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Egyptian economy under revolutionary stress

Introduction

Following eighteen days of demonstrations in Midan al-Tahrir (Liberation Square) in the center of Cairo, Egyptian President Hosni Mubarak stepped down, on February 11, 2011. The Supreme Council of the Armed Forces assumed the president's powers and vowed to oversee a peaceful transition process leading to free and fair presidential elections, after five rounds of presidential referenda that had ensured the election of Mubarak, the incumbent, uncontested. As the Egyptian people grapple with their newfound freedom, the broader economic and social impact of the political turmoil in Egypt and, indeed, across the region, will fully unfold in the future.

Impact of Global Economic Slowdown on Egyptian Economy

Prior to the political upheaval that erupted in Egypt last January and has continued since then, the global economic slowdown had impacted the growth of Egypt's real gross domestic product (GDP), fiscal balances and poverty levels. Unemployment, according to contested official data, had risen to 9.4% (with underemployment even higher); capital inflows had declined (in particular foreign direct investments which had fallen by 39%, and fell even farther after January 25). The Egyptian government had implemented a crisis response plan featuring fiscal, monetary and direct support measures.

The fiscal stimulus had come mainly in the form of additional spending, including higher subsidies and social benefits. As a result, economic growth had been recovering. Real GDP grew 5.3% in fiscal year (FY) 2010, up from 4.7% in FY2009 (but still below the 7% average of FY06 to FY08). There were signs of robust activities in sectors such as construction, tourism and communication. But the recovery was too slow to significantly affect the increase in unemployment rate and the living conditions for the average Egyptian remained poor, and perhaps as many as 40% of the 82 million Egyptian population live below the poverty line, meaning living on income of less than $1 a day.

Over the past two decades, social conditions in Egypt were noticeably enhanced: infant mortality and malnutrition among children under five both decreased by half, and life expectancy rose from 64 to 71 years. The economy and the living standards of the vast majority of the population improved, although in an uneven manner. While 18% of the Egyptian population lived below the national poverty line, this figure goes up to 40% in rural Upper Egypt. The partial modernization of Egypt's economy has not succeeded in reaching a critical mass of its citizens. Some of the recent gains were reversed due to the 2008 food price crisis and fuel price shock and to the global crisis-related slowdown in economic activity.

The Nature of the Egyptian Revolution

Egyptians prefer to call the events that led to the removal of President Hosni Mubarak from power a revolution. But revolutions are meant to change a dominant paradigm – politically, economically and socially – not just rebel against them. It remains to be seen whether the Egyptian "revolution" qualifies as such or falls under what the French existential philosopher Albert Camus would have called a rebellion, a reaction to unjust activity that has been tolerated for too long.

The majority of the Egyptian people have no idea about the nature of democracy that would evolve from the turmoil and the shape of institutions that will govern Egypt. In fact, a recent survey of a random sample of Egyptians by the International Republican Institute found that 80% of those who brought down the regime had far greater concerns about their living standards and unemployment than about lack of democracy and political reform (19%). Not surprisingly, with the revolution in its initial honeymoon phase, 89% of the respondents felt that the country was heading in the right direction, and 95% felt that the revolution will impact Egypt for the better.

The Transformation into Revolutionary Economic Environment

No sooner had the Egyptian economy started to show signs of recovery than it was hit by the political and social upheaval that broke out on January 25, 2011. Mal-distribution of income and inadequate human capital development alongside lack of political reforms were among the key factors behind the widespread political and social discontent. Above all, corruption in its many forms – bribery, tax evasion, theft, nepotism and extortion – may have cost the Egyptian economy as much as $57 billion in 2000-2008, or an annual average of $6.4 billion. According to a report issued by the Center for Safety of International Financial System, Egypt rated third in Africa in terms of capital flight.The family of Mubarak and many of his close associates, including key ministers, are accused of accumulating enormous illicit personal wealth, and the Egyptian government is seeking the help of 120 foreign governments to identify the personal wealth of 150 members of the former ruling elite.

