Enhancing Egyptian economy may prove to be a tougher task than changing a regime, Sherine Nasr reports Scrutinising Egypt's economic situation after the revolution proves that toppling a president was not the challenge: steadying the nation's ailing economy is. Expectations for the growth rate of the fiscal year 2010/11 were hovering around 3.5 to 4.8 per cent. However, economists believe that given the new realities, Egypt's economy may grow by lower than 1.5 per cent and may rise to no more than 2.2 per cent in a best case scenario. Malak Reda, researcher at the Egyptian Centre for Economic Studies (ECES), underlined that many international agencies have downgraded their ratings on Egypt's sovereign debt against a background of social unrest. "On 31 January, Moody's cut its rating by one grade," said Reda. "The government may damage its already weak finances by increasing social spending to calm mass protests," quoting Moody's report on Egypt's performance. Two other world renowned financial agencies, Fitch and S&P, followed suit. The first cut the outlook for Egypt from stable to negative saying that the political turmoil would likely undermine the country's economic reform programme, while the second lowered Egypt's long-term foreign currency rating under the expectation that demonstrations will persist. "These ratings represent significant indicators to foreign investors of how stable or hazardous an economy can be," commented Magda Qandil, director of ECES, during a recently held seminar on the means to enhance Egypt's competitiveness in the global economy. While Egypt's comparative advantages remain to be a large market size and adequate infrastructure facilities, three major challenges need to be addressed efficiently: macroeconomic stability, human capital efficiency and innovation, in which Egypt ranked as the 129th, 133rd and 83rd respectively, among the lowest of 139 countries examined by the World Economic Forum's (WEF) Global Economic Competitiveness 2010/11 issued in September 2010. According to Qandil, Egypt ranked among the weakest nations on the macroeconomic stability indicators such as country credit rating, government debt, inflation, national savings rate and government budget balance, as seen in the Global Competitiveness Index (GCI). However, a high inflation rate is the biggest challenge to this economy. According to the GCI, inflation in Egypt has been among the highest along an extended period of time and among the group of countries which are competitors to Egypt. "A high inflation rate has the most adverse effect on our competitiveness as a nation," she said. While the outlook of the economic situation in Egypt is evidently not very optimistic, more pressures on the government's budget are accumulating still. According to Qandil, there is a loss of $6 billion in terms of revenues as a result of recurrent protests and a slowed down tourist season. Moreover, remittances from Egyptian expatriates which constitute nine per cent of the country's GDP have fallen considerably due to the political unrest in the region. Unfortunately, international oil and food prices are rising against Egypt's best interest. "There is a solid commitment by the government not to eliminate subsidies, but an increased subsidy bill of food and petroleum products will add to the burden," said Qandil, adding that food and oil subsidies may rebound to the high levels of 2007/08, exceeding nine per cent of GDP. "At least, LE26 billion will be added to the budget deficit during this fiscal year. The budget deficit is expected to increase by two per cent from 7.9 per cent to nearly 10 per cent of GDP," said Qandil, who added that revenues have not been able to keep up with a growing expenditure, while a wider fiscal deficit has contributed to a rising public debt ratio. Statistics have shown that subsidies, wages and salaries, and interest payments are the three main monsters eating up the already shrinking revenues. "The three items have been steadily growing, presenting 75 per cent of the total expenditure bill," said Qandil, who explained that vital sectors such as education and health are being crowded out by items which hardly contribute to growth, and help produce more inflation. "Given that around half of the government's expenditure is spent on subsidies and wages, there is clearly a risk that the public finances could deteriorate significantly," said Moody's. On the human capital development front, Egypt has been deteriorating in terms of health and primary education, higher education and training, job training and labour market efficiency which constitute the main pillars of the economy. "Although some improvements can be noticed as in the area of infant mortality rates, Hepatitis C and B remain a major threat. As a whole, spending on health is minimal in Egypt as only 15 per cent of the population has health insurance," commented Reda. Moreover, the quality of primary education cannot be worse due to the outdated curriculum, low pay for teachers and the lack to evaluate the outcomes among other issues. Statistics by the WEF have shown that Egypt's expenditure on education is less than the other middle lower income countries such as Algeria, Morocco and Yemen. Of all the economic sectors, tourism was performing the best as a main source for hard currency and new direct and indirect job opportunities. The Central Bank of Egypt (CBE) underlined that in 2010, tourism contributed 11 per cent of the country's GDP, 20 per cent of hard currency revenues, 49 per cent of service exports, 12.5 per cent of the total direct and indirect job opportunities, in addition to 25 per cent of the total sales tax revenues. The volume of losses in this sector after the revolution is "appalling," according to Adla Ragab, professor of economy at Cairo University and economic counsellor to the minister of tourism. "We expected the sector to grow by 10 to 12 per cent in 2011. However, in February, the volume of losses hit $685 million with an occupancy rate that did not exceed 15 per cent. In March, losses reached $708 million," said Ragab, who added that tourism is unfortunately a very vulnerable sector to internal or external shocks. "However, it is the first to rebound once the situation settles down." Revenues from the tourist sector have been growing steadily. In 2006/07, tourism contributed $302 million to GDP with 9.1 million tourists visiting the country. In 2009/2010, its contribution jumped to $12.5 billion while the number of tourists neared 15 million. A major threat, though, is the rising tension in the Middle East (ME) at large and the fragile security situation in the country. "While tourists can accept political turmoil as a fact, the high volume of road accidents is stigmatic for this country," she commented. Nevertheless, Egypt is ranked the 18th country as a most likeable tourist destination among other 50 countries worldwide. It is the first country in the Middle East, North Africa and the black continent. "Almost 23 per cent of the total tourist revenues to the Middle East go to Egypt, which attracts 1.4 per cent of the total volume of the international tourist market," said Ragab.
