• July 12, 2008

Woes of inflation and succession in Egypt

Woes of inflation and succession in Egypt

Political risk is rising on the banks of the Nile. Egypt“s inflation rate has trebled in the past year to 20 per cent, triggering the worst wave of street protests and worker riots since an enraged mob torched the heart of Cairo in the late 1940″s, forcing the withdrawal of British colonial troops and the demise of King Farouk”s dynasty and its feudal Pashacracy.


Even though Egypt has accumulated $34 billion in central bank reserves, is emerging as a strategic LNG exporter to EU, attracts high levels of FDI in the emerging markets, its economic miracle now faces grave threats from inflation.


Worker riots in Cairo factories, Helwan cement plants and the vast state owned textile conglomerates in Kubra Mahalla have forced the regime to raise civil servant salaries by a third, impose new taxes, offer new subsidies on cooking oil, sugar, flour and bread.


Yet the current wave of political protests are on a vastly bigger scale than those organised by the ineffectual opposition parties after the 2005 Presidential election won by President Hosni Mubarak, the Soviet trained, air force general who has now ruled the most populous nation in the Arab world for 27 years.


The Egyptian economy”s inflation angst has grim political resonance because Gemal Mubarak, the son of the President, is the eminence grise of the Cabinet of reformist technocrats, headed by Prime Minister Ahmed Nazif.


I was genuinely impressed by Gemal Mubarak, a former international banker and a policy wonk extraordinaire. His command of Egyptian economic deregulation was encyclopedic during a presentation he gave us at an investment conference in Sharm al Sheikh. While Gemal Mubarak denies he has any interest in the presidential succession, the fact remains that Hosni Mubarak will be 84 when his current term ends and has not settled rumours of a Syrian style dynastic transfer of power with the appointment of a Vice-President.


If hyperinflation destroys Egypt“s economic miracle, Gemal Mubarak”s presidential prospects would be dealt a blow.


The military has ruled Egypt continuously ever since the Free Officers palace coup that overthrew King Farouk”s monarchy in 1952. Naguib, Nasser, Sadat and Mubarak, the four men who have ruled the modern Egyptian republic, were all military officers whose power base was ultimately the officer corps, even though the regime is now a Praetorian-bureaucratic hybrid corporate state.


Even though Gemal Mubarak does not control the price of wheat, cement, steel or crude oil, his liberal economic policies could be blamed for the inflation nightmare, the bread riots, the chasm between the ostentatiously rich elite and the 30 million citizens who barely survive on $1 day and the President”s freeze on the democratic agenda, symbolized by the jailing of Ayman Nour, the founder of Kefaya and a potential rival for the succession.


Moreover, Gemal has a powerful constituency in the ruling NDP, the armed forces, the secular intelligence and Coptic/Muslim business elite who are terrified of a future Muslim Brotherhood government. Gemal is also popular in the palaces of the Arabian Gulf and the White House and Elysee Palace.


Economic reforms will be the immediate victim of a contested succession or an election victory for the Brotherhood. After all, when Hosni Mubarak allowed multiparty presidential elections after intense pressure from the White House in 2005, the Muslim Brotherhood won 20 per cent of the seats for the People”s Assembly, the lower house of Parliament and its candidates won half all seats they contested.


The regime has banned the Brotherhood, jailed its leaders and ideologues, whose vision of an Islamic state terrifies the secular elite, Egypt“s ten million Coptic Christians, US and Israel.


It is even possible that Egypt could share the fate of Algeria if the Muslim Brotherhood ever tried to seize power, possibly after another victory in a future Presidential election. The regime”s Constitutional amendments in 2007 were a de facto judicial coup against the Brotherhood, particularly the anti-terrorism law.


Apart form mainstream Islamist opponents like the political heirs of Hassan al Banna and Sayyid Qutb (hanged by Nasser for subversion in 1966), Egypt is also threatened by extreme radical groups like Takfir Wal Hijra or Gemaya Islamiya.


This is the reason Hamas”s seizure of power in Gaza is seen as a threat by many in the Egyptian regime. Hamas is inspired by the Muslim Brotherhood, whose ideologues infiltrated Gazan society when the Palestinian enclave was governed by Egypt before the Six Day War.


It is significant that despite the Israeli blockade of Gaza, Egypt has also sealed its border with Hamas-ruled Gaza, an act assailed as “traitorous” by Dr. Zawahiri in his latest video.


Above all, Egypt is aghast at the meteoric rise of Iran as the new regional superpower in the Middle East, with its proxies Hamas in Gaza and Hezbollah in Iran.


Anwar Sadat became anathema to Khomeinist Iran after his visit to Jerusalem, historic Camp David peace treaty with Israel and decision to offer asylum to the Shah after the revolution in 1979.


Egypt was appalled when Iran named a Teheran street in honour of Lieutenant Khalid Istanbuli, who assassinated President Sadat at a military parade in October 1981. Iran“s strategic alliance with Syria, role in sectarian politics of Shia Iraq and Lebanon, undermines Egypt“s role as the political powerbroker of the Arab world. Egypt“s financial dependence on Washington and peace treaty with Israel is routinely used by the Ayatollahs to devalue the legitimacy of the Mubarak regime in the Islamic world.


A new Middle East cold war now pits revolutionary Iran, Hezbollah, Hamas and Syria against Egypt, Saudi Arabia, Jordan and the Gulf states. Egypt will not succeed brokering ceasefire between Hamas and Israel in Gaza or reconcile with the Baathist Alawite regime in Syria.


After all, Hosni Mubarak boycotted the Arab summits in Damascus and mini-summit in Tripoli to demonstrate Egypt“s diplomatic ostracism of Syria for its alliance with the Ayatollahs. Yet Iran has now checkmated the Bush White House in Gaza, Lebanon and Iraq. Iran directly threatens the national interests of an Egypt whose Pharonic ancestors struggled with the ancient Persian Empire for geopolitical supremacy in the Middle East.


Matein Khalid is Dubai-based investment banker and analyst