When Abdel Fattah al-Sisi, Egypt’s former army chief, became president in June, he pledged to sort out Egypt’s troubled economy. Eight months later, on February 11th, the International Monetary Fund said it was starting to see signs of “a turnaround”, and upped its growth forecast for the year to 3.8%. Prodded by a gaggle of new PR men, ministers have become more eager to talk. “Egypt has lots of competitive edges,” boasts Ashraf Salman, the minister for investment.
The economy has been in the doldrums since 2011, when turmoil spread across the region and tourists and investors fled (see chart). Growth has since hovered around 2%; unemployment and poverty are in double digits. Foreign oil and gas companies have gone unpaid because the state is broke, says a Cairo-based economist. So far the government has survived on more than $20 billion in largesse from Gulf states that were happy to see the back of the previous government, which Mr Sisi ousted in 2013. Mr Sisi needs to make Egyptians feel richer or risk the same fate.
There is some reason for optimism. Egypt, the Arab world’s most populous country with 90m people, has recently attracted business delegations from Japan, led by Shinzo Abe, the prime minister, and Britain, whose oil and gas companies make it Egypt’s largest source of investment. Private-equity fund managers in Dubai see it as by far the Middle East’s most interesting market. BP, a British energy giant, has said it will funnel $12 billion into its Egyptian operations over the next five years. Nestlé, a Swiss food group, recently announced it would invest $138m over the same time period. 
Like the IMF, investors have been cheered by a handful of reforms adopted by Mr Sisi. In 2014 he removed some fuel subsidies that had helped drive the deficit to 12% of GDP. This year’s shortfall will be closer to 10%. The government has also liberalised its exchange-rate regime slightly, allowing the Egyptian pound to depreciate. That should bolster both exports and tourism.
But most of the companies investing are ones already in the country, such as Nestlé and BP, or Gulf companies following their governments’ cash. The tourism industry, which contributes over 10% of GDP, is in a dire state: the number of visitors last year was a third below the level of 2010. Moreover, Egypt needs to do much more than simply get back on its feet. It is short of power, roads, schools, hospitals and housing, not to mention jobs, for a population predicted to grow to 116m by 2030.
The World Economic Forum ranks the country 100 of 144 for the state of its transport, electricity and telephone connections. Yet investment is just 14% of GDP. “In a developing, industrialising economy, investment needs to be much higher—around 25% of GDP for many years in a row,” says Simon Kitchen of EFG Hermes, an investment bank.
The government cannot close this investment gap. Public debt is 86% of GDP. Moreover, subsidies, public-sector wages and debt service continue to gobble up most of the budget. Instead, the new regime is hoping to woo foreign investors at an economic get-together it is hosting in the resort town of Sharm el-Sheikh next month. It aims to secure the funding to increase the country’s generation capacity by 30,000 megawatts over the next ten years, to avoid worsening power cuts. Ministers also want to entice companies to a planned manufacturing and assembly zone around the Suez Canal.
Economists reckon Egypt needs foreign direct investment of $60 billion (some $10 billion-15 billion per year) to reach its target of 5% GDP growth by 2018. In the last fiscal year net foreign direct investment was a measly $4 billion—a third of the level of 2008. Parlous politics and the weakness of the Egyptian pound mean returns have to be good. Mr Salman says generous incentives are being put in place: the government will guarantee power providers a lucrative price for renewable energy for 25 years, for example, and pay 85% of it in foreign currency. A new investment law is promised. “You don’t have conditions that favourable anywhere,” he says.
Not all are convinced that Egypt is quite such an attractive prospect. Regulations are still a jumble. Too much public money ends up in the pockets of army businesses. Egyptian labour is unskilled and has become more expensive as public-sector wages have risen. Public spending is still geared towards maintaining stability, says Amr Adly of the Carnegie Endowment for International Peace, a think-tank based in Washington DC. Mr Sisi has made it clear that he sees the private sector as simply playing a supporting role to the government as the steward of the economy.
And then there is the sort of turmoil that brought Mr Sisi to power. The World Economic Forum ranks Egypt 140 of 144 countries for security, below the likes of Chad. That is not a statistic Egyptian officials have been eagerly repeating.
Source: The Economist
