Egypt's Economic Outlook Neither Blissful Nor Heavenly

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Includes: EGPT, EGYP
by: QFinance

By Ian Fraser

“Bliss was it in that dawn to be alive, but to be young was very heaven!” This is how poet William Wordsworth felt about the storming of the Bastille in 1789. When Egyptian protesters toppled President Hosni Mubarak – the dictator who had ruled them for 30 years – in February, I suspect this was pretty much how they felt too.

For most of the previous 30 years, the West turned a blind eye to Mubarak’s human rights abuses, cronyism and corruption. Indeed, Britain and the US so liked the way in which he suppressed Islamic militants, and were so enamored of his peaceful approach to Israel, they showered him with aid and arms.

Mubarak was finally forced to step down, after 18 days of protests in Tahrir Square and elsewhere in Egypt, on February 11, in what must be one of the biggest achievements of the 'Arab Spring'. Since then, an interim military government has been in power. It initially promised elections in September.

However, I'm afraid the outlook for the Egyptian economy is some way from being blissful or heavenly.

Difficult recovery process

The fact the country is in a state of political paralysis does not help. The interim government – the Supreme Council of the Armed Forces – is perhaps understandably reluctant to make long-term plans.

Getting the economics right is going to be critical to Egypt’s long-term future. Yet none of the parties vying for power in the coming elections, now delayed until October or November, has much appetite for working up long-term economic plans. Nor is the dismal science top-of-mind for the coalition of starry-eyed youths, Muslim Brotherhood, bourgeois intellectuals or others who led the revolution.

In an analysis piece in Gulf News, Ayman Mustafa said the legacies of the Mubarak years included that the country was emptied of any meaningful politics and "left only with mediocre politicians and a really useless elite of middle-aged … still trapped to their personal aspirations in a corrupt totalitarian regime”. He added:

After a few days in Cairo last week, I can say that the government and SCAF are in deep trouble. The economy is not showing any signs of returning to normal … The Central Bank is struggling to keep the Egyptian pound from falling against the US dollar and thus putting more constraints on the banking system ... Company profits are still falling, and those that have dealings with the outside world have been stripped of liquidity, eroding external trust in Egypt’s economic revival. Promises of financial help from wealthy countries have proved to be just that — promises, and not real action.

To add to the list

Other problems facing Egypt include unemployment among young people of 25% at a time when the population remains relatively fast-growing, tourism revenues that fell off a cliff after the revolution, the large informal sector, and an economy expected to shrink by 3.3% this year. Writing in The Weekly Standard, Dalibor Rohac, deputy director of Economic Studies at the Legatum Institute, said:

As a result, the budget deficit, which was projected to be 8.6% of GDP by the ministry of finance, is now expected to be in the neighborhood of 10%. That is very dangerous territory for a mid-income country with an already huge debt burden. What lies at the core of the country’s public finance problem are wasteful subsidies given to energy and food products.

According to David P. Goldman (aka 'Spengler'), writing in the Asian Times, Egypt could be bust by December. He cited the country’s dwindling foreign currency reserves and its recent rejection of a $3bn, no-strings-attached offer from the IMF.

The country may be losing as much as $130bn a year through capital flight. That includes expropriation of diesel, rice, and other basic commodities from public stores for sale overseas. Certain types of food are already having to be rationed because of supply chain blockages and theft.

Rohac share's Mustafa's view that the situation is exacerbated by the apathy of Egypt's "apolitical elite" who seems blind to the gravity of the situation. He added, "If the new leadership fails to deliver on the economic front, and if the country faces an acute economic crisis next year, Egyptians are bound to look for alternatives to democratic forms of governance."