Thursday, 14 Jun 2012
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Egypt Economy: What Will Egypt’s New President Inherit?
British Embassy Cairo
The economy is a major electoral issue in Egypt. Whoever wins this month will face daunting economic challenges. They must build consensus to start to address them.
The economy is one of the biggest election issues in Egypt. Ahmed Shafiq has his track record of turning Egyptair, and Cairo airport, into modern, profitable businesses. Mohamed Morsi is using the Muslim Brotherhood’s business expertise to promote their programme for economic development, the Renaissance project.
Whoever emerges as Egypt’s first elected president will soon find that most Egyptians will expect the political elite to work together constructively in the national economic interest.
What kind of economy can the incumbent expect to inherit on 1 July? Egyptian economist Magda Kandil, head of the Egyptian Centre for Economic Studies, estimates growth for the financial year (July 2011-June 2012) to reach 2%. But this falls well short of the 7-8% needed to absorb the 700k new entrants to the labour market each year. A slowdown in growth since 2008 has led to official youth unemployment figures of 25%, overall unemployment at 12.6%, and a much broader problem of under-employment.
The fiscal deficit has also widened, from 94bn LE in March 2011 to 113bn LE in March this year. Only a popular campaign to pay tax arrears prevented the situation from becoming even worse. The new draft budget is relatively expansionary, with the deficit expected to grow further to 170bn LE. Securing agreement to this budget before 30 June will be highly problematic. And 75% of the new budget remains committed to subsidies, salaries and interest payments, offering limited room to manoeuvre.
Foreign reserves rose again by $300m in May, primarily due to the sale of treasury bills to Egyptian expats. But such one-off gains are not sustainable in the long-term. Stocks have fallen to their lowest level for four months. Qatar’s bid for EFG-Hermes, the Middle East’s preeminent investment bank, has raised fears of further hostile takeovers.
Long queues outside petrol stations are starting to have serious repercussions for agriculture, which accounts for 14% of GDP and employs 1/3 of the Egyptian workforce. Reuters has reported that there are several oil tankers waiting for letters of credit before they will offload. Many companies seem to be delaying strategic planning until after the election.
Nor has it been possible to undertake much economic reform. Commentators say that nothing had been done to promote SMEs, for example, although this was supposedly a top priority of the caretaker government. Parliamentary scrutiny has forced a greater sense of transparency in the public finances, for example by putting many state employees currently paid by so-called ‘special funds’ onto the main payroll. But real public financial management reform will take several years to implement – the EU are just beginning to support this process.
The Muslim Brotherhood economic programme includes international finance, foreign investment and an open, transparent economy.
Shafiq is broadly committed to these principles too and is supported by many leading business figures. Whoever wins will need to tackle the endemic problems of the past including corruption, rising inequality or a highly inefficient public sector and seek political consensus on key economic policies.
We have a clear interest in seeing the Egyptian economy recover and succeed in a way that reduces poverty and creates opportunities for all Egyptians. We are the largest foreign investor, consider Egypt as one of our top 20 markets with significant potential for further growth, and can benefit economically from close historic links.
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