CAIRO Faced with economic threats on several fronts, Egypt's rulers look unlikely to come up with a coherent policy response as the country heads into a long and turbulent election period which may make tough decisions even more difficult.
On Wednesday it was not even clear what government would manage the economy before the elections end; the ruling military council accepted the resignation of the civilian prime minister and his cabinet late on Tuesday, but gave no details of the "national salvation government" which some politicians said would be formed.
Even if a new cabinet is appointed quickly, it will struggle to cope with rising food prices, tumbling foreign reserves and a looming state budget crunch that are complicating authorities' efforts to deal with the worst civil unrest since President Hosni Mubarak was toppled in February.
Addressing any of the problems could worsen the others -- cutting state spending on food subsidies to strengthen state finances, example, could increase the impact of food inflation and trigger more unrest. So far, authorities have shied away from strong action on any of the problems.
"The government has thrown up its hands," said a Western diplomat on condition of anonymity, speaking before the cabinet resigned. "There seems to be virtually no dialogue on the issues and no sign of policies to adapt to changed circumstances."
Elections to the lower house of parliament are due to start next week and run into January, with upper house polls taking place from the end of January into March. During this period, the government will lack a popular mandate for economic policy changes.
And a new parliament will not necessarily mean more decisive policy-making; presidential powers will stay with the military council until a vote for the presidency. Field Marshal Mohamed Hussein Tantawi, who runs the council, promised on Tuesday that a civilian president would be elected in June. That is about six months sooner than previously planned, but still threatens seven more months of vacuum in decision-making.
The most pressing economic threat is the slide in Egypt's foreign reserves as tourism and export earnings suffer from the unrest and capital flees the country. Reserves have tumbled from around $36 billion at the start of 2011 to $22.1 billion in October, and may in coming months reach levels where the central bank is no longer able to prevent a sharp, sudden depreciation of the Egyptian pound.
Egypt could initially have responded to the problem by imposing some form of capital controls, or by allowing a slow, controlled fall of the currency that could stimulate economic growth and reduce pressure for further depreciation. It may now be too late to take either action without causing panic in the currency market and fresh instability.
Many industry leaders favor a devaluation to make exports more competitive, but say it should have begun long ago.
"This should have happened gradually over the past six months rather than suddenly losing 10 percent, which hurts everyone and makes it impossible to plan," said Khalil Kandil, Chairman of the Chamber of Metallurgical Industries.
So to head off a currency crisis, the government may have to find billions of dollars of international aid in the next several months. But aid from the International Monetary Fund or Western donors could come with economic policy conditions, such as a requirement to restrain state spending; aid from rich Arab states in the Gulf might carry political conditions.
This summer the government turned down the offer of a $3.2 billion financing facility from the IMF, but it raised bankers' hopes this week by saying it would ask the Fund to start negotiations on a package that would probably resemble the previous proposal. The cabinet's resignation could now delay the negotiations.
"The immediate priority has to be agreeing international financial help or the pound will slide," said Neil Shearing, chief emerging markets economist at Capital Economics. "People still harbor the hope that pragmatists will prevail. But there is a risk that this could end rather messily."
Nada Farid, analyst at Middle Eastern investment bank Beltone Financial in Cairo, said in a research note: "If external aid does not materialize, the Egyptian pound depreciation will be more severe and could average 6.8 against the U.S. dollar in full-year 2012/13." The pound traded at 5.99 to the dollar on Wednesday, a seven-year low.
At the current rate of capital outflows, even IMF aid and further assistance from Gulf countries might only delay rather than prevent a sharp fall of the currency. Foreign reserves dropped by nearly $2 billion in October.
The currency's movements will directly affect two other economic problem areas, inflation and state finances. A big depreciation of the pound would put upward pressure on consumer prices; Egypt is the world's biggest wheat importer so more expensive imports would threaten additional hardship for the estimated one fifth of Egyptians who live in poverty.
Urban consumer price inflation was 7.1 percent year-on-year in October, according to state statistics agency CAPMAS. That was the lowest level in four years, thanks to good local harvests, but it was still high in absolute terms and some analysts think it will rebound in coming months.
To reduce the impact of rising food prices on the population, the government operates a massive food subsidy program which is contributing to an officially estimated budget deficit this fiscal year of 8.6 percent of gross domestic product, near Greece's level.
The government has been discussing reforms to the subsidy scheme to reduce its cost and make it less wasteful, but authorities have not acted and may be unwilling to move on such a sensitive issue until after the elections.
Meanwhile, the government is finding it increasingly difficult to finance the deficit by borrowing from Egyptian banks. The central bank cut the size of its Treasury bill auctions last week as yields reached their highest since the 2008 global economic crisis.
The cost of insuring Egyptian sovereign debt against default for five years surged 60 basis points on Monday to its highest in 2-1/2 years. Egyptian dollar bond yields jumped.
Complicating all economic policy decisions is the risk that they may trigger fresh civil unrest and make holding the elections more difficult. Even before the deaths of at least 33 people since Saturday during clashes between police and anti-government protestors in Cairo, there was scattered unrest across the country.
Protesters closed the northern port of Damietta on November 13 during fighting between the army and residents worried by pollution from a fertilizer factory, state media reported.
On the same day, police in Aswan fired teargas to disperse a protest over the killing of a local boat captain, and last Wednesday, clothing factory workers in Port Said clashed with thugs who attacked them with knives, security sources said.
Some Egyptians blame the police for not intervening more forcefully to prevent such violence, but as the weekend's clashes in Cairo showed, aggressive intervention risks causing casualties which add to public outrage.
The government's paralysis extends to its approvals of business deals and development projects. Legal challenges to private-public investment deals may be discouraging state officials from pressing ahead with new projects for fear they could be challenged in court, economists say.
Steel and metals output has slumped 40 percent from levels before Mubarak was ousted, says the Chamber of Metallurgical Industries, mainly because state-backed infrastructure projects are on hold. Work on a planned $4 billion oil refinery has been delayed since January as investors wait for the government to ink the deal.
Egyptian businesses and the millions of people they employ will therefore be hoping desperately for fresh leadership in economy policy over coming months.
"Every so often we get news that things are about to return to normal," said Ahmed Elashram, managing partner at Greater Cairo Foundries, which makes steel pipes. The company has scrapped night shifts and moved to a three-day week this year as its output tumbled as much as 70 percent.
"First it was two months after the revolution, then after June when the financial year ended, then it was supposed to be after Eid (Muslim holidays)...Now we don't know, but from the first quarter of 2012 we will need to bounce back."
(Additional reporting by Marwa Awad, Ehab Farouk and Maha El Dahan; Editing by Andrew Torchia)