The Macro-Economic Consequences of the Political Upheaval

Putting aside the philosophical argument about the nature of the Egyptian political turmoil, the events have had serious macroeconomic consequences. Former Egyptian finance minister Dr. Samir Radhwan (who was replaced in July by Dr. Hazem al-Biblawi) estimates that the gross domestic product in the first quarter of this year has contracted by 7%, for a loss of about $30 billion for the national economy following the events of January 25. Inflation is projected to rise to 12%, while the rate of economic growth is projected by the IMF to decline to 1% in 2011 from an estimated rate of 6% before the political turmoil.

The foreign currency reserves, which stood at $36.1 billion at the end of 2010, dropped by $9 billion to $27 billion by the end of May and have continued to decline. Maj.-Gen. [liwaa] abu-Bakr al-Jundi, the head of the Institute for Mobilization and Statistics, pointed out that inadequate liquidity in the economy has forced the government to draw on its foreign currency reserves.  The foreign currency situation was further aggravated by the withdrawal from Egypt of about $16 billion of foreign capital in the first six months following the revolution. As a result of all of this, the rating of Egypt's sovereign debt has been reduced to a "high risk" grade which sharply limits the government capacity to borrow on the international financial markets without a high premium on interest rates.

Meeting Social Demands

Responding to the yearnings of the masses for a better-quality life, the Egyptian government, despite financial constraints and the loss of revenues particularly from the tourism industry, has approved the state budget for 2011/2012 sporting a deficit equal to 10.95% of the gross domestic product, reflecting a wide gap between revenues of 350 billion Egyptian pounds ($58.9 billion) and expenditures of 514 billion Egyptian pounds ($86.5 billion). Former finance minister Radhwan stressed that one of the significant features of the state budget would be an increase in the expenditure item for special workers' compensation from 95 billion pounds ($15.99 billion) to 116 billion pounds ($19.5 billion). The budget will provide 5.7 billion pounds $0.95 billion) to support minimum wages. Tax exemptions on salaries have been raised from 9,000 pounds ($1,515.15) to 12,000 pounds ($2.020).We assume the figures reflect annual salaries.

The budget also increased allocations for social security, from 101 billion pounds ($17.03 billion) to 207 billion ($34.8 billion). The increase in social security expenditures will allow the inclusion of 300,000 new families under the system, to reach 1.5 million. The recently appointed minister of finance Dr. Hazem al-Biblawi said the poor will be given a high priority in the 2012-2013 budgets. Indeed, he asserted that the social sector will be addressed even at the expense of economic growth.This will be politically expedient but hardly an effective remedy toward placing the economy on a path of sustainable growth. Steffen Hertog wrote about "the perils of economic populism in the Middle East," and warned of the "first signs of a post-revolutionary hangover" being witnessed everywhere in the Arab world.

On the revenue side, the budget includes a number of tax reforms to generate resources for additional social spending and enhance fairness through a moderate increase in the progressivity of the tax system. These reforms will be accompanied by efforts to strengthen tax administration and improve compliance. The International Monetary Fund welcomed the draft budget with its "overarching goal aimed at promoting social justice."

Sharp Decline of the Tourism Industry

Tourism, a labor-intensive, foreign currency-generating industry which provided employment to about four million Egyptians, has declined sharply, resulting in a loss of employment as well as revenues of about $1 billion a month. The loss of employment has been particularly painful as it added a new layer of unemployment to an already a high rate of unemployment estimated anywhere between 10% and 20%, depending on age group and the source of the data. The almost total collapse of the tourism industry was accompanied by a decline of 56% in passenger traffic in the national carrier Egypt Air.

Other Factors Impacting the Economy

Strikes and turmoil have caused the economy to operate at 50% of its capacity and reduced export volume by 40%.A preliminary study indicates that $1.2 billion will be required to restart 75 factories closed at the outbreak of the turmoil.Strikes had taken place in many sectors of the economy, including the public sector, with strikers demanding higher wages and improved working conditions and social benefits which the government can ill afford. Recognizing the damaging effect of wild strikes, the ruling Supreme Military Command has issued an order outlawing industrial strikes. At one time after the start of the political and social upheaval the strikes brought the economy to a standstill. This led one union activist to query: "The question today is not who is on strike; the question is who is not on strike." As a result, the daily Al-Sharq al-Awsat reported on a growing sense of pessimism among Egyptians regarding the economic situation in the country, while consumers' confidence declined by 7.5% in July compared with the month of June.

