The latest growth rates are nothing to brag about, but the government remains hopeful, writes Niveen Wahish The announcement of the growth rate for fiscal year 2010/11 last week passed with little fanfare. At 1.8 per cent, as opposed to previous government estimates of 2.6 per cent, the modest growth rate came as no surprise given the halt in activity, as Omar Radwan, chief operating officer-asset management at HC Securities and Investment, put it. The economy shrank by around four per cent during the third quarter of the year but picked up again in the fourth quarter, said minister of international cooperation, Fayza Abul-Naga, last week. She said the target growth rate for the fiscal year 2011/12 is between three and 3.5 per cent. "Growth in the first two quarters may not be at the desired level and will depend on stability and the security and political situation, but we are hoping for a rebound in the second half of the year." But these optimistic forecasts may be put to the test especially following the events on Friday which involved storming the Israeli embassy and the violence that followed. "The events of Friday clearly depict that control over the Egyptian streets is a long shot and portrays a very dark image to the world that things are still very unstable and could deteriorate more," said one expert who preferred to remain anonymous. "Besides the immediate effect on tourism, if any investor were thinking of tapping the Egyptian market, he/she might hold back to see how the situation develops," added Radwan. Moreover, the anonymous source added, investors are more worried about the inability to forecast events in Egypt to be able to manoeuvre and minimise risk to their investments. Nonetheless, he believes that Egypt is a great investment story with a diverse economy. "The events of Friday will be short-lived but we need stability and security to achieve business as usual. Egypt has faced the worst economic crisis known to man between 2008 until 2010 with minimum repercussions, so once investors are confident with stability and security, they will return for sure without any hesitation." In the meantime, any effect on tourism and investment would not bode well for Egypt's foreign reserves or its balance of payments both of which are already suffering. Recently released figures by the Central Bank of Egypt (CBE) show that Egypt had a balance of payments deficit of $9.2 billion in fiscal year 2010/11, reversing a surplus of $3.4 billion a year earlier. Foreign direct investment (FDI) fell 67.6 per cent to $2.2 billion from $6.8 billion the previous year. The fall in the balance of payments has affected the bank's foreign reserves, a CBE statement said. Egypt's net international reserves lost $11 billion since January 2011 when the revolution broke out. It reached $25 billion at the end of August 2011, $700 million less than the month before. But Beltone Financial is optimistic; in a note issued recently, it said that the decline was only by 2.7 per cent month-on-month in August 2011, compared to a monthly contraction of 3.3 per cent in July 2011. That slowdown in the depletion of reserves, according to Beltone, is attributed to the improved performance of major foreign exchange earners that was affected negatively since the 25 January Revolution. For example, tourism revenues have continued to rebound whereby the annual drop in the number of tourist arrivals declined from 41 per cent in May to 29 per cent in June and to 19 per cent in July 2011. Also, Suez Canal revenues have maintained their strong performance since January 2011, growing by 10.6 per cent year-on-year in July 2011. But others are not too optimistic about the short-term prospects. A report prepared by the International Monetary Fund (IMF) staff for the Deauville Partnership Ministerial Meeting last week in Marseille, France for the Middle East and North Africa economic outlook and key challenges, projects Egypt's growth to rise to four per cent only in 2012/13. "The Egyptian economy is expected to recover only modestly in 2011/12, with growth being held back by political uncertainty, a restrictive fiscal stance, and the difficult external environment. Absent external financing, the official reserves of the Central Bank could drop by $9 billion. However, medium-term prospects are positive as the economy's underlying potential remains intact." With so much at stake, Radwan laments mostly the fact that the gravity of the economic situation is not taking centre stage. Although he acknowledged the importance of political reform and the upcoming elections, it will not help in overcoming the economic bottleneck. "We cannot only look in the rear-view mirror; we have to look forward." An economic group is needed in every sector, he said, adding that it is economic achievements that make governments succeed. "Even the revolutionary youth are not interested in the economy and believe it is not the time to talk about it, but in fact, the solution to our problems begins with the economic solution." "It is time to take revolutionary decisions to resolve problems that have hampered the development of the economy for years, such as bureaucracy and red tape," Radwan said, adding that "there are things that can begin to resolve the problems; encourage Small and medium enterprises (SMEs), give them tax breaks and facilitate company setups, to name a few." In fact, as the IMF reports says, "leveraging the Egyptian economy's potential to return to rapid -- but also more inclusive -- economic growth to provide sufficient employment for the fast growing labour force will be key." It said that, "this can be achieved by creating a more transparent and competitive economy, improving the business environment -- especially for small enterprises, and generally providing more equal access to opportunities for all sections of the society." But the anonymous source adds that without a proper set of rules for elections, all efforts will go to waste. "The Supreme Council of the Armed Forces, the government and the revolutionists should all work to finish the regulatory framework and use the remainder of 2011 to start 2012 on a positive note. This is a transitional period that needs to prepare for a boost with essential needs as its objectives."
