Egypt courts economic disaster. President Mubarak faces a crisis. Domestic problems mount as he juggles delicate relations with the US, Israel, and the Arab world. Beginning today a four-part series examines Egypt's economic slide, its booming population, rising fundamentalism, and Mubarak's prospects.

Egypt, the second pillar of United States policy in the Middle East, is crumbling beneath the weight of its crushing foreign debt, suffocating bureaucracy, and exploding population. That is the assessment of Egyptians and foreign diplomats alike, who predict Egypt will be bankrupt this year unless President Hosni Mubarak negotiates a rescheduling of Egypt's debts and takes drastic steps to repair the collapsing economy.

Egypt's crisis has been brought on largely by last December's steep decline in world oil prices. The drop from $28 a barrel to about $11 robbed the nation of foreign currency that in recent years allowed the Egyptian government to avoid making desperately needed structural reforms in its bloated, inefficient economy.

The loss of oil revenues, the related loss of remittances from Egyptian workers who had lost their jobs in the Persian Gulf's slowing oil economies, and the drop in Suez Canal and tourism revenues only serve to emphasize the economy's underlying weaknesses.

``Until the price drop, the government was able to coast on oil and remittances,'' a Western economist here says. ``Two years ago, the problems were nothing that some smart management couldn't handle. But there is a lack of leadership and management skills here. Until now, this government has not demonstrated an ability to handle the problems.''

Egypt's creditors have long urged that the government slash its budget, devalue the Egyptian pound, reduce subsidies, and shake out the bureaucracy, but no comprehensive steps were taken.

The Mubarak government has been reluctant to take drastic measures urged by such institutions as the International Monetary Fund, because they call for at least partial dismantling of the pervasive subsidy system that makes Egyptian bread cheap enough to feed to chickens and keeps its populace relatively passive.

Egypt's muddle-through policies, however, have left it with a $32 billion foreign debt that, some Western analysts predict, it will be unable to service by this fall.

What happens then is anyone's guess.

The US is unlikely to let Egypt's pro-Western administration collapse, and it has already indicated a willingness to consider lowering interest on Egypt's $4.5 billion military debt. But it is unlikely to forgive Egypt its entire civil and military debt or to boost the $2.2 billion in annual aid it now gives Egypt.

Western analysts predict that as Egypt's economic crisis deepens, its relations with the US will worsen. Already, there is growing anti-American sentiment in the Egyptian public. Egyptians do not like what they perceive as economic dependence on the US, because they fear it limits Egypt's freedom of political action and further isolates it from the Arab world. Constraints on Mubarak

Supporters of Mr. Mubarak's pro-Western stance argue that the US's policies in the region, coupled with its failure to bail out Egypt's economy, have left Mubarak feeling exposed and vulnerable to a rising tide of Egyptian nationalist and anti-Western sentiment.

The President, supporters say, is committed to nurturing Egypt's limited democracy and expanding the private sector. But he cannot do so if forced to take harsh measures that may prompt large-scale social unrest.

``The Americans have, to some extent, taken Egypt for granted,'' says Tahsin Bashir, a former Egyptian diplomat. ``What is at stake here for the United States is whether a country like Egypt, which is developing an open policy and aligning itself with the United States, will be allowed to go under. There is a perception that the US will give us enough to keep us from going under, but not enough to do more than float, barely breathing.''

Many Egyptians trace their economic troubles to the ``open door'' policy adopted in 1974 by then-President Anwar Sadat. Infitah, as it is known here, aimed to en courage foreign investment in Egypt's planned economy by fostering a private sector alongside the public one. The policy produced a very wealthy mercantile class, but not long-term investment in productive industries. As a result, it widened the gap between the wealthy few and the poor majority. The desperate economic situation of many of Egypt's 48 million people makes it nearly impossible for any government to ask for sacrifices from a populace already living at subsistence level. Why outside pressure could be counterproductive

Two years ago, the US faced the likely economic collapse of Israel, its closest ally in the region. A combination of massive US aid, a team of American economic experts talking tough to the Israeli government, and a package of strict government measures reversed Israel's inflationary spiral, restored its dangerously low foreign-currency reserves, and stabilized its chaotic economy.

Such a happy outcome is ruled unlikely here by American experts. Egypt's problems are more pervasive, its relations to the US of a different nature, and its government's relation to the people far more tenuous.

``The political dynamics in Israel are completely different,'' a Western diplomat says.

``They are used to the notion of the United States putting pressure on them. It is a convenient device for Israeli political leaders in pushing through unpleasant economic policies.

``For Egypt, it is completely the reverse,'' he says. ``The standing public policy of this government and previous governments is `We are an autonomous country.' There is tremendous reluctance to be dictated to by any Western country.''

Economic reform is possible in Egypt, analysts here agree, only when the Egyptian government itself perceives it to be unavoidable and believes that taking drastic economic measures will be less risky than doing nothing. That point does not yet seem to have been reached.

``There is no lack of prescriptions,'' an economist says. ``Everybody -- the Americans, the World Bank, the IMF -- has been here a dozen times. The theology of what needs to be done is agreed, but it is almost a question of faith. [Egypt] has no prior experience with a liberal economy.

``The economists say you have to try this, this, and this, but these guys have to live here. They have to be convinced that what they're being asked to do is worth the risk, and they're really being asked to take it all on faith.''

As the government hesitates, the foreign debt rises, currency reserves dwindle and the government's options for dealing with the crisis shrink.

What the government fears is nothing short of street riots of the sort that occurred in 1977 when President Sadat raised the price of heavily subsidized bread. It cites opposition pressures, spearheaded by Islamic fundamentalists on one hand and hard-line leftists on the other, as inhibiting government actions. But many Egyptians are growing impatient with the government's failure to act.

``It is a lack of credible, sustained policy that is enemy No. 1 to this government,'' says Mr. Bashir. ``Good intentions are not enough. It is paralysis that is the danger.''

Last September, Mubarak installed an economist, Ali Lutfi, as prime minister with a mandate for economic reform. Mr. Lutfi has periodically announced halfhearted measures, but the verdict on his government is that it has failed to act. Rumors are rampant in Cairo that Lutfi will be replaced soon in a new Cabinet shuffle.

Lutfi is partly the victim of external forces. The drop in oil prices is estimated to cost Egypt about $150 million monthly in oil revenues.

The oil price collapse also hit two other important sources of foreign-currency -- Suez Canal tariffs and remittances from Egyptians working in the Gulf states. Suez Canal earnings are suffering from slower oil-tanker traffic; Gulf nations hard hit by the oil price slide are sending expatriate workers, many of them Egyptians, back home. Returning workers mean a loss of remittances and more pressure on the Egyptian government to provide jobs.

It is estimated that some 400,000 Egyptians annually enter the job market. The government's longtime policy of guaranteeing a public sector job to every college graduate is seen as a major cause of bureaucratic inefficiency.

Tourism, another main source of income, has been hit by regional terrorism and the riots in February by some members of the Central Security Police forces, who rampaged through posh hotels and nightclubs near the pyramids before the Army could quell the revolt.

The security police revolt both underscored the desperation of the very poor -- the police are drawn from the poorest rural families -- and made it all the more difficult for the government to contemplate harsh economic measures that would affect the least affluent. Next: Coping with a burgeoning population

You've read  of  free articles. Subscribe to continue.