Morsi’s Fiscal Cliff

If Egyptian President Mohammed Morsi fails to secure a IMF loan, Egypt could fall into a power vacuum, throwing the security of Egypt and the rest of the region into question.

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Mohamed Abd El Ghany/ REUTERS

Egyptian protesters demonstrate against President Mohamed Morsi's decree widening his powers outside the presidential palace in Cairo, December 4, 2012.

The fiscal disaster facing Egypt makes Washington’s budget battles look like kids squabbling over the milk money. Unless Egyptian President Mohammed Morsi can secure a loan from the International Monetary Fund within the next three months, Egypt will run out of currency reserves, default on its debt and go broke. If that happens, renewed protests could topple the government and send the country back into chaos.

It looks like Morsi’s strategy for meeting his debt payment deadline is falling apart. Morsi has dragged his feet for nearly a year on the loan, hoping to put off the severe austerity measures – like slashing some state subsidies by as much as 25% — until after the legislative elections. Those elections were due to be held this April through June, leaving Morsi a tight window to impose the austerity measures and ink the deal after his party, the Muslim Brotherhood, had presumably swept the elections. Doing so would’ve cemented their hold on Egypt’s government.

But an Egyptian court Wednesday postponed those elections indefinitely. Instead of appealing the decision, which Morsi could have done, he surprised observers by acquiescing.

(MORE: Washington’s Two Opinions of Egypt’s Islamist President)

The main secular opposition group had been planning to boycott the elections. Without full participation, the legitimacy of the winners would’ve been questioned and his critics would still have reason to protest in the streets. Egypt has suffered months of unrest and violent protests as Morsi and the Muslim Brotherhood have tried to solidify their hold on government. Opposition groups are demanding a new constitution, arguing the one Morsi rushed through does not protect minorities and goes too far in imposing Islamist doctrine. The court that postponed the elections would have been done away with under the new constitution, which was due to be implemented following the legislative elections. The courts are one of the few remaining checks on Morsi’s power.

So what caused Morsi to change his mind? Some say Secretary of State John Kerry who last week visited Egypt on his first official trip. “John Kerry…didn’t come [to Egypt] to vacation…but to tap [Morsi] on the head and say ‘get your act together, make concessions to the competition, this is not the environment for free and fair elections,'” Mona Makram Ebeid, a political science professor, Coptic Christian and member of the Shura Council, the de facto legislative body until a lower chamber is elected, told NBC News.



Kerry said Morsi pledged to quickly reach an agreement with the IMF on the loan, worth $5 billion with an additional $1 billion bonus in U.S. funds when its completed, and that he’d endeavor to address the concerns of minorities. “Our hope is that the democracy that he has talked about can come to fruition,” Kerry told NPR. “I can’t sit here and tell you that I know it will. I can’t tell you there’s a guarantee that the things that he said he wants to do can, in fact, be affected. And if they are not, then Egypt is going to have a very difficult time in the days ahead.”

(MORE: ‘No Glimmers of Hope’: Two Years After Egypt’s Revolution, an Economic Crisis Looms)

As a show of good faith, Kerry convinced Republican Representatives Ed Royce and Kay Granger, two members of the House Foreign Relations Committee, to let go of their holds on some aid to Egypt. As a down payment towards the $1 billion pledged by President Obama last year, Kerry gave Morsi $190 million, plus $60 million as part of an Enterprise Fund for small businesses that Kerry passed while he was chairman of the Senate Foreign Relations Committee. “The concern is we don’t know who’d replace Morsi at this point,” says a House Republican aide involved in the negotiations. “They’ve continued to live up to the Israeli peace treaty. They made commitments to Kerry to make political and economic reforms, to provide protections for NGOs and people from all faiths. So, we felt it was okay to let go of this tranche of the money.”

Compared to Egypt’s needs, the $250 million is a drop in the bucket, but it did underline U.S. backing of Morsi at a moment when he really needs it. The U.S. has thus far supported Morsi as the democratically elected leader of Egypt, while expressing concerns about his attempts to quash his opposition. The military is waiting in the wings for Morsi to fail, but as they learned the hard way in the first 15 months after the revolution, governing isn’t their cup of tea. Which means, if Morsi falls Egypt could fall into a power vacuum. If Morsi fails to secure the IMF loan, that may happen any way, throwing the security of Egypt and the rest of the region into question.

MORE: An Interview with Egyptian President Mohamed Morsi: ‘We’re Learning How to Be Free’