further into chaos and civil strife, rolling back the fledgling democratic process that began two and a half years ago.
(Samir Radwan was the Egyptian finance minister from January to July 2011. He was also a candidate for the post of prime minister in the current transitional government.)
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