CAIRO - After a year of ups and downs, Egypt's economy seems to be in the doldrums on the first anniversary of the January 25 Revolution. Public debts have increased by more 3 per cent since last February on a growing liquidity crisis. As history shows, the economy of any country that has gone through a revolution experiences severe financial turmoil due to political unrest. Debts are seen to be Egypt's toughest challenge, as they total LE1.2 trillion ($200 billion). Before the July 23 1952 Revolution, the country's debts were zero. After World War II, the United Kingdom was indebted by £400 million. Ousted president Hosni Mubarak took the helm in 1981 with a total debt of $22 billion. In January 2010, the debt reached LE1.1 trillion. Growth below 2% Economic growth has been slowing due to the political unrest that followed the 'Lotus Revolution', which toppled Mubarak. At the beginning of 2010, the economy was forecast to grow by 5.5 per cent of gross domestic product (GDP), according to the then minister of finance, Youssef Boutros-Ghali. Ghali, who fled Egypt days before the revolution, was the regime's financial and economic guru for nearly 10 years. In 2011, the economy grew by an estimated 2 per cent. But the picture is still unclear on the revolution's first anniversary, one analyst says. "Parliamentary polls are a very promising sign. It's a step on the way. An elected president will be the most crucial step to restore confidence in the economy," Nashaat Sabry, a Cairo-based analyst, told the Egyptian Mail. International agencies slashed the country's growth outlook in the wake of the lack of security and political turmoil. Answering a question on how these reports may affect the economy, Sabry said: "Global reports take into consideration the political environment. In Egypt, the situation has been very unstable. The revolution has not achieved its goals yet. A presidential election soon will help boost confidence." He added that investors are worried that there might be more tension, if military rule is prolonged. "By June, I think the picture will be clearer. Democracy will be a guarantee that investment rates will bounce back," Sabry explained, adding that the picture is not as bad as many people think.
Unemployment at 12% Before the January 25 Revolution, unemployment in Egypt stood at 9 per cent of the labour force in 2010, according to the Central Agency for Public Mobilisation and Statistics (CAPMAS). Twelve months later, the rate rose to around 12 per cent. But unofficial reports estimate unemployment before the revolution at around 20 per cent. "Unemployment is Egypt's most serious challenge in the coming years. As population grows, the rate goes up too," Sabry said. Around 800,000 young people enter the labour market annually, according to CAPMAS. "It takes around LE400,000 of investments to create one job. The market needs LE400 billion to create 1 million jobs," he stressed. The United Nations forecasts Egypt's population will hit 100 million by 2020. By 2050, the population could be anywhere between 140 and 155 million, according to the country's Supreme Council for Urban Planning and Development. "The Government needs to reshape the whole investment strategy by shifting to labour-intensive industries. Sectors like agriculture, textiles and construction should be given priority to combat unemployment," Sabry explained.
Reserves shed $2b monthly Foreign reserves at the Central Bank of Egypt (CBE) fell by 50 per cent to $18 billion at the end of December. Foreign reserves stood at $36 billion at the end of December 2010. In what analysts blame on declining inflows of foreign direct investment (FDI), the reserves are seen to fall to around $10 billion by the end of April. "The reserves might have already fallen to $16 billion. The situation regarding the reserves is the worst since the ousting of Mubarak," says Suheir Wagih, an economist at Future Investment Consultants. "The reserves are like a guarantee that Egypt can afford to pay its international financial obligations. For instance, debt servicing, imports and others. "It is expected that debt rating agencies will downgrade Egypt's sovereign borrowing potential in the coming months," Suheir warns. The country's foreign reserves have been falling by $2 billion per month since January 2011. Revenues from tourism, one of Egypt's top hard currency earners, plunged by 30 per cent in 2011 due to lack of security and political unrest, according to official reports. "Foreign direct investment has taken a blow. Investors by nature fear to risk their money in an unstable country. I believe the situation will change after a new president is elected," she explains.
Pound depreciated, revenues down The lack of security has taken its toll on tourism since January 25, with revenues falling to $8.8 billion in 2011, according to Minister of Tourism Mounir Fakhri Abdel-Nour. Revenues hit $12.5 billion in 2010, according to Abdel-Nour. "The pound has taken a blow, falling to a seven-year low versus the US dollar," Suheir says. But, fortunately, other hard currency earners, the Suez Canal and remittances from Egyptian expatriates, have increased, according to the Central Bank of Egypt (CBE). Revenues from the Suez Canal totalled $5.2 billion in 2011, up $4.7 billion from the previous year. Egyptian expatriates' remittances hit $12.6 billion fiscal year 2010/2011, an all-time high, according to the CBE. "The dollar has risen to LE6.05. The CBE has had no other choice but to raise the interest rate on the pound to maintain the local currency at a safe exchange rate," she adds. Inflows of FDI plummeted by 47 per cent in the first quarter of FY 2011/2012 to $521.9 million, according to the CBE. Egypt's fiscal year begins on July 1.
