Resetting Egypt’s economy

February 9, 2011


By Mohamed A. El-Erian
El-Erian is the CEO of PIMCO. He spent part of his childhood in Egypt where his father was a professor of international law at Cairo University and then served as an Egyptian diplomat and was elected to the International Court of Justice in 1978. The opinions expressed are his own.

While Egyptians are yet to specify the final destination for their revolution — and only they can, and should do so — there is little doubt in my mind that the country is now on a new, bold and uncertain road toward greater democracy and individual freedoms. The next few days and weeks will be critical in determining the journey for a country that is central to the stability of the Middle East.

Undoubtedly, domestic political developments hold the key to what will happen. Egyptians need to converge on a common understanding and vision of “managed change”. And this vision must satisfy the millions of Egyptians — from all ages, religions and walks of life — that unite in Tahrir (Liberation) Square and elsewhere to better influence and improve their destiny.

Yes, street and state politics are the undeniable drivers today. This will involve both upheavals and compromises. Yet economics and finance will also play a crucial role, especially when it comes to the urgent recovery of an economy that has experienced one of the most dramatic “sudden stops” in recent history. In the process, this will also define how Egypt’s friends and allies can come off the sidelines and help the country’s unprecedented transformation.

For two weeks, economic activity was at a virtual standstill. Supplies dwindled. Banks and many shops closed. ATMs ran out of cash. Schools and offices were shut. Domestic and international trade was disrupted. Tourism evaporated.

Egypt’s economy will need to restart and reset. Three factors stand out in a process that is critical for the longer-term well-being of the country, including the millions of Egyptians that are protesting for greater freedoms.

First, Egypt’s banking system must resume normal operations in an orderly fashion. A very good start was made on Sunday to bring part of the system back on line, and important challenges remain.

The central bank has no choice but to flood the financial system with both domestic and dollar liquidity. And both the central bank and the commercial banks must continue to avoid the temptation to overly curtail deposit withdrawals lest that, in itself, fuel a deposit run.


Second, the Finance Ministry must deal properly with the unanticipated collapse in tax revenues. It must make sure that this temporary interruption in government receipts does not lead to even more destabilizing spending disruptions. Salaries must be paid promptly, and all supplier bills must be met.

Third, particular emphasis must be placed on targeted social spending, particularly when it comes to health, food subsidies, and shelter. Remember, Egypt’s poor are extremely vulnerable to the current economic and financial dislocations.

The challenge of such an orderly reset is an enormous one. It cannot be met easily by Egyptians alone. They will need help; and their courage and determination warrant international support.

Assuming a satisfactory political resolution, Egypt’s friends and allies will have a chance to support the country’s economic recovery. In particular, they should stand ready to provide central bank swap lines, as well as to significantly accelerate and redirect aid in the pipeline. And they should actively facilitate the involvement of institutions that already have effective links and extensive networks among the most vulnerable segments of Egyptian society.

A historic grass root movement has made massive sacrifices by taking to the street to bring greater democracy to the most populous country in the Middle East and North Africa. The movement has endured tremendous pain and taken enormous risks. Let their brave historic efforts be reinforced by properly resetting an economy that has been subjected to a dramatic sudden stop.

Photo, Top: An anti-government protestor shouts anti-Mubarak slogans after Friday prayers at Tahrir Square in Cairo February 4, 2011. REUTERS/Mohamed Abd El-Ghany

Bottom: Anti-government protesters carry a big Egyptian flag after Friday prayers at Tahrir Square in Cairo February 4, 2011. Tens of thousands of Egyptians prayed in Cairo’s Tahrir (Liberation) Square on Friday for an immediate end to President Hosni Mubarak’s 30-year rule, hoping a million more would join them in what they called the “Day of Departure” . REUTERS/Amr Abdallah Dalsh


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An excellent article. Most of the Egyptian commentaries focus on the demonstrations, conflicts and politics to the exclusion of economics. For Egypt to pull forward it needs people knowledgeable in economics. In the United States revolution we had Alexander Hamilton for economics. Few other revolutions in the world have had someone in the caliber of Alexander Hamilton. You will find good people with a knowledge of economics in the universities and students who have graduated from those universities having studied economics. It isn’t just democracy, freedom, authoritarianism or theocracy. Economics matters.

