Egypt needs economic miracle

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Egypt needs economic miracle

It may be too early to judge the success or failure of Egypt’s 2011 revolution, but this much is clear: The young people who led the uprising feel betrayed, and the Islamist government that followed is focused on consolidating power when it should be ensuring economic recovery.

The genius of the Jan. 25 revolt was reflected in its slogan “bread, freedom, social justice.” Those words expressed an aspiration for change that created unprecedented expectations, and today the country’s mounting dissatisfaction is first of all due to the underperforming economy. It is no coincidence that the first word of the uprising’s slogan was bread.

Egypt’s economy faces daunting challenges. Technically in a recession, the country has experienced an extended period of slow growth, a big budget deficit, declining foreign-currency reserves and a widening gap in the balance of payments. The Egyptian pound is under intense pressure. Meanwhile, throughout the country more people are slipping below the poverty line, while those already beneath it are sinking ever deeper.

All of these failures were reflected in the downgrading of Egypt’s long-term credit rating last month by Standard & Poor’s, which cited “deepening political turbulence undermining efforts to prop up the economy and public finances.” The government’s approach to managing Egypt’s transition to benefit average Egyptians is in question.

Such is the backdrop to the debate raging in Egypt, particularly in light of the vocal demands from private and public-sector workers for secure employment contracts and higher pay, which the country does not have the resources to meet. In the absence of an overarching vision of how to address the country’s economic challenges, both the government and the opposition are struggling to find a solution.

It seems that only a miracle can now rescue Egypt’s economy, and indeed society, from the bleak future that it now faces. Miracles do happen, but they require vision and political will. The much-touted program of Nahda, or Renaissance, that the Muslim Brotherhood’s ruling Freedom and Justice Party proposed as the road to recovery and prosperity after presidential elections in May and June of 2012, vanished into thin air. The program is now the butt of satire from cartoonists and comedians. Any serious vision must in reality not just on paper address the trio of growth, employment and poverty. Without a return to prerevolutionary growth of more than 7 percent, unemployment and poverty rates will not fall and the crisis will continue.

Egypt’s gross domestic product rose less than 2 percent in 2012, roughly the same as the rate of population growth. So, in per-capita terms that matter to individual Egyptians, the economy was stagnant. Without growth, there are no new jobs. Official data put unemployment at almost 13 percent in 2012, representing 3.6 million people out of work, rising to about 25 percent for the age group 15-29. That statistic alone constitutes a socioeconomic time bomb.

Slow growth, combined with rising unemployment, also explains an explosion in the unregistered economy, which now accounts for one-third of the working labor force, or about 8 million people, according to Egypt’s statistics agency. The same causes lie behind an increase in the numbers living below the poverty line to 25 percent, from 20 percent in 2010. A further 22 percent of Egyptians are at risk of falling into poverty in the event of an economic shock, such as a sudden acceleration of inflation, according to a World Bank study.

Is there a way out? There has to be, because Egypt cannot afford to delay an economic recovery any longer. The economic and social costs would be immeasurable. The starting point should be to manage the short term, namely 2013. A growth recovery requires immediately covering a financing gap, caused by budget and balance-of-payment deficits, of about $14.5 billion. Egypt’s domestic means fall well short of this target. At present, the investment rate is slightly less than 17 percent of GDP, compared with 30 percent to 40 percent or more in East and Southeast Asia.

That is why securing the $4.8 billion International Monetary Fund loan that the government delayed last month for political reasons is a must. Not only would an IMF agreement provide needed cash flow to the budget, it would also provide a kind of certificate to reassure investors that the government has the sound financial and monetary policies required to deal with its swelling budget deficit and public debt. These measure about 11 percent of GDP and 85 percent of GDP, respectively.

Managing these debt levels requires fiscal discipline that deals in the first place with the chronic problem of subsidies, which in Egypt mainly benefit the top 20 percent of income groups and swallow as much as 32 percent of public expenditure. However, a major obstacle to tackling Egypt’s economic crisis goes beyond economics to politics.

At the moment, there is a political deadlock due to the acute polarization of Egyptian society between Islamists and secularists. The credibility of the ruling Muslim Brotherhood has been eroded by the widespread perception that it has sought to grab as much power as possible, by dominating all of Egypt’s institutions: executive, legislative and judiciary.

Many Egyptians think the country is slipping back to the one-party system of the past, this time dominated by Islamists. They perceive the growing numbers of government appointments to state institutions as a way to establish a parallel government that is loyal only to the ruling party.

The way out of this impasse is to seek a genuinely inclusive, rather than divisive, political system, in which consensus can be reached on the major changes to policy that Egypt so badly needs. In other words, the solution to Egypt’s economic problems is mainly political.

*The author was the Egyptian finance minister from January to July 2011. He was previously a board member at Egypt’s General Authority for Investment and at the Financial Supervisory Authority.

by Samir Radwan
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