Samir Radwan* presents evidence for a quantitative leap for Egypt's economy In its latest forecast (December 2010) for the year 2015, the Economist Intelligence Unit reported that "the government's overriding concern in the forecast period will be to maintain economic activity and job creation as Egypt emerges from the aftermath of the global recession". It predicted a return to high growth as of 2011 (5.3 per cent), higher than that of world GDP (2.5 per cent) and of the MENA region (4.3 per cent). It further predicted that this drive will continue well into 2015. IMF/World Bank forecasts predict that Egypt will break through the six per cent growth rate barrier by 2012, reaching 6.5 per cent in 2014. Such was the backdrop of optimism against which President Hosni Mubarak asserted to a joint parliamentary session of the Shura Council and new People's Assembly that Egypt would aim for a six per cent growth rate this year, creating 700,000 new jobs, and strive for an average of eight per cent growth over the next five years. But how realistic are such forecasts given that the global financial and economic crisis is far from over? Will global demand return to its pre-crisis levels any time soon? And how certain are the investment flows that are necessary to stimulate the Egyptian economy? The answer to all three questions is likely to be affirmative, and for a number of reasons. First, it is becoming increasingly evident that the reforms introduced since 2004 have paid off. They have enabled Egypt to face up to two major crises with relatively little damage. The food crisis and the financial meltdown certainly had a negative effect, with economic growth falling from 7.2 per cent in 2007/08 to 4.7 per cent in 2008/09. The impact was felt more in the real economy than in financial services. Egypt wisely opted to swim against the tide, implementing counter-cyclical expansionary policies. Two successive stimulus packages compensated for the decline in foreign and domestic demand, mitigating the negative effects of the crisis. Signs of the first "green shoots" of recovery of the global economy reinforce the sense of optimism. The Economist Intelligence Unit predicts that world GDP will recover by 2013, reaching growth rates of 2.3 per cent compared to the zero or negative rates during the crisis, and that world trade will grow at six per cent a year from 2011. Equally significant is the growing interest of foreign investors in Egypt. Oil producing members of the Gulf Cooperation Council, heavily affected by the global crisis, are now looking for safe havens to redirect surplus funds. Similarly, FDI from the US, Europe and Asia is being attracted to Egypt by its huge market, abundant labour and its position as a gateway to Africa and the Middle East. Energy, infrastructure, tourism and manufacturing projects offer lucrative returns. Despite the impressive performance recorded since 2004 some problems remained. Inflationary pressures appeared from time to time, rising to above 20 per cent in 2008 then falling to 11 per cent in 2010. The Central Bank has been working hard at inflation-targeting and the Core Inflation Index shows reasonable stability. But when consumer commodities, especially food, are added, the General Price Index becomes more volatile. A second area of concern has been increased public expenditure. Social considerations make it difficult to reduce subsidies: together with public service salaries they absorb more than 75 per cent of government expenditure. This has resulted in a government deficit of eight per cent, and increased public borrowing to finance the deficit which represented 81 per cent of GDP in 2010. A third problem has been the distribution of the fruits of growth. The common perception has been that the results of high growth during the five years preceding the crisis have not "trickled down" to the bottom 40 per cent of the population. Poverty continues to be the lot of 20 per cent of the population, with another 20 per cent categorised as "near poor", vulnerable to any shock and at risk of falling below the poverty line. Notwithstanding the chronic problems of inflation, mounting public debt and poverty, the Egyptian economy is in a position to take off in the coming year. These are not pipe dreams, but are based on a realistic reading of the strength of the Egyptian economy, the likely recovery of the global economy and a growing supply of domestic and foreign investment. To achieve the six per cent growth rate forecast for this fiscal year, and an average of eight per cent over the next five years, a number of challenges have to be met. Economic and social policies must be aimed explicitly at the creation of new job opportunities. Investment projects should be evaluated primarily in terms of their employment creation potential. Sound macro-economic management cannot be sacrificed, it is essential for steady growth, but a balance must be struck between considerations of efficiency and of the potential to create more jobs. Absorbing new entrants to the labour market means 700,000 jobs be found if the ranks of the unemployed are not to swell. Related to job creation is the need to increase investment from its present level of 17 per cent of GDP to 25 per cent. This can only be achieved through an intensive campaign to attract both domestic and foreign investment. The declining trend that resulted from the global crisis has to be reversed. Improvements in the investment climate must be consolidated by solving a trio of nagging problems: land availability, ease of licensing, and mechanisms to allow exit from the market. There are at least three sectors in Egypt with a high potential to attract investment: the industrial sector, tourism, and agriculture and agro-business. Efforts are also needed to improve the quality of the labour force. The Return on Public Education Survey in 2007 underlined the extremely modest performance of the education system. Only half of graduates know a foreign language and as few as 4.7 per cent have knowledge of computers. The experience of the US after the appearance of the A Nation in Danger report, and of the Asian Tigers, shows that reform of the education system is a long-term objective, though a quick fix of "corrective training" could help resolve the problem in the interim. This means that the needs of the market over the next five years must be assessed, and training programmes developed that will allow graduates to meet these demands. * The writer is senior economic advisor at the Egyptian Financial Supervisory Authority.
