Egypt is on edge. Politically and economically the country is on the brink – whether it is of deterioration or recovery will depend on the candidate chosen in Egypt’s upcoming run-off election on June 16th.
The economy is in a dire state. International reserves have decreased from $43 bn in December 2010 to only $15 bn in end March covering only 3 months of imports. The balance of payments has worsened with a substantial drop in tourism and FDI. The fiscal deficit is widening, the cost of borrowing is nearly 16%, inflation remains in the double digits, and unemployment is a serious problem with between 3 and 4 million Egyptians out of work. Growth is projected to be sluggish at only 1.5% for FY 2012.
Egyptians are hoping that the election of a new president, either Mohamed Morsi from the Muslim Brotherhood or Ahmed Shafik, a relic from the Mubarak regime, will usher in a period of political stability and allow the country to position itself for economic recovery.
It still remains to be seen if the winning candidate will put his money where his mouth is. The economic ideology of both candidates is very similar. Both support private led growth and free markets but their approach to resolving Egypt’s issues are very different.
Ahmed Shafik has emphasized the deterioration of the economy and promised to restore a degree of stability, security, and order enjoyed under Mubarak. His approach is top down believing that by addressing issues at the aggregate level, the benefits will trickle down and reach the bottom.
Morsi, on the other hand, is employing a bottom up approach. He has been successful in appealing to the bottom portion in Egypt through his vision for a Renaissance program - of which a large component is his plan to help small and medium enterprises. He has had a good track record with working at the community level and believes that addressing the problems at the bottom is the most effective way to get the economy back on track.
Both candidates will have to figure out how to balance the ballooning fiscal deficit with the pressure to increase social spending. Though they are aware of the need to create fiscal space they differ in their approach. Morsi would prefer to better target social spending taking some of it away from the government books and diverting it to the local communities and the social network at the private level. He sees this as a better way of managing the social agenda rather than lowering the budget with wasteful additional spending.
Shafik is focusing on public-private partnerships as a solution to the widening fiscal deficit.
“Shafik is very big about instituting the public-private partnership to release thepressure on the budget. He’s talking about big projects where private resources could team up with public resources particularly towards investment, infrastructure development, and so forth that would help the economy. It would help to rescue the pressure on government resources, and would also help to mobilize the private sector at a time when the private sector has been very much cheated by developers,” said Dr. Magda Kandil, Executive Director at the Egypt Center for Economic Research.
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Both candidates are paying lip service to an anticorruption stance. Morsi and Shafik are talking about Small and Medium Enterprises giving the impression that they would like to fight corruption, enforce regulations, and establish a more competitive business environment. Many are weary of such promises especially from Shafik who has a large group of constituents that expect him to guard their interests. Some Egyptians believe that this conflict of interest may cause him to back away from his campaign promises if he is elected.
Businessmen remain concerned. Omar Samra, the founder of a small company in Cairo, remains uncertain of Morsi and Shafik’s agendas and believes their views have swayed throughout their campaigns.
“The main issue hindering businesses is endemic and deep rooted corruption that meant you could not get very far if you weren’t playing the system which we hope is going to change in the coming period regardless of who comes in power. Even if the street does not agree with him, we hope that what has happened over the last year and a half and the fact that the street has a say and can cause an uprising will be a deterrent from going back to the extremes of the past regime.”
Once elections have taken place the winning candidate will have to articulate his message quickly to unite the polarized population behind his agenda so he can begin to focus on political and economic priorities. These economic priorities will have to be articulated through an economic agenda.
“I think because of the low level of international reserves they need to resolve the negotiations with the IMF and quickly and other international donors and institutions as well. They need to mobilize funds that could be used to finance the projects in Egypt in many sections that they have not used yet,” said Dr. Kandil.
“The budget will be negotiated in the parliament immediately after the formation of the government and the elections so they need to go through the items one by one to trim the waste, to identify areas where they could save and restructure the savings towards mobilizing finances where the government should be taking bigger responsibilities.”
In addition to these measures, the government will have to provide access to financing and offer technical assistance to small businesses while addressing structural issues to increase the competitiveness of the business environment.
If the elections bring about a degree of stability in Egypt and parliament is able to hammer out a feasible economic agenda, the country will have a chance to position itself for faster growth going forward. If, however, Egyptians refuse to accept the outcome resulting in uncertainty and instability or the candidates rescind on their campaign promises, the economic situation of the country will get a lot worse before it has a chance to get better.