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The early promise of Egypt’s economic reforms

Possibly the biggest challenge facing the Egyptian government since it took over is the long overdue economic reforms

Manuel Almeida

Published: Updated:

At least seven civilians including women and children were killed last week when mortar bombs hit their home in the Bedouin village of Negah Shabana in Egypt's Sinai Peninsula, close to the border with Gaza. This was the latest tragic episode of the fighting in Sinai between the Egyptian army and local jihadist groups.

A dangerous mixture of longstanding grievances among the local Bedouin population, lawlessness and Islamist militant ideology resulted in a jihadist insurgency that has been steadily building up since 2011. To make matters worse, earlier this month the leadership of the Sinai-based group Ansar Bayt al-Maqdis pledged allegiance to ISIS. There is now the fear that the group's terrorist operations, which include a brutal attack in October that killed 33 security personnel in the north Sinai regional capital of al-Arish, might be redirected to targets outside Sinai.

A dangerous mixture of longstanding grievances among the local Bedouin population, lawlessness and Islamist militant ideology resulted in a jihadist insurgency that has been steadily building up since 2011.

Manuel Almeida

Crisis in Sinai aside, Egypt has gone under the radar in recent months. This might not come as a surprise given the magnitude of the various crises unfolding in Syria, Iraq, Yemen and Libya, adding to all the suspense surrounding the talks between the P5+1 and Iran on the Iranian nuclear program.

After the approval of the new Egyptian constitution and the presidential elections, preparations are discretely under way for next year's parliamentary elections, which should be held before March. But what else is happening in the country that is home to almost a quarter of the population of the Arab world and that has lived through very tumultuous times since the 2011 uprisings?

Possibly the biggest challenge facing the Egyptian government since it took over is the long overdue economic reforms. The state faces a rising budget deficit (at 12 percent of the GDP in 2013/2014 fiscal year) and the rising cost of public debt. Recent unemployment figures were more than 13 percent. The tourism industry is in ongoing decline. The sector, which amounted to approximately 12 percent of the GDP the year before the uprisings and employed directly and indirectly almost 4 million people, registered a 41 percent drop last year. Despite being the biggest wheat producer in the Arab world, Egypt remains the world’s largest importer of the cereal, a striking indicator of the pressure the state faces to provide for the millions of Egyptians living under the poverty line.

The sceptics continue to point out to the lifeline that Saudi Arabia, the UAE and Kuwait extended to the current Egyptian government ($9 billion in the second half of this year, according to some estimates). They note that with the continuing slide in oil prices, oil-rich Gulf governments might be forced to make spending adjustments and their ability to provide financial assistance to Egypt will be curtailed. Yet there are a few encouraging signs that the efforts to reform the Egyptian economy are starting to pay off, even if the road to be travelled is a long and rocky one.

While the current Egyptian government seems to have finally placed Egypt on the right path to begin to reform its economy, it will have to navigate through internal problems such as the Sinai insurgency.

Manuel Almeida

An important step had already been taken in June, with a cut of almost a third on energy subsidies with price increases for car fuel and natural gas by more than 70 percent. Bread and energy subsidies amounted to a fifth of the government’s annual budget. Their reform has long been a sensitive area for successive Egyptian governments so the recent measures also delivered a powerful message. In three decades, the government of Hosni Mubarak showed great reluctance to reform the subsidies. In 1977, Mubarak's predecessor President Anwar Sadat tried, only to reverse the decision after massive riots erupted all across Egypt.

Coupled with energy subsidy cuts, the government adopted measures to raise taxes and attract foreign investment. UAE firms are investing big in infrastructure projects such as low-cost housing and shopping malls. Plus, $8.5 billion have been raised via local bonds for the hugely ambitious project of expansion of the Suez Canal, according to Egypt's Central Bank. The expansion of the canal, which at present generates $5 billion in annual revenues, is expected to be finished by 2016 and employ up to 100,000 people, according to optimistic forecasts.

After the approval of the new Egyptian constitution and the presidential elections, preparations are discretely under way for next year's parliamentary elections, which should be held before March.

Manuel Almeida

The involvement of the IMF and the praise by the fund's Managing Director Christine Lagarde of Egypt's economic reforms is also helping to improve investors’ confidence. An IMF mission visited the country this month to conduct Article IV consultations aimed at assessing a state's economic and financial situation. The last time Egypt and the IMF held consultations under Article IV was before the 2011 uprisings, in December 2008. Also the outcome of recent meetings between U.S. Treasury Secretary Jacob Lew and Egypt's Finance Minister Hany Kadry Dimian indicates that the United States might do more to provide financial assistance to Egypt, if Egyptian authorities continue to push forward with difficult reforms.

While the current Egyptian government seems to have finally placed Egypt on the right path to begin to reform its economy, it will have to navigate through internal problems such as the Sinai insurgency. It is an obstacle for any meaningful recovery of the tourism industry and it can contribute to undermine stability and investors' confidence. More important is President Sisi and the government's ability to continue gathering the necessary political capital to implement much needed but sometimes unpopular economic reforms. One aspect of the 2011 uprisings that will not go way is the high expectations of so many Egyptians, which will have to be carefully managed regardless of the emphasis on stability.

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Manuel Almeida is a writer, researcher and consultant focusing on the Middle East and emerging markets. He holds a PhD in International Relations from the London of Economics and Political Science, and is the former editor of the English edition of Asharq Al-Awsat newspaper. He can be reached on @_ManuelAlmeida on Twitter.

Disclaimer: Views expressed by writers in this section are their own and do not reflect Al Arabiya English's point-of-view.