On March 13, Egypt will open a big economic development conference in Sharm el-Sheikh intended to show the world that it is fixing its economy and to attract foreign investment. The conference is pitched as a “key milestone of the government’s medium term economic development plan.”
With a population of more than 80 million and the geographic advantage of being situated between Asia and Europe, Egypt has theoretically strong medium- and long-term economic prospects. In reality, though, economic performance has disappointed. For several years after the revolution, growth was stuck at about 2 percent. Today, the unemployment rate is above 13 percent, government debt hovers around 90 percent of gross domestic product, and inflation is about 10 percent.
In the run-up to the conference (at which I will speak), the International Monetary Fund released a major review of the Egyptian economy, which projected growth of more than 4 percent for next year and almost 5 percent by 2018. IMF projections are certainly no guarantee of a rosy future; for the past several years, they’ve been consistently overoptimistic. In April 2012, the IMF projected Egyptian growth in 2014 would reach 5 percent and it turned out to be less than half that.
Egypt can indeed realize its economic potential, however — as long as the government continues with reforms, the business environment improves, the exchange rate depreciates, and more women are encouraged to enter the workforce. That’s a long list of conditions, but not unachievable.
President Abdel Fattah al-Sisi has already carried out some needed economic reforms. He has reduced the country’s excessive, regressive fuel subsidies, which have pulled resources into energy-intensive sectors. This has meant price increases of 40 percent to 80 percent on fuel products — a jump that’s been cushioned by the global decline in oil prices. The regime has also raised tobacco and alcohol taxes, introduced a tax on dividends and capital gains, and imposed a new 5 percent tax on high incomes. These changes are all to the good. Achieving 5 percent or even 6 percent growth, however, will require more action, in addition to the efforts being planned to phase out energy subsidies.
One imperative is to improve the business environment. Egypt ranked 112th out of 189 countries in the World Bank’s 2015 survey on places to do business. The development conference is meant to signal that the government is working hard to attract foreign investment, including by cracking down on corruption, passing a new investment law and streamlining the bureaucracy.
The government also needs to allow the Egyptian pound to adjust further, by loosening or eliminating the informal peg to the dollar. Last year’s current account deficit (excluding grants from other countries) amounted to 5 percent of GDP. Inflation is running higher in Egypt than in its trading partners, and that’s causing a real appreciation of the exchange rate. The economist Caroline Freund, at the Peterson Institute for International Economics, estimates that Egyptian exports are only about a third of what they should be. Freund also says the currency should depreciate by 20 percent to 30 percent to help boost foreign investment, exports and tourism.
A third imperative is to boost the number of women in the workforce. Only about 25 percent of Egypt’s women are in it now, placing the country 136th out of 142 on this measure, according to the 2014 Global Gender Gap Report. It’s hard to boost economic growth when half the potential workforce participates at such a low rate. (Interestingly, in Egypt, the women who do work earn almost as much as otherwise similar men; on this measure, Egypt ranked 12th in the world.)
A rosy financial future for Egypt is by no means guaranteed, but with continued bold reforms, the IMF’s optimism on Egypt may this time prove warranted.
About the Writer:
Peter R. Orszag is a Bloomberg View columnist. Now vice chairman of corporate and investment banking and chairman of the financial strategy and solutions group at Citigroup, he was previously President Barack Obama’s director of the Office of Management and Budget. Orszag was the director of the Congressional Budget Office from 2007 to 2008. He served in two jobs in the Bill Clinton administration, as a senior economist at the Council of Economic Advisers from 1995 to 1996 and, in 1997, as top adviser to the director of the National Economic Council. He has a doctorate from the London School of Economics and a bachelor’s degree in economics from Princeton University. An adjunct senior fellow at the Council on Foreign Relations, he lives in New York.
Source: Bloomberg
