How is the economy in Egypt 2018

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Reform program

Is the Egyptian economy stabilizing the country?

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El-Haddad, Amirah / Omar El Shenety / Ahmed Abd Rabou
The Current Column (2018)

Bonn: German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE) (The current column of January 29, 2018)

Bonn, January 29, 2018. January 25th marks the seventh anniversary of the uprising that overthrew Egyptian President Hosni Mubarak - an occasion to take a look at the country's economic situation. The West’s fear of radical Islam means that it has great interest in a stable Egypt. That is why the IMF and bilateral donors granted US $ 21 billion in loans on condition that Egypt implement reforms. Will these reforms solve the country's deeply rooted structural problems and put it on a new, inclusive growth path?

The reforms aim to correct macroeconomic imbalances by lowering government spending: through cuts in subsidies for gas and water, among other things, through lower public investment and through wage cuts in the public sector. To increase revenue, the government introduced a sales tax, unblocked the exchange rate and removed capital controls to dry up the parallel currency market, improve the trade balance and increase currency reserves.

In the short term, these measures had the following consequences: (i) In addition to the loans, foreign currency flowed into the country in the form of investments in government bonds. Foreign exchange reserves grew and the black market almost disappeared, but the Egyptian pound depreciated significantly. (ii) The trade balance improved due to an increase in exports and a decrease in imports - albeit to a lesser extent than hoped, leaving a trade deficit and a high dependency on raw material exports. However, a large part of Egypt's processed products are based on imported intermediate inputs and capital goods, so that imports will inevitably recover. (iii) The free exchange rate, higher import duties, the introduction of a value added tax and the abolition of subsidies increased prices sharply. (iv) The growth rate increased, albeit less than expected. The outlook for the future is poor given the limited influx of direct investment, weak consumer spending, interest rate hikes and the decline in government investment. (v) The budget deficit decreased but remained high at 10 percent of GDP. Without reforms to reduce leaks, tax and customs revenue will not reduce the deficit. (vi) The government borrowed heavily, pushing domestic debt to over 90 percent of GDP and external debt to 40 percent (the latter had never exceeded 20 percent before).

In the long term, Egypt has committed itself to a development strategy based on real estate development and mega-projects, such as the new capital and the expansion of the Suez Canal. However, construction and real estate development are symptoms of weak structural change - away from tradable goods and services from productive sectors - which is unable to transform Egypt into a rapidly growing, dynamic and inclusive economy. Instead, the Egyptian government should try to generate sustainable growth through an effective export strategy.

The current development strategy lacks three elements in particular: (i) Political development: requires that state authorities guarantee integrity and neutrality in elections, guarantee the independence of judicial and legislative bodies and a balance between civil, political and economic institutions and the security / Manufacture military equipment. (ii) Human development: this means investing more resources in education and health. (iii) Sustainable and comprehensive development: it requires a broader perspective that better protects the available natural resources, makes better use of the creative energies of the youth, promotes peace and reconciliation and establishes a new permanent social contract between state and society. Egypt's current development vision is based on a facade of political reform. Political representation lacks the simplest legislative and parliamentary functions and the integrity of elections is widely questioned. Reconciliation between civil society and the security apparatus is completely absent from the agenda. An economy dominated by military companies restricts free competition. Recently, dozens of companies' fortunes have been frozen to enforce political loyalty. These measures are repressive and reduce investor confidence in the economy. Investing in human capital will be neglected in favor of populist mega-projects and will only take place in the event of a transition to a participatory model or full democratic change. To this day there has been no such change. The sustainable development that people long for is completely absent from the leadership's vision. Egypt’s vision for development lacks real dialogue between different parts of society - it is currently only faked. Political reform and a new social contract should be at the heart of this dialogue; without them there will be no economically prosperous or politically stable Egypt.

Omar El Shenety is an Advisory Board Member at the American University in Cairo. Ahmed Abd Rabou is Visiting Assistant Professor at the Josef Korbel School of International Studies at the University of Denver.

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