Posted by JoeHitselberger | Report as abusive

I doubt that most of the folks shouting in the streets have given any thoughts to these matters.

Posted by macira | Report as abusive

Well put, as always, Mohamed.

Egypt’s geopolitical importance is undisputed and the economic challenges it faces are great. Outside assistance is not only warranted on economic grounds, but imperative to safeguard the stability of a more democratic future for Egyptians.

I would just second many of your thoughts for Tunisia, where no-less-brave citizens took to the streets demanding similar freedoms, inspiring a regional reawakening that still has many chapters left to be written.

The economic challenges facing Tunisia are arguably less acute than those of Egypt, and its geopolitical importance less marked. Yet economic and financial support from the international community for nascent deomcracies, however small, is important as both a symbol and an incentive.

As you rightly note, the costs of such historic transformation are high. This is true for Egytians and Tunisians alike. Hopefully the international community will see the opportunities inherent in helping to share the burden.

Posted by annwyman | Report as abusive

Egyptian billionaires are getting ready to withdraw and deposit their money elsewhere. There will be no more paychecks for the military, tanks will be used only to break down super market gates. Egyptians will have gained freedom, but at the price of empty pockets and hunger. It will take years of prayer to bring back the billionaires.

Posted by morristhewise | Report as abusive

Is the author mocking Egypt? In a country where half the population lives on $2 a day it is a bit of a joke to discuss fiscal matters at this time. Hosni Mubarak is worth $70 BILLION, largely corruption money collected by his regime. Vistually impossible to do anything in Egypt without bribing or paying off the Hosni Mafia. Until this dictator is thrown out or shot dead, talking about economic policy is pointless.

Posted by Anthonykovic | Report as abusive

While the richest 5pct are able to “tax” and “own” all worthwhile economic activity using “mafia thugs” (in or out of police uniform) and divert it into offshore “wealth management”, hedge funds, gold and Dubai real estate, it is difficult to see benefits from assistance by the international community.
The question is how a middle class, westernising revolt can cut the heads off the Hydra.
But it is the middle management and skilled workers who actually run the banks and business and trade, not the parasitic “fat cats” at the top doing deals with each other.
And boatloads of wheat, rice and other basic foodstuffs could possibly be distributed to the bottom 75% using UN style supervision and town market trading.

Posted by Neurochuck | Report as abusive

[…] * Mohamed El-Erian: Resetting Egypt’s economy […]

Posted by Pre-Marketing 2/15 – | Report as abusive

This is indeed an earthquake which no one saw coming. No one thought that the Egyptian people will rise like this to cause such a corrupt 60 years old regime to collapse. Egypt has about 10 million people unemployed,not only that but with about a million coming each year to the employment market. This needs at least 8 to 10 Billion dollars of FDI each year. Whatever the political outcome of the revolution is, there must be a very fast new transparent economical system which will allow FDI to flow into the economy. In the short term the local government bodies like the CBE and Ministry of finance will have huge challenges to sustain the minimum required. Egypt will also need to set its priorities in a fashion to drive the growth to spread among the Egyptian people.

Posted by mashraf | Report as abusive

Grassroots Efforts and Stabilized Governments

Egypt has seen grass root movements.

Its citizens have made massive sacrifices by taking to the street to bring greater democracy to Egypt – the most populous country in the Middle East, and North Africa.

North Africa is experiencing a shift in mores and sentiment.

The movement has endured tremendous pain and taken enormous risks is seeking a more democratic existence, however its methods must also embrace democratic principles.

Brave historic efforts must be reinforced by properly resetting and restoring an economy that has been subjected to a dramatic sudden stop – and in restoring the economy – ideas and theories of stability must be incorporated.

Posted by JenniferCWarren | Report as abusive

Obviously the past 3+ years tell a completely different story … Maybe people should stick to opening on what they actually have real substantive expertise in and not just semblance.

Posted by Abushanabhara | Report as abusive