While most of the attention on Egypt in the past couple of months has been over constitutional battles — president Mohammed Morsi’s decree asserting extraordinary powers and a hastily called referendum on what’s now become Egypt’s constitution — it’s easy to lose sight of the fact that the Egyptian economy has gone from bad to worse.

Indeed, since the initial Tahrir Square revolts began two years ago that ultimately pushed former president Hosni Mubarak out of office, the Egyptian economy has taken a backseat to more philosophical arguments about Egypt’s future and its governance.

But Egypt’s sclerotic economy remains, perhaps, a key ingredient in determining how Egypt’s political and constitutional debate will ultimately be resolved, and it’s probably one of the most important issues that U.S. and international policymakers should be watching as they try to discern what’s happening in Egypt and in the Middle East more broadly.

So with the third round of parliamentary elections in two years set for this spring, which will certainly feature another round of debate about the weighty issues of the role of Islamism in government, the relationship between the presidency and the Egyptian army, the separation of powers in Egyptian government, and the freedoms and rights that should be granted to Egyptians, Morsi’s cabinet reshuffle over the weekend is an opportunity to remember that Egypt’s economic condition will feature prominently as well.

Morsi replaced 10 of the cabinet members (retaining the current prime minister Hisham Qandil, a former minister for of water resources and irrigation), but the most important appointment was a new Egyptian finance minister after what’s been seen as a disappointing six months for Morsi and the Egyptian economy.

Al-Mursi Al-Sayed Hegazy, a professor of economics at Alexandria University and an expert on Islamic finance, will replace Momtaz El-Saeed, who had served as Egypt’s top financial officer since December 2011 and who had served as a budget undersecretary in the finance ministry during the Mubarak era.  We don’t know much more about him other than that, although any change is probably a good sign, given the horrific state of Morsi’s economic policy.

Although Hegazy doesn’t have ties to the old Mubarak regime, and he is seen as much closer to the Muslim Brotherhood (جماعة الاخوان المسلمين‎) than his predecessor, his selection is curious, because he’s not incredibly well-known, and certainly, not someone who would have immediately reassured international investors or the International Monetary Fund (in the way that, say, the appointment of Mohamed El-Erian, the chief executive of investment manager PIMCO would be).

At the top of Hegazy’s to-do list will be to secure a postponed IMF package for up to $4.8 billion in loans — the package was signed in November, but later postponed in December amid the political tumult surrounding the constitutional referendum.

That gives IMF managing director Christine Lagarde (pictured above in Egypt) incredible influence over the Egyptian economy, and it means that the tax increases that Morsi had been preparing before December, not to mention additional austerity measures, are all but certain to be enacted.  With parliamentary elections expected in April, I’m not sure we can really depend on austerity measures being implemented too soon.

On the other hand, if the IMF deal isn’t sealed shortly, Egypt’s economy could face a meltdown that would also harm Morsi and the Brotherhood, which will contest the upcoming elections through its Freedom and Justice Party (حزب الحرية والعدال).  With the country’s foreign reserves rapidly declining, Qatar provided a $2 billion loan to Egypt on Tuesday, with an additional grant of $500 million in immediate aid.  Qatar has taken the most active role in keeping Egypt afloat since the end of the Mubarak era — last September, it committed $8 billion for power, iron and steel investments at the northern end of the Suez Canal and $10 billion for additional tourism infrastructure.

For Morsi, the sweet spot is securing the IMF deal ASAP, with austerity measures expected to begin very shortly after the spring elections — he gets the institutional benefits of stabilizing Egypt’s economy without taking the politically painful steps that the IMF may ultimately require under the deal.

That timing may be fine with the IMF, though, so long as Morsi commits to raising additional revenue and other structural reforms shortly after the April elections.  Certainly, the IMF must realize that a deal will boost the chances for a more stable Egypt.  

Furthermore, as Rebel Economy notes, there’s lingering distrust with the IMF from its intervention in the Egyptian economy in the 1990s, when it prescribed privatization of state industries that are seen as having unduly enriched the wealthy Egyptian elite tied to the Mubarak regime, so the IMF needs to tread lightly.  The reforms of the 1990s boosted growth, but many industries in the Egyptian economy remain too tied to the public sector (e.g., much of the textile industry remains in the state sector).

Leaving aside the political machinations, Egypt’s economy is a mess — and in fairly short order, Morsi and the Muslim Brotherhood are going to have to find a way to rejuvenate it, despite the fact that Egypt lacks the kind of oil wealth that other Arab countries, such as the United Arab Emirates and Saudi Arabia, have enjoyed for decades.  Consider the following:

• Egypt’s public debt is approaching 90% of GDP, and its budget deficit has surged nearly 40% in the past six months.
• The Egyptian pound’s value is in free fall against the U.S. dollar (currently trading at 6.5 per dollar), partly due to the political tumult surrounding the constitutional referendum and its aftermath.
• The government’s foreign currency reserves have fallen to $15 billion (and rapidly declining even before the latest drop in value on the currency markets).
• Egyptian GDP, which had flatlined in the immediate wake of the 2011 revolution, had rebounded earlier in 2012, but has since dropped dangerously low — nearly recession-level.
• Unemployment is rising — the rate is now officially 12.6% with no signs of reversing; urban unemployment is at 16.2%; and unemployment for those aged 15 to 29 is an astonishingly high 77.5%, a dangerous fact for a country where two-thirds of the population (82.5 million and growing) is under 30.
• Tourism revenue remains depressed after falling nearly 30% in 2011 — it account for around 2.5% of Egyptian GDP and a key source of foreign currency.

In addition to tax increases, it seems likely that Egypt will have to reduce or eliminate many of its energy subsidies — keeping the price of gasoline artificially low cost the Egyptian government around $17 billion last year, nearly 20% of the Egyptian state budget.  As part of the IMF negotiations earlier last autumn, Qandil pledged to cut subsidies by a third in 2013, though it remains to be seen how Egyptians would react to a phase-out of energy subsidies.

The danger for Egypt is that if the Muslim Brotherhood loses its credibility on economic matters with voters, Egypt could face the return of an Egyptian army-led government or an even more conservative and Islamist government under control of the Salafist Al-Nour (حزب النور‎) party.