Analysis: Egypt’s faltering economy

The country braces for soaring debt and another tough economic year.

Egypt''s faltering economy
A new poll finds Egyptians favour economic stability over democracy [AFP/Getty]

Doha, Qatar – As Egyptians end their first year living under the rule of a democratically elected president, economic pressures, rather than political challenges, seem to the most serious threat to the new president and the democratic transformation of the country.

A Pew survey of Egyptian public opinion released in May found out that a solid 66 percent of Egyptians preferred democracy to any other form of government, and 51 percent were willing to live under a democratic government even if they risk instability.

Yet, when asked if they preferred “strong democracy over a strong economy”, their loyalties shifted. Only 45 percent agreed, while 52 percent said that living in a good economy was more important to them to living in a good democracy.

The same survey highlighted Egyptians’ growing economic pains and worries. Only 29 percent of those surveyed said they expected their economic situation to improve next year, a result down from 50 percent in 2002. Some 42 percent thought their economic situation would worsen next year, up from 20 percent last year. And, a strong 76 percent majority believed the national economic situation was “bad”.

Official numbers

Such worries reflect a struggling economy that is yet to recover from multiple setbacks it faced in the aftermath of the revolution that toppled Hosni Mubarak in early 2011. They also reflect a tough economic first year for Mohamed Morsi, Egypt’s first elected president, and a difficult year ahead looming.

Official numbers seem to deepen such fears. A preliminary government budget for the next financial year, which starts on July 1, seems to show the Egyptian economy and government plans suffering from the same old problems, such as a shortage of funding for new projects and the rising costs of public salaries, loans, and the budget deficit.

The three items together absorb around 80 percent of public spending, leaving very little to spend on reviving Egypt’s deteriorating public health and education sectors, or to invest in new projects to help energise Egypt’s sluggish economy. In fact, the draft budget only lists 63.7bn Egyptian pounds (about $9.1bn) for new public investment next year.

In addition, the draft budget projects a 9.6 percent deficit next year, down from a projected 10.7 percent this year. Although some economists Al Jazeera spoke to doubt the authenticity of such numbers and the government’s ability to cut the deficit, the numbers still show how much pressure is being put on the government to borrow more money from local banks and from abroad next year.

The projected budget says that, if the government can cut the deficit to only $28bn next year, it still cannot borrow the full amount from local banks without hurting liquidity – and it must borrow $9-10bn from abroad, adding to a rising $43.8bn foreign debt, up from $34.4bn a year ago.

That foreign debt adds to a staggering $198bn debt to local banks. The draft budget also expects Egypt to spend about $26bn on debt service next year, up from a projected $19.8bn this year. The widening deficit and rising cost of debt are alarming to many Egyptians, as the country struggles to attract foreign investors, achieve higher levels of economic growth, and protect the local currency – which lost more than 10 percent of its value against the dollar in the past six months.

 Egypt economy sputters in democratic era

Another problem is unemployment, which is estimated by the government to be standing at 13 percent. A government plan for social and economic development in the new financial year published by the ministry of planning says the government hopes to create 800,000 in the forthcoming year. Still, it will not be able to reduce the number of unemployed – 3.5 million – as an estimated 700,000-750,000 new job seekers join Egypt’s job market every year.

Moreover, the same plan states that 21.4 percent of the 27.3 million strong workforce are temporary workers, and at least 46.5 percent of those employees work in the unofficial sector without contracts. Furthermore, 67 percent has no health insurance. No wonder – rising employment, widespread poverty (with 25 percent living under the poverty line), and poor working conditions were all factors behind the January 2011 revolution that toppled the Mubarak regime.

With this sluggish economy, expected to grow at just 2.6 percent this year and at 3.8 percent next year – down from 5.1 percent growth in the year before revolution, not much could not be expected to improve the living standards of the majority of the Egyptian people, raising fears that more economic and political trouble is expected down the road to express growing public frustration with Morsi and his economic policies.

Morsi’s economic plan

“Economic achievements during the last period did not match our much higher hopes. Sometimes winds blow in the wrong direction,” economics professor Khalid Abdel Hamid, told Al Jazeera.

Abdel Hamid, a member of the economic committee at the ruling Freedom and Justice Party, said Morsi faced daunting economic problems “that have been accumulating for decades and during the transitional period ruled by the military”. Such problems include widespread corruption, flight of foreign capital after the revolution – and under SCAF’s watch – political unrest, low economic growth, a rising deficit, and huge expectations.

Full openness and transparency about the status of the economy are still lacking. We have to open so people can understand the size of the problem and cooperate accordingly.

by Abdel Hamid, FJ Party

He says fixing an economic situation like this requires time, and Morsi has been able to make some progress, such as cracking down on the subsidised fuel black market, increasing wheat production to help cut Egypt’s dependency on imported wheat, supporting farmers by forgiving old debts, expanding public welfare for the poorest, and visiting several foreign countries, such as China, Italy, and Brazil, to help attract foreign investment.  

Reem Abd ElHaliem, a professor of economics at Cairo University, told Al Jazeera that Morsi should be given credit for what he achieved economically in the past year.

She believes that Morsi has worked hard to look for alternative sources of funding, such as issuing Sukuks, or Islamic bonds, which were recently approved by parliament. She also commended Morsi for seeking to cut fuel subsidies without hurting the lower classes. A new card distribution system is under development and may be introduced this autumn. Morsi also resisted pressure to cut spending on social programmes that benefit the poor.

The draft budget shows that Morsi intends to increase spending on public salaries by about $4.3bn to help reduce the negative impact of rising inflation on the six million public employees. Morsi is also planning to increase spending on subsidies and social support programs by $3.24bn. Benefiting programmes include development of poor villages in Upper Egypt, increasing support for farmers, public transportation, and housing for low income people.


However, Abd ElHaliem also thinks Morsi has been slow in reacting to some economic problems, such as depleting foreign reserves and the increasing pressure on the Egyptian pound. She believes that if Morsi reacted faster to the problem he could have managed a more orderly currency devaluation. She also thinks structural transformation of the Egyptian economy is needed in order to achieve needed growth.

Mohammed Mossallem, an economic researcher at Cairo based Egyptian Initiative for Personal Rights, thinks Morsi has not done much to help the Egyptian economy. He says Morsi has changed three finance ministers in one year, does not seem to have a clear economic policy, and has focused too much on borrowing from abroad and on attracting foreign investments – without preparing the country or the economy for absorbing such investments into pro-growth activities.

Mossallem thinks government should take more ownership of the economy at this moment, be more transparent with people about the dire economic situation, direct more funding to productive sectors instead of subsidies, and to focus on developing small and medium size enterprises – which employ an estimated 75 percent of Egypt’s labour force – offering them more funding, instead of following Mubarak-era policies to attract large foreign businesses.

Analysts who spoke to Al Jazeera seem to agree that Morsi has to be more transparent with the people about the economic challenges ahead, and that he should work on uniting the country politically behind a clear agenda to transform the country’s economy and make the needed structural changes.

Abdel Hamid, the FJP’s economist, seems to agree: “Full openness and transparency about the status of the economy are still lacking. We have to open so people can understand the size of the problem, and cooperate accordingly.” 

Abdel Hamid also said that the party was hoping to hold a national conference on the economy to involve all groups in discussing the economic situation and building a united vision – but “no time has been set for the conference yet”.

Follow Alaa Bayoumi on Twitter: @Alaabayoumi

Source: Al Jazeera