Dented economy haunts Egypt a year after revolt
Worrying figures suggest Egypt's ruling military and future government will have to make some tough, potentially unpopular decisions in the coming months
AFP, Friday 10 Feb 2012
A year after Egypt overthrew Hosni Mubarak, the poor condition of the once-growing economy of the Arab world's most populous nation poses a threat to its restive transition to democracy.
That was highlighted on Friday, when ratings house Standard & Poor's downgraded Egypt for the second time since November over concerns about political stability and plunging currency reserves.
With an estimated growth rate of one to two per cent -- compared with five to seven per cent in past years -- the government is looking to the International Monetary Fund and donors to fend off a possible social explosion.
"One year after the revolution, the economy is in a state of anarchy, out of control," said Salah Goda, the director of the Economic Research Centre in Cairo.
Key earnings from tourism fell by 30 per cent, a shortfall of $4 billion, according to official figures that some tour operators believe are rather rosy.
As ratings agencies steadily degrade it, investors no longer jostle to buy into Egypt, which has a workforce sometimes cheaper than China's and a market of 82 million people.
On Friday, S&P cut its long-term ratings from B+ to B, saying "external financing risks have risen significantly, with foreign direct investment having declined sharply and net portfolio flows also having turned negative."
At the centre of economic concerns is the melting away of foreign currency reserves, which dropped by more than half in a year, from $36 billion in January 2011 to $16.3 billion.
Coupled with a deficit of 8.7 per cent of GDP -- more than 10 per cent, according to some economists -- there are doubts that Egypt can maintain its costly subsidy system.
The subsidies cover such essentials as bread, cooking oil and gas. Removing the subsidies raises fears of a social explosion in a country where 40 per cent of the population lives on just $2 or less a day.
In January, rumours of fuel shortages led to long queues of cars at petrol stations across the country, reflecting the general nervousness.
Reforming the system, whether under pressure from the sagging economy or international donors, could place the military-appointed caretaker cabinet in a dangerous position.
"Changing the policy of subsidies on food, petrol or butane gas can lead to political disaster," said Hamdi Abdelazim, an economist at the Sadat Academy for Management Sciences.
Depreciating public finances "will weigh on the government's ability to ask for credit from international and domestic funders," said economic analyst Zeinab Abdelrahman.
After initially turning it down, Cairo decided to ask for an IMF loan of $3.2 billion and an additional $1 billion from the World Bank.
But amid growing dissent against military rule, an official campaign against civil society groups, including American ones, might affect these loans.
World Bank chief Robert Zoellick said he expected "tensions" as Egypt requests aid from the international lender which, in turn, would demand progress on governance and democracy.
"They're reaching out to us, to try to see about financial support," Zoellick said recently.
"But if we do provide initial financial support to the government in general, we will want... to make sure it's transparent, that it relates to some of the changes that people were calling for or a broader social accountability. And there'll be tensions with that."
Even if these funds come through, they would represent less than half of the $10-$12 billion needed to keep the economy afloat, according to government figures.
Funds from Arab donors had been expected to help fill the gap, but Prime Minister Kamal El-Ganzouri has acknowledged that most of the funds never materialised.
Some Egyptians also fear that European generosity may also be curbed to help save the eurozone.
And the almost monthly outbreaks of deadly protests amid the confused political atmosphere do not encourage international financial backing.
That concern was echoed by S&P's announcement that its outlook for Egypt remains negative, reflecting "our view of the likelihood of a downgrade either if the government fails to stem the decline in reserves, or an uncertain policy environment and weak institutions emerge from the ongoing political transition."
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