Egypt's constitution passes, now economic crisis looms

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An Egyptian vendor sells nuts in front of a giant poster of a U.S. dollar outside a currency exchange office in Cairo, Egypt, Tuesday, Dec. 25, 2012. As Egypt prepared to release official results from the constitutional referendum, its economy showed increasing signs of distress on Tuesday with worried residents hoarding dollars and fearing that continued political instability will lead to a fast devaluation of the local currency. The Central Bank of Egypt said Tuesday that the U.S. dollar was selling at 6.18 to the Egyptian pound, a spike from the rate of six pounds just two months ago. (AP Photo/Khalil Hamra)

CAIRO - The official approval of Egypt's disputed, Islamist-backed constitution Tuesday held out little hope of stabilizing the country after two years of turmoil and Islamist President Mohammed Morsi may now face a more immediate crisis with the economy falling deeper into distress.

In a clear sign of anxiety over the economy, the turbulence of the past month and expected austerity measures ahead have some Egyptians hoarding dollars for fear the currency is about to take a significant turn for the weaker.

The battle over the constitution left Egypt deeply polarized at a time when the government is increasingly cash-strapped. Supporters of the charter campaigned for it on the grounds that it will lead to stability, improve the grip of Morsi and his allies on state institutions, restore investor confidence and bring back tourists.

"In times of change, politics are the driver of the economy and not the other way around," said Mourad Aly, a media adviser for the political arm of the fundamentalist Muslim Brotherhood, the backbone of Morsi's presidency and the main group that backed the constitution.

But there are already multiple fights on the horizon.

The U.S. State Department bluntly told Morsi it was now time to make compromises, acknowledging deep concerns over the constitution.

"President Morsi, as the democratically elected leader of Egypt, has a special responsibility to move forward in a way that recognizes the urgent need to bridge divisions, build trust, and broaden support for the political process," said Patrick Ventrell, acting deputy spokesman. "We hope those Egyptians disappointed by the result will seek more and deeper engagement. "

He said Egypt "needs a strong, inclusive government to meet its many challenges."

After a spate of resignations of senior aides and advisers during the constitutional crisis, Morsi appeared to have lost another member of his government late Tuesday night when his communications minister posted on his Twitter account that he was resigning.

The minister Hany Mahmoud said he "couldn't cope with the culture of government work, particular in the current conditions of the country." The resignation could not be immediately verified because it came so late at night.

Morsi signed a decree Tuesday night that put the new constitution into effect after the election commission announced the official results of the referendum held over the past two weekends. It said the constitution has passed with a 63.8 per cent "yes." Turnout of 32.9 per cent of Egypt's nearly 52 million registered voters was lower than most other elections since the uprising nearly two years ago that ousted authoritarian leader Hosni Mubarak

Morsi is expected to call for a new election of parliament's lawmaking lower house within two months.

In the meantime, the traditionally toothless upper house, the Shura Council, will hold legislative power. But the chamber is overwhelmingly Islamist-dominated so any laws it passes could spark a backlash from the opposition. Many fear a legal crackdown on independent media, highly critical of Islamists.

In a bid to reach out to opposition, the leader of the Muslim Brotherhood said he hoped the charter will be a "good omen" for Egyptians.

"Let's all begin to build the renaissance of our country with free will, good intentions and strong determination, men, women, Muslims and Christians," Mohammed Badie said on his Twitter account.

But the opposition said the passing of the document is was not the end of the political dispute. Critics fear the constitution will usher in Islamic law in Egypt and restrict personal freedoms.

"This is not a constitution that will last for a long time," said Khaled Dawoud, a spokesman for the main opposition group, the National Salvation Front, vowing to fight for more freedoms, social and economic rights.

In a sign that the new front for the opposition against Morsi's policies may be the economy, Dawoud said the Morsi administration was "confused" both on the political and economic fronts.

"We want stability and economic prosperity like everybody else. But we don't believe that the policies of Morsi and the Brotherhood will lead to more stability," he said.

The turmoil over the constitution sparked huge protests that turned deadly at times. For a moment, the tension looked like it was spiraling out of control and only added to an already weakened economy.

At the height of the protests, the government called off its talks with the International Monetary Fund over a $4.8 billion loan which Morsi's government viewed as a way to attract much needed foreign investors, and deal with a high budget deficit.

Major foreign currency earners, such as foreign direct investment and tourism, have dropped off because of political unrest and deterioration in security following Mubarak's ouster in February 2011.

Over the last two years, the country has lost more than half of its foreign currency reserves from $36 billion in 2010 to around $15 billion currently. The reserve level has been slightly propped up by some Qatari deposits in past months.

Economic experts say that Egypt's current foreign reserves barely cover three months of imports, which is the IMF's minimum recommended coverage.

There were signs on Tuesday that some Egyptians were starting to hoard dollars for fear that the local currency could weaken significantly.

The run on the dollar was fueled in part by a decree issued by Morsi late Monday banning people from leaving Egypt with more than $10,000 or its equivalent in other currencies.

Some currency exchanges in the upscale Cairo neighbourhood of Zamalek ran out of dollars by midday and offered only euros — a rare occurrence. Some banks, too, said they had run out of cash dollars.

"I asked around in many exchange places and can't find dollars anywhere," said Cairo resident Mahmoud Kamel after unsuccessfully visiting one exchange office. "I want to exchange money because I'm afraid the Egyptian pound will not have any value soon."

The dollar rush prompted the Central Bank of Egypt to issue a statement on Monday calling on banks not to listen to rumours circulating about the fiscal health of the nation.

The bank declared its commitment to guarantee all deposits in local and foreign currencies to banks in Egypt and said banks are "financially strong enough."

There was one particularly nerve-rattling report in recent days that longtime Central Bank Governor Farouk Okdah had resigned. The report came on Saturday during the second and final round of voting on the constitutional referendum.

Official media quickly retracted the news after reporting it. The governor then turned up at a meeting of the government's economic team on Sunday in an apparent attempt to quell nervousness over the state of the economy.

Egypt's currency had been stable trading around 6 pounds to the dollar for the first half of the year. It has since slipped, especially in the past two months as political instability worsened. The dollar was selling Tuesday at 6.18.

Rumours swirling around impending tax hikes, subsidy cuts and other bread-and-butter issues have heightened the public's concern. Around 40 per cent of Egyptians live just at or below the poverty line of surviving on around $2 a day.

In a sign of the worsening economy, the number of people living on under $1 a day rose to 25 per cent in 2011, up from 21.6 per cent in 2009, according to government statistics released last month.

Promises that the Islamist-drafted constitution would bring about the stability Egyptians crave were dismissed by economic experts who warned that without enough currency reserves, there is little to stop the pound from falling.

"The instability of the foreign exchange rate is not at all detached from the political instability. It is a reflection and clear mirror to what is happening," said Haytham Abdel Fattah, head of the Treasury and International Markets Manager at Industrial Development Bank.

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Mariam Rizk contributed to this report