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IN THE SPRING OF 2002, THEN-LAWMAKER Mohamed Morsi took a visiting journalist on a tour of the university in his home district in the Nile Delta. Morsi was a professor of engineering there, and he lamented the widening gulf between the demands of Egypt’s youth and the economy’s ability to meet them. “When these students graduate,” he asked, gesturing to the young people around him, “where will they go? We have 200,000 graduates in the market, and there are no jobs.”

A decade later that number has risen to 750,000 and Morsi, now Egypt’s president, has done little to salve his country’s ailing economy. Instead, the veteran Muslim Brotherhood leader has polarized the nation by indulging his Islamist base while antagonizing secularists and liberals. He has aggrandized power at the expense of a dissolved Parliament and signaled ambitions to control the judiciary, prompting critics to compare him with Hosni Mubarak, the dictator toppled by a revolution two years ago. Morsi has also sowed confusion with ad hoc policy prescriptions and cabinet appointments, which analysts say have complicated talks with the International Monetary Fund for a $4.8 billion bailout package. While the two sides haggle, the country’s foreign exchange reserves have slipped to critical levels and the Egyptian pound has declined, to 6.51 to the dollar.

Discontent erupted in a wave of protests late last month, on the second anniversary of the revolution, that left dozens dead and prompted Morsi to declare a state of emergency in the provinces of Port Said, Ismaïlia and Suez, which straddle the Suez Canal.

“People of talent do not want to serve in this government,” says Angus Blair, president of Signet Institute, a Cairo think tank. “They see many negative factors and few positive ones. A lot of wealthy people have taken money offshore, and they’re worried about the fact that the government does not have a viable economic plan.”

The IMF expects Egypt’s economy to grow by 3 percent this year, up from 1.5 percent in 2012 but far short of the pace needed to reduce a 13 percent unemployment rate. More than three quarters of the jobless are between the ages of 15 and 29. In December, Standard & Poor’s cut the country’s long-term debt rating to B– from B and cautioned that another downgrade was possible without a comprehensive and compelling economic reform effort by Cairo.

Not all the news is bad. Qatar, like other Sunni Gulf monarchies an ally of Egypt’s Brotherhood-dominated government, has pledged a $5 billion lifeline to the country, money that may be tempting Morsi to believe Egypt can do without the assistance of the IMF — and its accompanying policy conditions. Qatar National Bank has agreed to buy a majority stake in the Egyptian unit of Société Générale for nearly $2 billion. Fitch Ratings, meanwhile, has praised the central bank’s new exchange-rate-setting regime for its transparency. The government recently announced a set of austerity measures that it contends will cut the budget deficit by nearly 15 percent.

Egypt is also blessed with a fertile underground economy. Recent government policies, however, suggest that an abundance of liquidity should not be taken for granted. In December the central bank imposed a $10,000 ceiling on foreign currency transactions while tightening restrictions on lenders’ long dollar positions to 1 percent of their capital bases, down from 10 percent. Inflation, always high in a country with badly neglected infrastructure and supply bottlenecks, is hovering around 7 percent and expected to enter double-digit territory this year given sustained political uncertainty and chronic food and fuel shortages. In December the government warned that its subsidies bill, which amounts to nearly 10 percent of gross domestic product, would increase by 10 billion pounds ($1.6 billion) in the fiscal year ending June 30 as a result of the currency’s sagging value and fluctuations in commodity prices.

Egypt’s liberal elites have failed to cohere into an effective opposition to offer solutions to the country’s economic woes. That leaves Morsi and his Islamist allies with a virtual hegemony over domestic politics, but so far they have failed to use their clout to revive the economy.

“I’m surprised by Morsi’s lack of competence and statesmanship, the inability to appear more than the guy from the movement,” says Issandr el-Amrani, a Cairo-based journalist, commentator and consultant. “The impression is that one hand doesn’t know what the other is doing and that even if he has a policy he may not be able to execute it.”

