March 12, 2014
The
unexpected resignation of the entire interim cabinet of Egypt on February 24
should serve as a reminder of just how acute and intricate the economic crisis
is that faces the country since Mubarak's ouster three years ago. The latest
manifestation of this crisis came in the form of escalating waves of labor strikes that hit several parts of the country
in recent weeks: doctors, pharmacists, public transport employees, low-ranking
policemen, pensioners, post office employees, workers in the textile industry
and several other state-owned enterprises, and garbage collectors; all
demanding higher salaries and better working conditions. Widespread shortages
of cooking gas along with frequent power outages over the past few weeks have
added to the pressure on the government and ultimately led to its sudden
departure.
Appointed days after the army removed president Mohammed Morsi from office on
July 3 last year, the largely technocratic government—headed by the renowned
liberal economist Hazem el-Beblawi—was tasked, among other things, with the
tough job of easing out of the economic crisis that had crippled the country since
the 2011 revolution.
The
statistics of the crisis when the interim government took office in mid-July
were not pleasant and depicted a picture of an economy in a continued state of
decline: an anemic Gross Domestic Product (GDP) growth rate of 1.8 percent
during the fiscal year (FY) 2012-2013; an unsustainable fiscal deficit that
reached 14 percent of the GDP; a mounting public debt that was fast approaching
the size of the economy; a weakened national currency that had lost 12 percent
of its value against the U.S. dollar six months earlier; rapidly depleting
foreign reserves that, at 14.9 billion dollars then, hit a “critical level”
barely covering two and a half months of imports; a deteriorating sovereign
debt standing that had been downgraded six times by international rating
agencies since the popular uprising of 2011; and an increasingly restive
Egyptian public that was eager to get a break fromsoaring prices, high youth unemployment, and rising poverty.
Such was the country’s economic situation when the interim government took
office last summer. Despite this, the new interim government got off to a good
start, thanks in large part to a swift aid package from Saudi Arabia, Kuwait,
and the United Arab Emirates worth a total of 12 billion dollars (later increased to 15 billion dollars) in cash
deposits, grants, and fuel and gas shipments.
The
positive impact of the Gulf aid pledged in support of the July 3 regime change
in Egypt was quickly felt on several fronts: their cash deposits in the Central
Bank of Egypt (CBE), about 6 billion dollars of the total aid package, helped
to stabilize the sliding pound, and fuel and gas shipments,valued at 4 billion dollars, mitigated the widespread
shortages that crippled the country during the last months of Morsi’s rule. The
grants component (mainly from the UAE) enabled the government to plan a second stimulus package worth
4.9 billion dollars, mostly in public investment projects, after a first 4.1
billion-dollar stimulus package was funded by cashing what is known as “the
Gulf Deposit”—an interest-bearing deposit that was kept in a special account in
the CBE since the first Gulf War.
Both of the stimulus packages—together about 3.5 percent of Egypt's GDP—were
intended to usher in a policy shift toward an expansionary fiscal policy that
would turn the foundering economy around and deliver some public goods and
services. An accommodated monetary policy that cut official interest rates three
times (by a total of 1.5 percentage points between August and December of 2013)
was implemented in support of the government’s expansionary policy. This policy
also included the implementation of a new minimum wage law for the country's
civil servants, effective January 2014, in addition to a 50 percent increase in social security pension payments.
But financial relief provided by the generous, exceptionally large, and
virtually cost-free Gulf aid proved to be ephemeral; it was insufficient to
bridge Egypt’s growing financial needs or to meet the demands of an impatient
Egyptian public that in latest polls viewed the Beblawi government as mediocre
and slow-performing. The Beblawi interim government was harshly criticized on
several grounds, including a problematic minimum wage law that
was hastily enacted and implemented (creating more troubles than it was
intended to solve, as seen by recent workers’ strikes), a partially executed first stimulus package that aimed to
implement infrastructure-related projects, and their procrastination in dealing
with the grossly inefficient food and fuel subsidy systems that in the 2012-2013 fiscal
year consumed 30 percent of the government budget and accounted for 9 percent
of Egypt's GDP.
On the macroeconomic front, the latest official figures continue to show an
economy in a state of distress. The growth rate is sluggish, with output only up one
percent in the first quarter of the current FY 2013-2014; the high unemployment rate currently stands at 13.4
percent—close to 70 percent of the unemployed are youth, and 82 percent of the
jobless are educated. Inflation also continues to rise, presently at
11.4 percent, thus exerting more and more pressure, particularly on the poor,
who represent 25 percent of the country's growing population. Public debt, both domestic and foreign, is also soaring
and by the end of 2013 it reached 268 billion dollars (about 107 percent of
Egypt's GDP). The fiscal deficit is expected by international observers (the World Bank and the Institute
of International Finance) to remain this year in the double digit
territory despite stated government efforts to bring it down. And the currency black market is making a comeback, with the dollar
currently trading at 6 percent above the official exchange rate despite
continued CBE intervention.
These are the daunting economic challenges that have eventually sealed the fate
of the Beblawi post-revolcouption government
and are certain to confront the new interim government headed by Ibrahim Mehleb
and, later this spring, the future elected president of Egypt. Whether they
will be able to put the economy back on the road to recovery remains to be
seen.
For now, however, at least three major and interrelated factors will ultimately
make or break their efforts. First is whether or not they will be able to
restore political stability and improve the internal security conditions that
have ravaged the country over the past three years (but more so since the
ouster of Mohammed Morsi), which were the principal reasons for Egypt’s current
economic decline. Second is their ability to secure more financial
resources—from rich Gulf countries and other potential donors—that are badly
needed to fill Egypt’s large and growing funding gap. And third is whether or
not the new leadership of Egypt will finally embark on a socially balanced
economic course to restore the state fiscal balance and to structurally reform
a long-constrained economy. How these tough and politically charged questions
will be addressed will largely determine Egypt’s economic prospects for years
to come and, with it, the fate of the country as well.
This
article is reprinted with permission from Sada. It can be accessed online
at: http://carnegieendowment.org/sada/2014/03/04/egypt-s-economy-and-fall-of-beblawi-government/h2cl
Mohammed Samhouri is a Cairo-based economist and a former senior fellow and lecturer at Brandeis University’s Crown Center for Middle East Studies in Boston. He is a regular contributor to Sada.