Is Egypt Broke?

That Egypt is encountering economic problems is no secret, but the gravity of the situation is being underestimated.

We know that the IMF negotiations with Egypt for a loan of $4.8 billion have dragged on month after month, and that the IMF team that was sent to conclude the deal left Egypt without doing so. On the other hand, Qatar and Libya agreed last week to increase aid to Egypt by $5 billion. And officially, Egypt claims to have about $16 billion in reserves.

A new analysis by David Goldman reveals just how bad things really are, and lends credence to what I am hearing from well-informed business sources: Egypt’s reserves are gone. The country is broke. Here is Goldman’s analysis (writing as Spengler in Asia Times) entitled "When Hunger Came to Egypt:"

Egyptians are getting hungry. The fall of the Egyptian pound to just 60% of its 2012 exchange rate against the dollar has priced everything but bread out of the reach of the poorer half of the population, and the bread supply is now at risk.

The news late last week that Libya and Qatar may lend US$5 billion to Egypt was overshadowed by reports that Cairo owes $5 billion to the oil companies that produce oil and gas on its territory. Half of the amount is overdue, and oil companies reportedly expect to wait years for payment. Egypt’s arrears on trade credits from suppliers of oil, wheat, and other essential items probably exceed its $8.8 billion cash reserves, leaving the country flat broke.

With a trade deficit running at $32 billion, the Libyan and Qatari money covers just a couple of months; stiffing the oil companies might have covered the past couple of months. If the Egyptian government finally comes to terms with the International Monetary Fund for a $4.8 billion loan, that will cover another few weeks.

In a separate article, Goldman noted this:

Egypt’s pound has fallen by 40% since last December, from 6 to the dollar to 8.25 to the dollar on the black market. The price of basic food items like beans and milk have risen by more than that, pricing all forms of protein out of the range of the half of Egyptians who live on less than $2 a day. And the worst is yet to come: according to the US embassy, the Muslim Brotherhood government has vastly inflated its estimates of this year’s wheat harvest in order to keep export orders down — because it doesn’t have the money to pay for them.

Goldman does not speculate here about the political impact of these developments, but they would be dire for President Morsi and his Muslim Brotherhood government. An opinion poll is March showed his approval rating falling precipitously in the last few months, from 78 percent to 47 percent. Add shortages of staples such as bread and fava beans to the mix and political instability becomes predictable. There are no candidates on the scene who, in that poll, seemed to garner much support in a face-off election with Morsi--but bread riots could change Egypt’s politics fast.