Growing Threat of Violence

On the home front, Egypt has witnessed an escalation of violence, particularly the sectarian violence involving Salafist elements and the Christian Coptic minority. The appointment of a Christian as a governor of the province of Qana in southern Egypt drew widespread protests which forced the government to remove him.It is part of what the Egyptian are calling infilat amni (security breakdown) reflected in street crimes, break-ins and looting by criminals referred to as baltagia (hoodlums or hooligans). The escape from prisons in the last two days of January of thousands of prisoners convicted for crimes has exacerbated the economic difficulties and security breakdown.It is exactly the same phenomenon that characterized the situation in Iraq for years after the American invasion in 2003 that lead many Baghdadis to yearn for the days of Saddam Hussein when families were able to spend late summer nights in coffee shops and on the shores of the Tigris River unmolested.

Pledges of Foreign Aid

The Egyptian government plans to finance the budget deficit, estimated at $10 billion, through a combination of instruments, including foreign grants and loans from bilateral multilateral development partners, including the IMF, the World Bank, the EU, the Gulf Cooperation Council (GCC) and others, to provide a respite after tourists and investors fled in droves following the overthrow of the Mubarak regime. Here is what the multilateral and bilateral donors have pledged in the form of aid to Egypt.

Qatar, for example, held high-level discussions with the Egyptian government with a view of generating private Qatari investments of $10 billion for a package of joint projects.The Egyptian minister of planning and international cooperation Faiza abu al-Naga announced that the Qataris have agreed to build one million housing units for low-income families in the next five years. They have also agreed to participate in the construction of the city for science and technology because time has come for Egypt "to become a country among producers of technology."

Saudi Arabia has pledged $4 billion in aid to Egypt. The aid was supposed to be in the form of soft loans, bank deposits and grants.

In financial distress itself, the United States has offered to forgive $1 billion from Egypt's outstanding loan of $3.6 billion. The amount of the forgiven loan would be placed in a special fund to provide support to the private sector and generate employment for youth. The U.S. has also agreed to extend debt guarantees for another $1 billion. The use of U.S. aid will in keeping with the two key objectives of the next development plan of Egypt which will focus on social justice and the development of human capital.

There were also discussions with the International Monetary Fund for a loan of $3 billion at a low interest rate and supposedly no conditions attached. However, the Higher Council of the Armed Forces, Egypt's de facto ruler, was not impressed that the IMF loan was without conditions, and General Sameh Saddeq, assistant to Field Marshall Tantawi for economic affairs, told the government to cancel the loan, which had "five conditions that totally went against the principles of national sovereignty," and which would "burden future generations." The so-called "five conditions" were never publically enunciated.

Experience with foreign aid has shown, however, that there is invariably a big gap between pledges of aid and its delivery, and the billions of promised aid by some bilateral sources may only materialize in dribs and drabs over a long period of time.

Conclusion

Seven months after the removal of President Mubarak from power, Egypt finds itself in the midst of contracting economic activities caused by a sharp decline in tourism, absence of foreign direct investments, rising inflation and unemployment, breakdown of security and the absence of political clarity, mingled with fears and incertitude about the nature of the political system that will emerge on the ruins of the old regime.

The Egyptian economy has gone through a period of convulsion and contraction triggered by a challenging period of political transition. Political stability and internal security will be two preconditions for the economy to restore its health. For now, however, the government is facing a critical dilemma of putting the economy on a sustainable growth track, while at the same time it faces enormous pressures to meet heightened expectations of social benefits that it can hardly afford.

It is premature to speculate about the nature of the political democracy that will emerge from recent political convulsion. It is absolutely certain, however, that Egypt will need a long term of political stability and internal peace to bring back the tourists and the foreign investors and with them employment opportunities for millions of unemployed Egyptians.

The Egyptian people are known to be patient people but patience has its limits. If the masses who demonstrated in Midan al-Tahrir and other cities of Egypt get nothing in return for their efforts and sacrifices, it will not be far-fetched to see many of them falling prey to the Salafist slogan "Islam is the Solution."

Source: memri.org

Publication date: 9/19/2011


 


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