The economic situation of Egypt is quite bad, but there is room for hope and the improvements might come quickly. At least this is what many representatives of finance and industry, in Egypt and abroad, seem pleased to express.
Of course they might be fishing for investments and not speaking their mind, but their optimism and faith in the will and capacities of the Brothers’ administration to tackle this issue may not be fully ungrounded.
“Growth has to be of 5 or 6% to allow an actual development,” thinks Mohamed Abu Basha, an economist at EFG-Hermes. However, according to Ahmed El Sayad, Counsellor to the Chairman at the General Authority for Investment, GDP growth will be 2.3% this year and should be 3.5 to 4.5% next year.
But Abu Basha says Egypt is “moving closer to stability”, and Heba Abdel-Latif, Head of Capital markets at the Commercial International Bank agrees, saying that Egypt is doing well, just out of the cataclysm of a revolution.
“Banks are robust, which we didn’t expect. Tourism is suffering but holding, Suez Canal revenues still coming in – the fundamentals are there.”
Egypt is low on foreign reserves: the uprising led to a diminution of tourists and foreign investors. President Mohammad Morsi’s administration expects several dozen millions dollars in loans, investments or trade agreements.
Around the world, there is an enormous amount of good will, from states and corporations, towards Egypt,” says Angus Blair, president and analyst at Signet Institute.
Morsi has met with investors from many countries, such as the USA, Qatar, Saudi Arabia, Kuwait, Turkey, China and Italy. Some countries have made promises but without giving any timeframe.
Qatar has started fulfilling its promise; at the end of the summer the oil rich Gulf state deposited the first $500 million of a pledged injection of $18 billion into Egypt over the course of the coming five years. These investments will go to electricity and natural gas projects and to a planned tourist resort on Egypt's north coast.
Saudi Arabia – at the moment the second largest investor in Egypt after Great Britain – is planning an aid package to support the Egyptian state budget and develop projects with fast returns on investment. Saudi companies are particularly interested in projects in petrochemicals and agriculture.
Egypt and Saudi Arabia have also agreed to build a bridge between the two countries. Initially planned in the 1980s, it could be ready by mid-2013 and start yielding benefits in only ten years, thanks to a toll on religious pilgrims, tourists and workers. But an ecological campaign says it would massively disturb the fragile ecosystem of the Red Sea.
The government considers such public/private sector projects vital for Egypt’s economic recovery – they are “the mainstay of growth, especially for infrastructure, roads, schools and health,” said Momtaz Al-Saïd, the Egyptian minister of Finance.
A US financial delegation recently visited Egypt. Mohamed Abu Basha said that they “heard what they wanted to hear”, and that despite the embassy events, they are pleased and waiting for projects that the government is preparing. But the Obama administration's plan to transfer $450 million in cash to Egypt was blocked by a top House committee chairwoman.
So far most of the pledged help packages have not been implemented. But this is normal for Richard Banks, Director of Emerging Markets at Euromoney. “The IMF loan comes first, other investors will follow suit,” he says.
Egypt in August asked for a $4.8 billion loan from the International Monetary Fund, which in turn urged economic reforms.
Speaking in Riyadh on Saturday, IMF director general Christine Lagarde, who was presented with the loan request during a visit to Cairo in August, said the lender "will accompany Egypt" as it undertakes its challenging journey of reform.
But Lagarde made no firm commitments, saying the amount, details and terms of the loan programme – which Cairo hopes to seal by the end of the year – were still under discussion.
To improve the ease of doing business in Egypt, many Mubarak-era legislations need to be changed. For one thing, the current administration tries to streamline of decision-making process.
“Before you had to get permits from many ministries and it would take ages and you would give up. Now it is more of a democracy, they delegate responsibilities, senior employees in the administration may make decisions, instead of asking the minister – so decisions are much faster,” says Richard Banks.
The optimists dismiss quite easily one of the gloomy indexes: a very high level of unemployment, still rising and even more important among urban people and young educated people. The main challenge awaiting Prime Minister Qandil’s administration is increasing the number of jobs.
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Ahmed El Sayad says only 29% of young people are fully employed. On the one hand it means that there are no jobs, on the other hand that with a vision it is a workforce ready to increase the productivity.
“A very young population is an asset, but they need to be educated and trained,” says Hesham Wagdy, Executive Director of the Industrial Modernisation Centre. “They also represent a strong potential in demand,” adds Graham Hoar, Vice-President Middle-East at Nexant.
“And productivity, not so much employment, is the battle,” says Richard Banks.
Potential investors may flinch at the thought of the number of strikes nowadays. But this is nothing to be worried about, says Hesham Wagdy: “Everybody has been frustrated for so long, that they want everything and now.”
Ahmed El Sayad says that the only string attached to the IMF loan is the ability to repay.
But the issue of the budget deficit cannot be ignored.
“In the absence of a genuine reform roadmap for our energy resources and the entities entrusted to govern them, how can we be excited about foreign investment? How will the government power all these wonderful projects? According to Minister Osama Kamal, Egypt imports 25 per cent of its energy, so are we going to import more and neglect the yawning budget deficit?” says Al Bahrawi, a journalist from Daily News Egypt.
Then there is also the risk of having to comply with certain policies and lose a part of the country’s sovereignty. Some revolutionary groups seem concerned with this issue.
Ahmed El Mokadem’s alternative solution aims at “sociatalism,” that is a regulated mixed economy. A retired Professor of Economics and the founder of the British Egyptian Society he advocates a hands-on investment sovereign entity, an assessment of projects by experts and not bureaucrats, and making use of the expats.
“If they have rights, they have duties,” he says, and they could provide a “patriotic source of funding”.
Many people fear a violent liberalisation of Egypt that would leave the poor even more stranded than they already are, and benefit the already wealthy. For example, rationalising the public sector means cutting jobs. And many leaders of the Brotherhood are well-known businessmen, which does not allay the fear of a reform of the economic sector to the sole benefit of the Brotherhood organisation.
“The IMF discussion will force the Brothers’ administration to cut subsidies substantially - otherwise the money gets pulled back,” says Richard Banks.
For example, cutting a big chunk of energy subsidies (electricity and oil) would mean a lot to the public budget. There is even a popular rhetoric according to which these subsidies do not even benefit the poor.
The minister of Petroleum, Osama Kamal, has on numerous occasion statet that “80 per cent of those who deserve energy subsides receive only 20 per cent of it”, following the same words earlier this year by IMF Deputy Managing Director, Nemat Shafik.
The Minister of Electricity and Energy, Mahmoud Balbaa, has asserted that the lower income classes would not be affected by the changes.
An IMF study on the MENA region in May said “Social safety net instruments, which better target the poor, and social insurance play less of a role in the region.”
But will these really be implemented?
“Energy subsidies represent six times as much as what is spent on health and education,” says Richard Banks.
Many people in the public sector receive shamefully low wages, which forces them to depend on their family until very late. This is the case for teachers and doctors for example and reflects the dire state of the education and health systems. The question is if Morsi’s administration call this a priority?
For a look at Morsi's foreign policy, read our latest article on the subject.