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Egypt's Perfect Storm: A Convergence of Political and Economic Crises

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Putting politics to one side, the events of the past few weeks in Egypt have exposed a lack of competence and a serious breakdown of communication within the Morsi administration. Alarmingly, this has been the case when dealing with a number of critical economic issues.

It all came to a head earlier this month when it dawned on Egypt's leaders that they couldn't go ahead with their plans to prop up the ailing economy. Firstly, because they were going about their economic program in reverse and secondly, because the political crisis made it virtually impossible to get any consensus on economic policies, let alone have a fighting chance of implementing them.

It became obvious that any attempt to institute tough reforms -- however necessary and urgent -- would ultimately fail, given the polarized environment.

First there was a dramatic u-turn on a proposed tax hike after public uproar, then, less than 24 hours later, the request to put on hold an IMF loan seen as key to regaining investor confidence. Together, the incidents confirmed what many had suspected: Egypt's government is dysfunctional.

On one level, there's the disconnect between the cabinet, led by prime minister Hisham Kandil, intent on securing a crucial IMF financing package and the president, hell bent on passing the constitution. On another level, there's the failure to exercise the most basic ABCs of policy-making.

The administration's top economic priority is deficit reduction, a key requirement for IMF funding. But by choosing to kick off its reform program with an overnight tax increase on more than 50 consumer goods and services the government was taking the easy option. And to do so at a time of deep division indicates either an inability to gauge the public mood or a total disregard for it. Also, the decision to raise taxes as a stand-alone measure, removed from a comprehensive program that also boosted growth, reveals a lack of vision.

Every economist I've spoken to agrees that tough reforms are an unavoidable part of any economic program given the state of Egypt's finances. But they all say there would have been less outcry if the taxes were coupled with stimulus.

Also, the tax increase was announced suddenly and at the worst possible time to announce a tax hike. Ever.

It's hard enough implementing economic austerity when you have a strong mandate and widespread public support, let alone trying to ram it through at the height of a political crisis, without discussion or consultation, and devoid of measures to soften the blow.

Equally worrying is the apparent breakdown of communication within the government itself. The cabinet of ministers was reportedly neither consulted nor informed of the president's decision to retract the tax legislation, issued only hours earlier. The president's swift retraction, literally overnight (the suspension of the tax was publicized on the president's Facebook page at 2 a.m.), appeared to be a panicked reaction to the public outrage.

The prime minister attempted damage control via a televised cabinet meeting calling for national dialogue on the economic plan, but it was too little too late.

The tax u-turn fiasco highlighted the difficulty of implementing tough reforms at a time of severe polarization and the subsequent request to delay the IMF deal was a public admission that the government did not have its act together.

The actual economic plan is a procedural ticking of boxes to achieve deficit reduction, lacking in vision and creativity.

Similar to Egypt's constitution, the economic plan isn't terrible, but it is not what one would have hoped to be the blueprint for a populous post-revolution emerging economy with lots of potential.

There is also a sense among many Egyptians that since taking office, president Morsi and his allies have focused the bulk of their energy on consolidating power rather than addressing the bread and butter issues that brought people out against Mubarak in the first place. This explains some of the anger unleashed on the streets of Egypt these past few weeks.

Had Egypt's newly elected leader devoted as much attention to mending the economy as he has on gripping power, perhaps the country would be less polarized and his actions would be viewed with less skepticism and mistrust.

The mess we are in today is the convergence of Egypt's political crisis with its economic reckoning.

But as bad as things are, both politically and economically, I wonder, can the threat of economic collapse -- in which everybody loses, Islamist and secular alike -- compel those in power to reach out and engage with their opponents?

Even if the concept of 'consensus' doesn't sit comfortably with the Islamist leaders' majoritarian world view, perhaps the economic reality could make them consider it.

As a financial journalist with extensive experience covering the eurozone crisis I am well-versed in the difficulty of implementing painful economic reform in the face of ballooning deficits and mounting piles of debt. It is never easy, and the riots across Europe this year are proof that even when you have a pluralist democracy and a functioning parliament, you cannot contain the anger on the street. But even in the case of Greece, which is in its 5th year of recession and where youth unemployment is above 50 percent, the austerity still had to be agreed upon by parties on the left, right and center. The majority party knew that it couldn't succeed in implementing the needed policies without the support -- however begrudging -- of other political stakeholders.

If the events of the past few weeks have taught us anything, it's this: The notion that having a majority (whether real or manufactured) somehow negates the need for consensus is misguided and will not work, particularly in a post-revolution setting with huge economic challenges. Without consensus there is no way out of this crisis, and everybody in Egypt loses.