Economy should be a priority for Sisi

Egypt's economy has been deteriorating for years, which is why the new government must find adequate solutions to improve the situation as soon as possible.

al-monitor Employees work at an exchange office in downtown Cairo, June 5, 2014.  Photo by REUTERS/Amr Abdallah Dalsh.

Topics covered

unemployment, poverty, egypt, economy, abdel fattah al-sisi

Jun 5, 2014

Abdel Fattah al-Sisi is assuming the presidency in Egypt in light of serious economic challenges and probably in the absence of possibilities to challenge them in the near future. Since the overthrow of former President Hosni Mubarak in February 2011, foreign exchange reserves have plummeted by almost half, which has weakened the ability to meet food and fuel import needs. The reserves are equal to nearly $16 billion (not all of them are liquid assets), which covers the costs of imported food and fuel for three months only.

Government revenues in Egypt come from the tourism sector, the Suez Canal and monetary remittances of Egyptians working abroad, as well as oil and gas exports and some manufactured goods. Yet, although the remittances of overseas workers and the Suez Canal revenues are ongoing and improving for many reasons, tourism revenues have sharply declined. Egypt’s Minister of Tourism Hisham Zazou said the country has seen a significant decrease in tourism revenues, from $12.5 billion in 2010 to $9.9 billion in 2013. Needless to say, the political turmoil and declining security have hindered the influx of tourists to the country.

The manufacturing industries are constantly disrupted due to employees’ strikes, low investment and poor or underdeveloped technical infrastructure, which weakens the potential to promote the export of goods. The provision of goods to the local market has even declined, leading to the rise of demands on imported goods. The value of exports in 2013 reached nearly $26 billion, while the value of imports was $57.5 billion, which implies a trade deficit of $31.5 billion. There was a rise in the value of external debt estimated at $47 billion since the beginning of 2014. Although the value of external debt is reasonable, as it represents 20% of the GDP, the ability to meet debt service requirements remains weak.

Since mid-2013, Gulf countries have tried to help the Egyptian government meet its multiple obligations, as Saudi Arabia, the United Arab Emirates and Kuwait have pledged to provide financial support worth $12 billion. Moreover, in 2014 these countries pledged to provide support amounting to $8 billion. Undoubtedly, this support is intended to finance the budget deficit and the balance of payments deficit, and to contribute to the provision of capital for infrastructure and other social projects. However, these Gulf funds are not sufficient to meet public expenditure requirements in Egypt, or to enable the country to cope with obligations to the outside world.

The most important challenges that any new Egyptian government will face are the same that the successive Egyptian governments have encountered over the past 30 years, and include finding ways to deal with public budget requirements. The subsidy issue represents 30% of the public budget allocations, and 80% of subsidies go to fuel derivatives, 14% to food — bread in particular — and 6% to other commodities. The International Monetary Fund (IMF) made remarks in this regard and suggested other remedies that may reduce the cost. Yet political hesitation has prevented any consensus and the provision of $4.8 billion in loans from the IMF.

It seems that developing the subsidy policy requires making sure that the eligible poor and low-income earners get subsidies. Fuel subsidies, which deplete significant amounts of money and are being spent on categories and uses that may not be essential and necessary, must be examined. The financial reforms are of paramount importance in facing the economic challenges in Egypt, and the disruption of these reforms has resulted from the harsh living conditions that Egyptians have long endured.

Twenty percent of the population lives below the poverty line set by the United Nations. Poverty is firmly established through the weak investment in the vital sectors, i.e., agriculture and manufacturing, and due to the population increase to about 90 million. Thus, the reform of fiscal policies must take place in parallel with social obligations to marginalized groups in society. Under the status quo, any Egyptian government must rely on aid and concessional external loans.

One of the most important factors to strengthen investment is to free bureaucracy from political and administrative corruption, facilitate capital investment and provide adequate legal facilities. It is impossible to reduce unemployment or create new jobs unless the role of the Egyptian and foreign private sector is promoted and the efficiency of economic management is improved. Official figures estimate unemployment rates at 13.5% of the labor force, while independent economists say they exceed 20%.

The next Egyptian government must realize that addressing the economic file should be a priority. If this file is effectively addressed over the coming years, political and security stability will be brought about in Egypt. Addressing this issue may not be easy and the necessary financial means may not available. Yet, it is necessary to lay systematic foundations to deal with the economic issues to boost confidence among Egyptian, foreign and Arab businessmen and international financial institutions.

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