Egypt: Green shoots of recovery?

By Neil Ford

The Egyptian economy has begun to recover under the government of President Abdel Fattah al-Sisi, new figures reveal. Some long awaited reforms have been enacted, economic growth has picked up and share prices recovered on the back of more stable government and an injection of money from the Gulf states. Yet the age-old problems remain: much of the economy is controlled by the state or the military; private enterprise is restricted and there is no acceptance by the majority of the population that deep-seated economic reforms are not only necessary but vital.

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After three years of revolution and uncertainty, Cairo has managed to improve both political and economic stability. While the May election consolidated Sisi’s position in power, parliamentary elections in 2015 should further calm international fears over national cohesion.

 In the new government’s first year in power, it has relied on financial support from Saudi Arabia, Kuwait and the UAE, including cut-price fuel imports, low interest loans and outright donations. This financial support could be maintained, but only if the government takes serious steps to strengthen the economy.

Slide1Cairo appears serious in its intention to tackle its budget deficit.

In October, the Finance Ministry announced its intention to launch multi-billion bond issues starting next year and suggested that it could discuss a new loan with the IMF. Both measures could help over the next two or three years but structural changes are also required. Revenue raising measures include higher taxes, while power and gas subsidies have been cut in order to reduce the government’s outgoings. The income tax rate for the wealthiest has been increased by 5% for the next three years and value added tax (VAT) on consumption is scheduled to be introduced next year, although the range of products affected, still needs to be finalised.

The economy has already begun to pick up. Annualised economic growth jumped from 2.5% for the year to the end of March, to 3.7% at the end of the following quarter. In late October, Moody’s raised Egypt’s credit rating outlook from negative to stable because of the country’s improving economic outlook.

A series of jumbo infrastructural projects have been unveiled this year, including the widening of the Suez Canal and the New Nile Valley Project.

One of the Egyptian economy’s greatest strengths is also its weakness. As the most egypt educationpopulous Arab state, it has a vast largely untapped market of consumers that have attracted inward investment, particularly from the Gulf states, even over the past year. Yet the population of 83 million people means that a handful of big projects will make relatively little impression on unemployment and economic growth rates. What is needed is a fundamental change in Cairo’s economic outlook.

The subsidy question

According to government figures, the state spent $15bn a year on fuel subsidies in financial year 2012-13, about 20% of its entire budget. This has been a common strategy in many African and Asian countries, particularly in oil and gas producing states, as governments have used subsidies in order to transfer some economic benefit to the poor in society. However, it has also encouraged inefficiency in energy consumption and contributed to Egypt’s current gas production deficit, while posing a drain on government resources. In compensation for higher fuel prices, the government has pledged to double the health and education expenditure between 2013 and 2017, and concedes that the budget deficit will decline only very slowly as a result, from 10.5% of GDP for financial year 2014-15 to 8-8.5% over the subsequent five years.

 Prospects for manufacturing

Manufacturing offers the best hope of long-term economic growth and employment.

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Inefficient production processes by companies owned by the army have impeded progress in the textile industry, which benefits from domestic cultivation of cotton. The desire to provide employment rather than secure contracts and maximise production resulted in the retention of labour intensive practices. Similar practices affected the agricultural sector to such an extent that Egypt began to import stable foodstuffs.

In the longer term, Egypt can make great use of its geographical position to promote exports. One area that has already attracted a great deal of investment is the port sector. Existing ports have been expanded and new ones built, primarily to act as transhipment centres but also with the intention of supporting export orientated zones.

The government has made a good start. Its promise to switch resources from fuel subsidies to education and health seems commendable, providing it is enacted in full. There is no doubt that maintaining national stability while implementing deep-seated economic reforms will be a different trick to pull off but optimism is high that significant steps forward can be made in the year ahead.

 

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