CAIRO - Throughout history, the economy of any country has always been very vulnerable to revolution. Egypt is no exception, as economic repercussions have taken their toll on the country's national macro- and microeconomic landscapes. As political turmoil affects investment and production rates, a slump in major sectors is natural, economists say, while forecasting a better future for Egypt as the revolution puts an end to corruption and lays the foundation for social justice. Growth takes a dive Before the 'Lotus Revolution', the economy was forecast to grow by 5.5 per cent of gross domestic product (GDP). In February, it was said to slow to 3 per cent. In April, it was seen to slow to just 1 per cent. "It is difficult to forecast given the current circumstances. The ending year [2011] has been exceptional. In 2012, I think growth rates may remain the same at 1 per cent of GDP, or maybe less," Hani Riyad, an analyst at Cairo-based Financial and Legal Consultants Centre, told the Egyptian Mail. "Political stability is a must to restore economic growth t above 1 per cent in 2012," Riyad said.
Higher unemployment Unemployment in Egypt has risen from 9 per cent of the labour force in 2010 to 11.9 per cent this year, according to the Central Agency for Public Mobilisation and Statistics (CAPMAS). But unofficial reports estimate unemployment before the January 25 revolution at around 20 per cent. When asked whether unemployment has risen since the revolution, Riyad stressed: "There's no certain figure for unemployment before the revolution. We cannot rely on official data. Unfortunately, the collapsed regime lied about everything. So the figure [9 per cent] for 2010 is unbelievable. "One of the main causes of the revolution was high unemployment, especially in rural areas. In Upper Egypt, the figure exceeds 25 per cent among young men," he explained. "The problem will remain a very nagging one for the coming governments in the next 10 years," he argued. Since the revolution, geologist Farouq el-Baz has proposed the creation of the ‘Development Corridor', linking Egypt with the rest of Africa, running from the Mediterranean port of Alexandria to Cape Town in South Africa. Could this project and other, similar schemes be a solution? "When the economy gets back on its feet again, labour-intensive projects will be key incentives for slashing unemployment rates and pushing growth ahead," he says. The project as planned is forecast to cost $24 billion over the coming 10 years. El-Baz believes the project will "change the face of Egypt" by creating 200 cities and around 500,000 villages in the Western Desert. The Development Corridor project includes a 1,200km superhighway to be built from west of Alexandria to the southern border of Egypt; 12 east-west branches, with a total length of approximately 800km linking the highway to high-density population centres; a railroad for fast transport parallel to the superhighway; a water pipeline from the Toshka Canal; and a power grid to supply electricity.
Foreign reserves down Alarmingly, foreign reserves at the Central Bank of Egypt (CBE) fell to $20 billion at the end of November. Foreign reserves stood at $36 billion at the end of December 2010. Analysts say the decline will continue due to falling inflows of foreign direct investment (FDI). "FDI has been zero over the past nine months. Investment outflows have been on the rise since February. Outflows totalled $9 billion, according to unofficial reports," says Suheir Wagih, an economist at Future Investment Consultants. "Foreign reserves are likely to fall further to $8 billion by April. The CBE is losing $2 billion a month," she adds. Since 2004, Egypt has netted $49.2 billion in FDI.
Falling hard currency earners Tourism has been hit the hardest since the revolution, with revenue seen to decline by 25 per cent this year, according to Minister of Tourism Mounir Fakhri Abdel Nour. Revenues from the country's key hard currency earner stood at $12.5 billion in 2010, Abdel Nour said in November. "Revenue from tourism pours directly into people's pockets. Many sectors are affected when it slumps – aviation, land transport, hotels, coffee shops, bazaars and many others," Suheir stresses, adding that restoring security will consequently bring tourist arrivals back to normal. According to her, other hard currency earners, the Suez Canal and remittances from Egyptian expatriates, seem to be intact. "Revenues from the Suez Canal may hit $5 billion this year, which is very good. Egyptian expatriates' remittances hit $12.6 billion in fiscal year 2010/2011, which is the highest of all times," she explains.
More budget deficit woes As production rates have been taking a knocking, the country's sovereign revenue from taxes is expected to fall by at least 50 per cent, analysts say. Taxes account for 65 per cent of Egypt's public finances, according to official data. "The State budget deficit is forecast to total LE134 billion in FY 2011/2012. Plunging revenue from taxes is expected to widen the gap," warns Sherif Shawqi, a researcher at Alexandria University. Prime Minister Kamal el-Ganzouri is seeking to reduce the deficit by LE20 billion in a bid to rein in inflation. "Egypt is going through a combination of an economic slump and high inflation. It is a clear symptom of stagflation. The situation may worsen in 2012 if investment remains down," Shawqi forecasts. Economists say the budget deficit is not a new phenomenon. In the FY 1987/1988, the budget deficit rose to an historic record high at 33.5 per cent of GDP. Foreign debts back then in 1987 totalled $42.3 billion, accounting for an all-time high at 173.1 per cent of GDP, according to World Bank figures. CBE raises interest rates In November, the CBE raised deposit and lending interest rates by 1 per cent to 9.25 and 10.25 per cent respectively. The move aims to boost the pound versus the US dollar. The dollar has risen to a seven-year high at LE6.05. "The interest hike has been expected to help the Egyptian pound. Exchange rates, if not well watched, may lead to higher inflationary pressures," said Riyad. The CBE raised the rates after two years of keeping them on hold. The consumer price index stood at 10 per cent in November, according to CAPMAS. But the CBE relies on core inflation figures in setting up its monetary policies. Core inflation hit 7.6 per cent in November, according to the CBE. Core inflation is different from the consumer price index, which is published by CAPMAS every month. CPI measures weighted price movements of consumer goods and services, which constitute a representative ‘consumption basket' purchased by households. Core inflation in Egypt takes out fruit, vegetables and energy from CPI components to reveal a stable reading of price levels. No price fluctuations would be included in core inflation rates.