Rates up, inflation down In a bid to boost the pound, the CBE raised deposit and lending interest rates in November by 1 per cent to 9.25 and 10.25 per cent respectively. It did so after two years of keeping them on hold. "It had been expected as the pound was losing ground. Inflation was another element that urged the CBE to take such a move," explains Mohamed Hashem, a professor of economics at the Delta University of Tanta. The consumer price index (CPI) fell to 10.5 per cent in 2011, down 0.6 per cent from a year earlier, according to CAPMAS. Inflation hit 11.1 per cent in 2010. "The decline is positive. But the reason why it fell is not," Hashem argues, citing that the economic slowdown was the reason. "Aggregate demand has fallen, while supply has declined as well. Imports, exports and production have all declined," according to the professor. Core inflation, which takes out fruit, vegetables and energy from CPI components, stood at 7 per cent in 2011, down from around 8 per cent a year earlier, according to the CBE. The CBE relies on core inflation figures in setting up its monetary policies. Gold prices have jumped by 15.3 per cent since the revolution, reflecting local investors' shift to the precious metal in view of the economic and political turmoil.
Budget deficit seen at 8.6% The State budget is forecast to incur a deficit worth LE134 billion in fiscal year 2011/2012, according to the Finance Ministry. Given the economic slowdown after the revolution, revenues from taxes, which account for nearly 65 per cent of the country's public finances, are seen to fall by half. "The budget deficit has been chronic for more than four decades. No government has managed to get away from borrowing to bridge the gap," Hashem says. Since taking the helm in November, Prime Minister Kamal el-Ganzouri has been warning about the serious economic dilemma. He said the aim was to reduce the deficit by LE20 billion in a bid to rein in inflation. But then it was revealed that the Government was actually seeking a $3.2 billion loan from the International Monetary Fund (IMF). Last June, a government led by Essam Sharaf turned down an IMF loan of the same amount. "Getting a loan is the easiest way to fix the deficit. For over 40 years, it has been the trick," Hashem explains. The deficit is forecast to hit 8.6 per cent of GDP in FY 2011/2012. Economists say the budget deficit is nothing new. In the FY 1987/1988, the budget deficit rose to an historic record high at 33.5 per cent of GDP. “Egypt's economy, despite its solid and sound fundamentals, is facing a number of difficult challenges, which have to be addressed through an economic programme that safeguards macroeconomic stability and creates conditions for a strong recovery," says Masood Ahmed, the IMF's Director of the Middle East and Central Asia Department. "The programme developed by the Egyptian authorities and its key policies are currently being discussed with emerging political parties to ensure broad political support. This should help reduce uncertainty and boost confidence in the programme's successful implementation," Ahmed explains. One of the serious challenges facing the Government will be keeping subsidies intact, despite any pressures from the IMF, analysts say. Around 40 per cent of Egyptians live on under $2 a day, according to World Bank figures. Roughly 20 per cent of the 85 million population are impoverished, eking out a living on less than $1 a day.Subsidies account for about 35 to 40 per cent of the Government's total spending, according to official reports. Food and fuel subsidies account for nearly 60 per cent of State outlays.
Borrowing, the easiest way Before the revolution, Egypt's debt totalled LE1.08 trillion, including a foreign debt worth $34.9 billion, according to the Central Auditing Agency. This month, the country's debts reached LE1.26 trillion, up 3.6 per cent over the past year. "The slowdown has incurred a liquidity crisis. The purpose of the Treasury bills and bonds over the past 11 months was to inject cash into the State coffers," Prof. Hashem explains. The Government signed a $200 million loan with the World Bank earlier this month. "Debts account for more than 91 per cent of GDP. With growth coming back to normal, the economy will be able to repay these debts," he says. Fitch Ratings, which forecasts a budget deficit of over 11 per cent this year, has downgraded Egypt's long-term foreign currency Issuer Default Rating (IDR) to 'BB-' from 'BB' and long-term local currency IDR to 'BB' from 'BB+'.
Stocks recovering slowly Since the re-opening the Bourse on March 23, stocks have seriously declined. International reports released by debt rating agencies have added insult to injury, analysts say. After losing nearly 50 per cent, the country's benchmark index EGX30 seems to be on the rebound since the beginning of 2012. The benchmark index has risen over 3,900 points, attracting more and more liquidity. The EGX30 fell to around 3,500 points in 2011. “The market may recover soon if political stability is restored. After parliamentary polls, the next step will be a presidential election. A civilian president will boost investor confidence,” Hashem says.
