It is without doubt that the main challenges that Egypt is currently facing are both social and economic; despite the fact that it is becoming much harder to separate the two from political instability. A country that has been through two revolutions in less than three years as well as external and internal pressures is bound to face socioeconomic challenges.
Current reality shows unrealistic figures marking a new deterioration for the economy and an even worse era for Egypt. The need for new and innovative solutions is dire at this stage; especially that we have not seen any significant change with the change of governments from Dr. Hazem El Biblawi’s government to Kandil to SCAF. The economic regression, increasing budget deficit and public debt, failing institutions as well as inflation have been the main problems facing the various governments that have been appointed post-January 2011 and still remain to be.
I strongly believe that before looking for solutions there is a dire need to first acknowledge the presence of a problem. Let’s take a deeper look at some of Egypt’s main challenges:
A decrease in GDP growth rate. One of the main economic challenges remains to be the low GDP growth rate, which has reached 2.1% during the last fiscal year (2012 – 2013). In comparison with previous years, especially before 2011, this is seen to be a steep fall seeing that population growth rate is increasing having a notable negative effect on the economy.
On the other hand, Biblawi government is forecasting a steady increase reaching up to 3.5% by the end of 2013 – 2014, a remarkable 4.5% by the end of 2014 – 2015. All in all, the government aims to reach a median of 7% by the year 2022.
An increase in Budget Deficit. Egypt is currently experiencing the highest budget deficit in its economic history; with government expenditure majorly surpassing its revenue in the past three years. Strikes and worker stop- outs have been and remain to be one of the main reasons behind this deficit. With limited productivity and more government expenditure has lead to an increase in deficit from 134 billion pounds to 240 billion pounds at the end of the recent fiscal year. Public sector wages, subsidies and debt interests are main causes behind the increasing deficit that currently stands at 13.8% of the GDP.
The government aims to decrease the deficit to 9% of the current budget; a 4 percentile drop is considered to be a major challenge and is contradicting to what the IMF forecasted in its last report – a drop from 13.8% to 13.2%. Several reports however forecast that the budget deficit will in fact increase and surpass 300 billion dollars (15% of the GDP).
Increasing Unemployment. Unemployment rates in Egypt have reached an unprecedented 13.3% bringing the number of unemployed Egyptians to 3.6 million. The inability to find jobs is caused by the decreasing production and investments. With the youth shaping up a little over 60% of the population (<30 years old) a HUGE percentage is currently unemployed.
The increasing public debt. According to official numbers, there has been an unprecedented increase in public debt exceeding 1.5 trillion pounds by the end of August 2013 with external debt also reaching up to 44.5 billion dollars (equivalent to 307 billion pounds). The total debt currently stands at 1.8 trillion pounds making public debt at 92% of the total GDP according to the Egyptian Minister of Finance, Ahmed Galal; 12% higher than the usual 80% causing grave consequences especially that this increase is taking place in line with government expansionary policies.
The lack of change in tactics by all previously appointed and current government has led to a 104% increase in debt during the past three years causing interest rates to reach up to 147 billion pounds. According to 2013 – 2014 budget estimates, this will have a negative impact on the present and future economy seeing that this is equivalent to the budget deficit.
Rising inflation rates. The increasing inflation rate is considered to be a major drawback in the Egyptian economy. According to the last Central Agency for Public Mobilization and Statistics (CAPMAS) report, the inflation rate increased 1.7% in September compared to August and has reached 11.1% in September 2012; which is the highest record since 2010.
Declining foreign reserves. Foreign reserves currently stand at a low 18.8 billion dollars sustaining Egypt for the upcoming four months; two months below the allowed minimum by world economies of six months.
Deteriorating foreign currency resources. Both the economic and political stability are the main drivers behind the unprecedented slowdown in the tourism sector causing deficiency in foreign currency. With Egypt marked as a risk-zone for tourists, hotel operations and touristic sites has dropped by a minimum of 10%. In addition, another main cause is the lack of FDI and continuous decrease in established foreign businesses with companies closing off their operations and retracting from investing in the Egyptian Stock Exchange.
The question here remains to be: will we be able to solve these challenges with the transitional government’s current capabilities and resources?
A major part of facing these challenges is reaching sustainable political stability, which will act as a stepping stone for the return of foreign direct investment, local investments and tourism.
There are three main points that need to be addressed in the current transitional period. The government needs to work on reviving the economy and increasing growth rates in order to create an environment that is suitable for investment as well as to motivate the local private sector to invest. This should happen with investor legislative and legal reform to the laws in order to boost investment.
Secondly, there needs to be a gradual reduction of the budget deficit with a short-term and long-term plan and the improvement of asset management as well as diversifying sources of revenue. A reallocation of subsidies is due since 154 billion pounds are spent on this aspect only; 114 billion pounds on hydrocarbons, 21 billion on bread and 19 billion on consumer goods.
CBE has reduced the borrowing capacity to 4% for public debt, which saves over 30 billion pounds and in return decreases return on government bonds from 15.5% to 10.5% and this is considered to be an important step towards improving Egypt’s public debt dilemma.
In their last meeting, the ministers have discussed minimizing their expenditures and controlling fiscal policies in order to decrease the budget deficit; although it has not discussed a concrete plan for implementation of these policies nor which entities will decrease their expenditures.
Apart from the challenges that face the Egyptian economy, which is considered to be the third in the Arab world, it always manages to survive because of its informal economic sector, which is considered to be 80% of the national economy and stands at around 1 trillion pounds. This reflects the pressure on this sector that is in high demands and it might be facing negative consequences with the increasing competitors in the formal sector that might cause deterioration in this informal sector.
Reflecting on the past governments and their mistakes, the Biblawi government is working on addressing those issues straightaway; this is reflected on the economic expansionist policies implemented and complemented by the financial support for the Gulf countries. The government announced a reform plan as well as setting two programs for economic stimulation; the first bulk of money used to motivate the market stood at 22.3 billion pounds and the second was 29.6 billion pounds. This is an attempt by the government to change the negative economic indicators to a more positive direction that would lead to increasing foreign direct investments as well as local investments by 2014.
The government is required to set a clear roadmap that would include the investment projects needed by every Egyptian province and should work on promoting these projects internally and externally to ensure that they are funded. It should also include the private sector, which has the know-how and technology, in the production and implementation process to ensure high quality and efficiency. There needs to be a renewed focus on infrastructure projects that are connected to over 85 industries; these projects generate jobs and will decrease the budget deficit indirectly. The government should create short-term and medium-term plans as well as working on loosening the restrictions and regulations of obtaining funds that are required for the implementation process.
If all of the above is implemented, the government will be able to move from recession to monetary liberalization through a set of procedures that would ensure the increasing government spending on investment and infrastructure projects, improving the living standards of the citizens by enforcing the minimum wage so that in return the citizen and the investor would feel like actual steps are being taken to ensure the revival of the Egyptian economy once again.
