Analysis: Will investment solve Egypt’s economic woes?

Since his election in June 2013, Egyptian President Abdel Fattah El-Sisi has talked up the benefits of a conference to attract foreign investment, and its potential to revitalise Egypt’s struggling economy.

Scheduled to be held on March 13, the conference will take place in Egypt’s resort town of Sharm El-Sheikh. Egypt’s International Cooperation Minister, Naglaa Al Ahwani, told reporters in early March that the Egyptian government will present 50 projects valued at up to $35bn, and expects 1,700 international investors to attend.

In one indication of how important Sisi believes the conference will be, on March 9 he said, “Someone asked me what is the latest with the economic conference. I pointed to my arm, and told him that the economic conference is one of Egypt’s arms.”

The late Saudi King Abdullah was the first to call for an international economic aid conference to support Egypt’s new regime, which Saudi Arabia, the United Arab Emirates and Kuwait have backed as part of their efforts to thwart the Muslim Brotherhood’s ambitions to power.

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After four years of political and economic turmoil, the Egyptian government has been working hard to present an image of revival and a country full of investment opportunities ahead of the conference. 

Accordingly, Sisi has pushed through austerity measures such as energy subsidy cuts in order to lower Egypt’s budget deficit. In the absence of an elected parliament, Sisi has used his unchecked powers to change Egyptian laws with the aim of attracting investment.

Egypt, a net importer of oil, has benefited from falling oil prices over the past year. It has also received generous economic aid packages from several Gulf countries since the military coup that ousted Mohamed Morsi, Egypt’s first democratically elected president.

Egypt’s investment minister, Ashraf Salman, told an audience at a business conference in Dubai early this month that Saudi Arabia, the UAE and Kuwait have together given Egypt $23bn of aid in the 18 months following Morsi’s ouster.

This has allowed the government to claim in September that the economy overcame its most difficult stage since the January 25, 2011 revolution. In January, the Egyptian government told a visiting delegation from the International Monetary Fund that the economy grew by 6.8 percent in the third quarter of 2014, that it aims to achieve a 3.8 percent growth rate at the end of this fiscal year in June, and that it intends to “raise growth to 6 percent per annum … in the next five years”.

The IMF described the Egyptian authorities’ stated goals as “ambitious but broadly within reach with steady policy implementation”.

In early March, Al Ahwani also told reporters that her government will offer 50 projects valued at up to $35bn at the Sharm el-Sheikh conference.

“Egypt needs the upcoming conference,” said Reem Abdel Haliem, an economic researcher at the Egyptian Initiative for Personal Rights. “We need foreign currency to stop the devaluation of currency and to increase economic growth. Organising an economic conference and marketing it are good and useful steps. But the conference is not a magic wand that will solve all of Egypt’s economic problems.”

One of the main investment projects to be presented at the conference is developing an industrial and logistics hub around the Suez Canal. In August 2014, the Sisi government embarked on a locally financed $8bn project to expand the canal, to facilitate two-way traffic of larger ships.

The government also wants to create an economic zone around the expanded canal where investors will enjoy lower corporate taxes, and to offer a number of energy and tourism projects. 

However, despite the abundance of planned projects, Egypt continues to face daunting economic challenges.

Decades of economic underdevelopment have impoverished Egypt and its population, at least one-fourth of which lives under the poverty line. According to the World Bank, Egypt’s gross domestic product was $270bn in 2013.

This is $20bn less than that of neighbouring Israel, whose population is just one-tenth that of Egypt’s 80 million people.

This puts huge pressure on the government to find enough resources to spend on education, health care, public services and public investment. About 75-80 percent of Egypt’s annual budget goes to fixed items, such as public wages, fuels and food subsidies, and public debt service, leaving very little for the government to spend on new projects.

In the current 2014-15 budget, the government projects it will spend only about $9bn on new public projects.

As a result, the government had to borrow another $8bn from local sources in order to invest in the new Suez Canal expansion project. Although the government tried this year to increase the amount of monetary aid it gives to some of Egypt’s poorest families, it was only able to raise the monthly stipend for a family of four from $40 to $59.

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In addition, years of political turmoil following Egypt’s January 25, 2011 revolution reduced the annual growth of Egypt’s economy to about 2 percent over the past three years, making it more difficult for the government to reduce the number of Egypt’s unemployed, who number roughly 3.5 million.

“Even if the government signs deals worth $10bn a year, this will only bring foreign investment levels back to the pre-revolution annual levels,” said Abdel Haliem. “I personally doubt that such a goal is achievable. Taking in consideration current conditions, I will consider it an achievement if the government can sign deals worth $6-7bn this year.”

Historically, Egypt’s authoritarian governments have presided over unequal development and distribution of wealth, with a small minority of well-connected elites enjoying preferential access to cheap land, energy, and government projects.

Political instability, increasing security threats and widespread human rights abuses may also deter some foreign investors. 

If the conference succeeds in attracting a significant amount of foreign investment, the Egyptian government may have an easier time in achieving its economic growth targets. It would also signal a regional and international commitment to help Egypt economically during its difficult transition.

But given the unequal distribution of wealth in Egypt, the average Egyptian will likely not feel the effects of this growth in the near term.