Public debt mounting Before the revolution, public debt totalled LE1.08 trillion, according to the Central Auditing Agency. The country's debt stands at LE1.2 trillion, according to the Ministry of Finance. “Debt accounts for nearly 100 per cent of GDP, which has breached safe levels,” Shawqi explains. According to him, external debt stands at $34 billion, which puts more pressure on the country's exchange rate and the balance of payments given debt servicing. The country's balance of payments posted a deficit of $2.4 billion in the first quarter of FY 2011/2012, according to the CBE. The trade deficit inched up to $7.8 billion (from $7.1 billion in July/September), because of the 10.2 per cent rise in merchandise imports to around $14.6 billion.
Privatisation under court scrutiny In September, the Cairo Administrative Court ordered three privatised companies to revert to the State because of legal loopholes. Tanta Flax and Oil Co, Misr Shebin Al-Kom Spinning and Weaving and Al-Nasr Company for Steam Boilers returned to State ownership, opening the way for more legal wrangling to try and have other companies revert to the State. In November, a similar ruling ordered the Nile Cotton Ginning Company to revert, sending more shockwaves through the Egyptian market, stoking investors' fears that more companies that have been privatised over the past 20 years may face the same destiny. “The rulings shed light on the corruption that overwhelmed the selling of State-owned assets from the 1990s onwards,” Riyad said. “There should be a compromise to compensate investors for any financial loss and there should be a transparent mechanism,” he argued, adding that more than 50 companies may be ordered to revert by similar court rulings.
Gas pipeline bombed ten times Egypt's natural gas pipeline to Israel and Jordan has been bombed ten times this year, undermining exports. Away from the bombings, Egypt is seeking to raise the price of its natural gas exports to a minimum of $5 per 1 million British thermal units (BTU) in the wake of the January 25 revolution. The move comes as no surprise given the public disapproval of gas being exported to Israel at low prices ranging between $3 and $4 per 1 million BTU, according to official reports. Egypt exports natural gas to Jordan, Syria, Lebanon and Israel through Sinai-based pipelines. The North African country exports liquefied natural gas (LNG) to France and Spain through its Mediterranean port of Damietta. Egypt exports 215 million cubic feet per day to Israel through the East Mediterranean Gas (EMG) consortium, according to the Ministry of Oil. The consortium consists of Ampal-American Israel Corp, Thailand's PTT and Israel's Merhav.
Butane cylinder crisis, subsidies rise In a country where around 40 per cent of its 85 million population live on $2 a day, subsidies are a must to make ends meet, analysts say. Roughly 20 per cent of people are completely impoverished, living on $1 per day, according to World Bank data. The price of butane cylinders has jumped to LE40 or more from LE2.50 due to distribution problems. Subsidised (baladi) bread sells for PT5 (LE0.05) per loaf, while each loaf costs the State budget PT25, according to data released by the Ministry of Social Security. “Fuel and food subsidies are a must to fight poverty in Egypt. Social injustice and unequal distribution of income sparked the revolution,” Shawqi stresses. More than 65 million Egyptians benefit from ration cards, getting foodstuffs such as cooking oil, sugar and rice at low prices, according to official reports. “Subsidy schemes will remain in 2012. No government can scrap them,” he adds.
Bourse feeling the squeeze Stocks have been in the doldrums in the wake of uncertainty and political unrest. Since the reopening of trading on March 23, the Egyptian Exchange has seen a number of ups and downs, mirroring million-man demonstrations nationwide and reports of debt rating agencies. The country's benchmark index EGX30 has lost around 50 per cent since the beginning of the year. “Stock markets are very sensitive to political unrest. Investors shun markets that are in trouble. The decline has been quite natural and expected,” says Amir Awad, a Cairo-based analyst. In 2011, the EGX30 fell below 3,500 points, which was a very strong support level. But the ups and downs remain “a healthy phenomenon”, he argues. “In 2012, there may be a rebound if the political reforms go as scheduled. Any delay that may lead to deadly clashes will hit stocks badly,” Awad explains, forecasting the EGX30 to range between 3,700 and 4,300 points by April.
