CAIRO: Egypt's economy has taken a turn for the worst in the first half of 2011. Projected GDP growth for 2011 dropped 4.5 percent following the uprising that ousted former President Hosni Mubarak. The World Bank now estimates that Egypt's economy will grow only one percent this year. How can that be true if Egypt's transitional government has everything under control, is cutting spending, bringing in billions of dollars in aid and maintaining stable domestic security (relative to countries like Libya and Syria)? There are a number of factors playing in to the sharp drop in Egypt's economic growth, none of which are being properly addressed by the interim government. No one, for that matter, neither opposition groups, nor government authorities, have really been talking about how to patch up Egypt's economic woes. They are hung up on political concerns, vying for power, redressing (or overlooking) the wrongs of the former regime, all the while forgetting the inherent and unavoidable connection between politics and the economy. Egypt cannot move forward politically with a broken economic system dragging it down. Just as in many countries across the region, tourism in Egypt is a significant part of the economy. Tourism revenue directly accounts for a little over 8 percent of Egypt's GDP. Through secondary effects, such as attracting foreign investment and spurring domestic production to support the tourism industry, tourism accounts for much more than that. Since the January 25 revolution, Egyptian authorities have reported a 45 percent decrease in tourist arrivals, resulting in an 18 percent projected loss in receipts for the year 2011. The World Bank calculates the impact of that loss on the growth rate to be -2.2 percent. So of the 4.5 percent drop in GDP growth, 2.2 percent can be attributed to tourism related losses. That is problem number one. Problem number two has to do with domestic production. Many of Egypt's domestic industries have experienced significant setbacks since the beginning of the revolution. Electricity generation, for example, which is a good proxy for industrial production as a whole, was growing at a three month moving average year over year rate of 8 percent at the beginning of 2010. For the first quarter of 2011, electricity generation was at a growth rate of less than four percent. What does that decreased production mean for Egypt's growth rate? Using available World Bank data, I estimate that 1.3 of the 4.5 percentage points lost by Egypt's GDP growth rate can be attributed to the decreased industrial production after the revolution.* So, 2.2 percent of GDP growth was lost in the tourism industry, 1.3 percent was lost in industrial production and a total of 4.5 percent was lost overall. Where was the remaining one percent lost? That brings us to problem number three, which has to do with international trade. Egypt's current account balance has suffered in the past few years, and especially in the past six months. This is due to the rising price of wheat and sugar, which are major imports and staples of domestic consumption, and double digit inflation, which reduces the purchasing power of Egyptian consumers. At the same time that the cost of imports are rising, export revenue growth is decreasing because of suppressed demand in fiscal crisis-struck Europe and the lagging, post-recession United States. The remaining one percent of projected GDP growth lost after the revolution can be attributed mostly to decreased growth in trade income. So Egypt's economy was brought to its knees in the past six months by losses in tourism, industry and trade. Let's take a look at the Supreme Council of Revolutionary Forces' (SCAF) policy in some of these areas. SCAF would have you believe that tourists are afraid to visit Egypt because of the unrest associated with the revolutionary demonstrations, but all of the groups involved in these demonstrations have affirmed their commitment to nonviolence. Confirmation of that commitment is evidenced by the fact that Islamic radicals, who directly targeted foreign nationals and the tourism industry in a bloody campaign during the 1990's, have not resorted to terrorism during the current uprising. The only forces responsible for violence and death in Egypt lately are those of the Interior Ministry, who killed more than 800 peaceful demonstrators in January and February. Furthermore, it is not the demonstrators who are intimidating tourists and making it difficult for them to stay in Egypt. It is actually the security forces who have been spreading rumors about foreign spies and western meddling, arresting tourists who get close to the protests, and denying extension visas to tourists. No wonder international citizens are reluctant to travel here these days. The biggest hit to Egypt's economy has come from tourism losses, and the SCAF has done nothing but making it harder for tourists to come to Egypt. The World Bank speculates that industrial production in Egypt has declined due to depressed domestic and foreign demand. The billions of dollars in aid that Egypt is getting from the gulf countries does include a substantial amount for infrastructure development, which will no doubt create demand for industrial production, but what about manufacturing of consumer goods, which also falls under the category of industrial production? With unemployment at 11.9 percent and the minimum wage set at a lousy LE 684 per month under the new budget, there is little reason to expect consumer demand to drive any kind of industrial production growth, not to mention the problem of economic inequality and injustice. Finally, what is the SCAF doing to make up its remaining budget deficit and economic dilemma? Fix the current account balance? Control inflation? No, better to take advantage of rich Arab neighbors and long-time Western allies who are eager to buy their influence in the “New Egypt.” The UAE has pledged $3 billion, Saudi Arabia $4 billion, and Qatar $500 million in aid. Additionally, the United States has offered $2 billion. No wonder Egyptian authorities turned down the $1.5 billion IMF package that carried along with it funding for tax reform, wage increases, and public spending on education, health care and housing. More than $10 billion in aid, with no economic reform is a whole lot easier. It keeps the budget balanced this year, but the fact remains that GDP growth is still crippled and the root causes have been overlooked. Egypt's ruling elite, and its closest neighbors and allies, are resisting and delaying reform, not only in the political structure, but also in the economic system. Political unrest will continue, not only because of the lack of social justice and political change, but also due to a lack of economic prosperity. Putting money in people's pockets is a great way to keep them on your side. Keeping them locked in poverty and economic stagnation, as the transitional government seems bent on doing, will only lead to continued unrest, with the Egyptian people demanding the reform they know is essential for their country's success. The potential near future outcomes for Arab Spring countries like Egypt, range “from lower growth scenarios associated with limited or unsuccessful reform, to higher growth scenarios linked to deeper and swift changes,” according to a recent World Bank report. At least that makes two groups who recognize the need for change. Hopefully the transitional government and Egypt's “allies” will jump on board soon. *Industrial production accounted for 37 percent of Egypt's GDP in 2009 (the latest year all of this data is available). The annual growth rate for industry was 5.7 percent, which is 121 percent of the GDP growth rate, 4.7 percent. Therefore, I estimate that industry growth contributes 121 percent of its weight in GDP to GDP growth. That means that industrial production was responsible for 45.9 percent of GDP growth in 2009. Assuming, for the sake of argument, that the same holds true in 2011, then industrial production would have contributed 2.5 percent to the 5.5 percent GDP growth in 2011 that was expected before the revolution. Considering industrial growth, estimated by using electricity generation as a proxy, dropped 4 percentage points from 8 percent in 2011, its contribution to GDP growth halved as well, dropping by approximately 1.3 percentage points. Therefore, 1.3 of the 4.5 percentage points lost by Egypt's projected GDP growth rate can be attributed to the decreased industrial production after the revolution. BM