At times the Morsi administration appears to be splitting at the seams under the weight of its challenges. In November massive political demonstrations erupted after Morsi — Egypt’s first freely elected president, though with only 51 percent of the vote — issued a decree granting himself emergency powers. Since then more than a dozen prominent government officials have resigned, none of them Brotherhood members.

A new constitution, written by a committee dominated by the Brotherhood and passed in a December referendum, has been condemned as illiberal by opposition leaders. Earlier that month Morsi slammed the door on a pledge to raise taxes in return for an IMF rescue plan, straining relations with the Fund.

In December state television announced that Egypt’s central bank governor was stepping down, only to deny the report a few hours later. The episode coincided with the resignation of the country’s vice president and prompted speculation that the news was leaked to focus Morsi’s attention on the economy.

While the government stumbles, Egypt burns. Absent a clear vision for the economy and the political will to impose it, say analysts, the country’s budget deficit could balloon to some 15 percent of GDP in the current fiscal year, well above the official 9 percent target. The burden of an already onerous public sector will deepen thanks to a 10 percent increase in civil-servant compensation, which Mubarak decreed at the 11th hour in a desperate bid to remain in power. Add to that the pound’s relentless depreciation, which has increased the cost of a vast array of government subsidies on food, fuel and other basic goods.

In a January cabinet reshuffle, the president appointed senior Muslim Brotherhood members to three key posts, a move interpreted as a gesture to Egypt’s ultraorthodox Salafi parties, which have emerged as both tactical allies and political rivals to the more moderate Brotherhood. He also named as his Finance minister Al-Morsi al-Sayyed Hegazy, an obscure economist and expert on Islamic banking. Analysts say Hegazy, who holds a Ph.D. from the University of Connecticut, was tapped to transform Egypt’s capital markets into a fountainhead of sukuk, or shari’a-compliant debt products. Such issues are a growth market worth competing for: Last year sales of sukuk in the Middle East quadrupled in value, to $18.5 billion, or about half the global total for such instruments.

Islamic banking has assumed totemic significance under the Morsi regime. The president and his advisers, nearly all of whom hail from the Brotherhood, have aggressively promoted interest-free debt as a means of financing everything from the redevelopment of Egypt’s aging infrastructure to an ambitious land reform program. Nonetheless, a proposed law that would help Cairo transform itself into a shari’a-compliant investment hub has been blocked by Al-Azhar University, not on spiritual grounds but on nationalist ones: Al-Azhar scholars, who routinely render decrees on the doctrinal fidelity of draft laws, object to a provision that would allow foreigners a share of revenue from projects in which they are invested.

Critics of the government’s shari’a-centrism assert that there is no guarantee Gulf investors would be any more willing to ignore Egypt’s downside risks than Westerners are. Instead, they urge the government to develop dollar-based credit markets for the sake of greater liquidity and lower prices. “If we want to defend our currency, we need to borrow from outside the region,” says one Egyptian financial specialist, who requested anonymity. “Why borrow in local currency at a cost of 700 to 800 basis points when you could borrow dollars over a period of ten years? This is an important discussion we’re not having.”

The departure of Mumtaz al-Saeed, Hegazy’s predecessor as Finance minister and a key negotiator in the IMF talks, may further estrange both sides in what has been a slow and jerky process. Al-Saeed, a ministry veteran who was lured out of retirement to join the Morsi government, had hammered out the main elements of an assistance package with Fund officials last fall, but the two sides postponed a formal agreement because of the street violence triggered by news of Morsi’s emergency powers. A key plank of the proposed IMF package was an increase in taxes on cigarettes, alcohol, food, fuel and other consumer goods, which the Fund and many Egyptian economists regard as crucial for reducing the deficit.

Talks between the ministry and the IMF broke down in December after the president, responding to intense grassroots resistance — much of it led by Brotherhood leaders — reversed his commitment to the proposed tax hike just hours after it was announced. Stunned by Morsi’s reversal, IMF officials insisted on a new reform blueprint. Fund officials have complained that the government’s figures “just don’t add up,” says one analyst close to the negotiations.

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