I have read two assessments of the Egyptian economy this week; one by Dr. Mohamed Samhouri, an economist, and the other by Mahmoud Salem, an activist and blogger. In terms of analytical depth, the two pieces are worlds apart. Dr. Samhouri’s analysis is based on official figures and the author takes an in-depth look at the economy and concludes rightly, that the fate of Egypt is directly linked to the performance of the economy going forward. In Mr. Salem’s piece, the treatment of the economy is cursory and incidental.
The two pieces have one thing in common though. Both fail to acknowledge the damage the post-Morsi terror attacks and (often violent) demonstrations have caused the economy. Since the ouster of Mohamed Morsi , Islamist militants have stepped up their assaults. These have largely targeted, but have not been limited to security forces targeting police. Most recently, these operations have targeted tourists in the South Sinai.
It is in this context that the economy and prospects for future performance must be appraised.
During the June-September quarter, the first following the ouster of Mr. Morsi, GDP growth was a bare 1.0%. However, this figure does not capture the full picture. Key sectors showed higher growth, with construction growing 4.5%, agriculture 2.9% and manufacturing (despite the then daily demonstrations), 1.6%. The most telling figure was the 28% plunge in tourism revenues. Tourism represents about 11% of Egypt’s GDP and accounts for one in seven jobs. It is little wonder that the economy showed barely any growth and that unemployment rose to over 13%.
Therein lies one of the biggest failures of the post Morsi cabinet, headed by Dr. Hazem Beblawi that resigned last month. Had the government dealt swiftly and firmly with the violent demonstrations early on, it would have sent a clear message that violence and such acts as torching university campuses were unacceptable. Instead, mixed messages were coming out of the cabinet, with the then Deputy Prime Minister for Economic Affairs, calling for reconciliation at a time when attacks were being stepped up, thereby giving the impression of a divided cabinet and emboldening the perpetrators.
The numbers today are no different. Inflation stands at 9.7%, the fiscal deficit is worrying at 13% of GDP, while foreign direct investment remains muted. But the prospects have changed.
Year-to-date, the stock market has risen over 20%, with foreign and Arab investors back as net buyers. This is the first indication of renewed interest in an economy that has all the fundamentals for robust growth. Investors are betting that the current cabinet will make good on its promise to deliver on security. In this, the government will have popular backing and any security overreach will be shrugged off as a fair response to violence. After three tumultuous years, Egyptians want security, stability and a return to work.
As presidential elections near, so do expectations for a return to at least relative stability, allowing for the resumption of foreign direct investment and tourism.
In the coming months, it is anticipated that government spending will be geared toward jump-starting the economy and away from palliative increases in salaries and wages. The immediate effect will be a higher fiscal deficit in the short term, but medium term gains will include improved infrastructure and job creation. There is a difference between running an inflationary increase in the deficit to pay salaries and increasing spending on infrastructure which translates into real growth and jobs creation.
Structural reforms and the reduction of subsidies, will – and should – be undertaken gradually and following the return of jobs and incomes. Pulling the plug today on subsidies can cause an internal shock to the economy as detrimental as any external shock.
In the end, issues of security will determine the presidential candidate the majority of Egyptians will vote for, as well as the future of the country’s economic prospects. It is true that the fate of Egypt is directly linked to the performance of the economy in the few years to come. It is also true that these are inextricably linked to security.
Dina Khayat is founder and chairman of an asset management company based in Egypt. She is also head of the economic committee of the Free Egyptians Party, a political party founded after the 2011 revolution.
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