Egypt has many advantages that theoretically qualify it to become one of the most important economic success stories in the Middle East. These include a strategic geographic, a significant regional influence despite its decline in recent years, a large consumer market, a well-developed financial sector, as well as an underdeveloped private sector providing ample room for growth.
However, Egypt’s economy is currently undergoing a painful adjustment process, which could have major economic and political repercussions in the future.
The Egyptian economy has suffered from structural flaws for many years, but the situation began to deteriorate very quickly since 2011 or the aftermath of the so-called “Arab Spring.” Three pillars of Egypt’s economy have suffered recently: tourism receptions, Suez Canal revenues, and foreign direct investment (FDI).
Egypt’s annual tourism revenues have plummeted by over 45 per cent to more than $1.6 billion (bn) in 2016, and by almost 80 per cent since 2010, in the wake of domestic instability and several terrorist attacks. Visitor numbers have also collapsed from 14 million a year to just 5 million over the same period, whilst the share of travel and tourism (both domestic and foreign) sector as percentage of Egypt’s gross domestic product (GDP), declined to just 3.2 per cent currently from 9 per cent in 2007.
Egypt’s economy is currently undergoing a painful adjustment process, which could have major economic and political repercussions in the future.Dr. Naser al-Tamimi
Egypt’s Suez Canal revenues fell to $5.005bn in 2016 from $5.175bn the previous year, despite a $8bn expansion in August 2015. Meanwhile, net foreign direct investment as a percentage of Egypt’s GDP declined from 2.9 per cent in 2010 to 2.1 per cent in 2015. Consequently, Egypt’s appeal to investors has also suffered significantly as economic reforms have stalled, foreign exchange shortages, persisting corruption, and low growth rates with high unemployment. These factors combined have brought the Egyptian economy to the brink of collapse.
To be sure, falling revenues mean the budget deficit soared to 12.6 per cent of GDP for 2016. To plug the financial deficit, Cairo has increasingly relied on foreign debt and international bond issuances. As a result, Egypt’s foreign debt increased by $19.5bn in 2016, recording $67.3bn by the end of December 2016, according to the Central Bank of Egypt (CBE).
Not all gloomy
Yet it’s not all gloomy picture. Politically, the Egyptian president during his visit to the United States this month received a strong support from president Donald Trump. Ironically, president Sisi currently is one of few leaders in Middle East and beyond to have the backing of three big powers - the United States, China and Russia.
Regionally, relations with Saudi Arabia are improving, especially after the Egyptian president met with the Saudi king at the Arab summit in Amman. Saudi Arabia agreed this month to provide Egypt with 700,000 tons of oil products every month under a five years’ preferential credit arrangement were set to resume after a six-month hiatus. Whilst Kuwait announced it has signed a new a multi-billion-dollar deal to supply Egypt with two million barrels of crude per month and 1.5 million tons of petroleum products annually over the next three years.
Importantly, the IMF noted in a recent report that the Egyptian government has made inroads to address longstanding challenges in the Egyptian economy, including a balance of payments problem identified in an overvalued exchange rate, foreign exchange shortages; large budget deficits that led to rising public debt; low growth with high unemployment. To be sure, the Egyptian government has been pushing forward with key economic reforms that helped the country secure a $12-billion deal with the International Monetary Fund (IMF).
The liberalization of the exchange rate regime and the devaluation of the Egyptian pound, fuel-subsidy cuts, and implementation of the value-added tax (VAT) were critical steps towards restoring confidence in the economy, rebuild international reserves, strengthen public finances, and encourage private sector-led growth, and foster stronger economic growth. The loan agreements with the IMF, World Bank, and African Development Bank are also positive steps in this regard.
Consequently, positive signs are emerging from largest Arab country. Egypt’s foreign currency reserves rose by a further $1.9bn to stand at $28.5bn at the end of March, their highest level since 2011. Moody’s rating agency projects that Egypt’s fiscal deficit will decrease to 11 per cent of GDP in fiscal year 2017 and 8.5 per cent in 2019, from 12.6 per cent last year. Meanwhile foreigners have returned to the Egyptian debt market, currency black market has all but disappeared, and remittances are rising.
Egypt’s medium-term outlook is also relatively positive. IHS projects Egypt’s real GDP to increase around 5 per cent on average from 2018 to 2022. Importantly, Egypt has strong potential to become a gas exporter. BMI research forecasts that gas production to rise from 41.7bn cubic meters (bcm) in 2016 to 67.6bcm in 2026, providing a solid source of foreign exchange inflows and mitigating the impact of the burgeoning import bill.
Despite an upbeat medium-term outlook, Egypt’s economic potential faces several risks. These risks include poor infrastructure, a shortage of skilled Labor, high unemployment, pollution, low productivity, security concerns, and a sharp political polarization.
Additionally, the devaluation and the austerity measures imposed by the IMF have led to domestic pain in the shape of high prices and rising costs of living. Indeed, the annual rate of Egypt's inflation jumped over 30 per cent in February, among the highest levels in emerging markets. Worryingly, public discontent with rising cost of living could lead to instability that could lead to a reversal of economic reforms or worse, a return to violent and widespread protests that could destabilize the Egyptian government and the economy.
To be sure, following a meeting with Egypt's President Abdel Fattah El Sisi in Washington on April 5, 2017, Ms. Christine Lagarde, Managing Director of the IMF, praised the steps taken by the Egyptian government but acknowledged the difficulties faced by the Egyptians people. “Egypt is implementing a strong economic reform program to help the economy return to its full potential, achieve more growth and create more jobs. We recognize the scarifications made and the difficulties faced by many Egyptian citizens, especially due to high inflation”, she said in a statement.
Meanwhile, “some Egyptian banks are still at risk of struggling to meet minimum regulatory capital requirements as a consequence of currency weakness after the Egyptian pound was floated last November, given their high exposure to foreign-currency (FC) loans”, Fitch Ratings said in a recent report.
Another concern cited by some investors is the growing role of the military in the Economy. BMI research estimates that the Egyptian army controls up to 30 per cent of the economy and it will seek to retain reasonable political and economic influence, potentially impeding the transition to democracy and a more liberalized economy.
Dr. Naser AL-Tamimi is an independent UK-based Middle East researcher, political analyst, and commentator with particular research interests in energy politics and Gulf-Asia relations. AL-Tamimi is the author of the book, (China-Saudi Arabia Relations, 1990-2012: Marriage of Convenience or Strategic Alliance? Routledge, 2014). He has also carried out extensive research on various aspects of Middle East-China/Asia relations, Saudi Arabia in particular. AL-Tamimi has worked for numerous Arab media and academic institutions, in the United Kingdom and a number of Arab countries and has written several articles, papers, and chapters in English and Arabic, (available at: https://independent.academia.edu/nasertamimi ) on the most pertinent political and economic issues affecting the Middle East. The writer can be reached at: Twitter: @nasertamimi or @chinaarabnews and email: email@example.com