During this revolutionary year, policymakers are partly to blame for a failed economy, Sherine Abdel-Razek
It is said that the first casualty in times of war and conflict is truth. Media coverage often serves the interests of those behind the outlets. In Egypt, the unclear vision of those making economic plans adds to an already murky scene.
Many observers believe the economy has been used as a political tool since the revolution, either to raise public fears of from post-revolution tremors, or to flirt with people by announcing popular decisions.
To begin with, before the economic situation got bad, the media blew the threat of demonstrations by workers nationwide out of proportion. In attempts to dissuade the public from demonstrating, the media said there was a threat that the production wheel would be broken. In fact, workers demonstrated because they were demanding rights they had long been deprived.
Then in March, the ruling Supreme Council of the Armed Forces (SCAF) sent shivers down Egyptians' spines when it announced pessimistic economic figures. The inaccuracy of the statements stirred many objections, pushing the SCAF to try and clarify later.
Those drawing Egypt's economic policies after an uprising that was mainly fed by frustrations of millions of poor, unemployed Egyptians, sought to focus on realising social equality. But a year on from 25 January 2011, this aim has yet to be attained.
Over recent months, the government has set a minimum wage, hired hundreds of thousands of people who were once on temporary contracts, and raised tax rates on the rich by five per cent. But in October, a report issued by the International Labour organisation (ILO) noted that Egypt's unemployment rate increased by three per cent since the end of January to reach 12 per cent.
The three post-revolution governments focussed much of their rhetoric on social goals, but did so little to achieve it that the minimum wage of LE700 per month became so low that people became more agitated than relieved.
The government of former prime minister Essam Sharaf withdrew a plan to increase taxes on security schemes and capital gains, which would have added billions of pounds to government coffers, affecting no one except those who make profits on the stock market. Meanwhile, export subsidies were kept in place, though they were lowered.
Although the government kept its promise not to decrease subsidies on food items, it failed to organise markets to control food and gas cylinder prices to the extent that two people lost their lives in November. The black market pushed the price of cylinders, used by more than 50 per cent of Egyptian households for cooking, from LE5 to LE50 per cylinder.
While inflation was not the government's biggest fear till October, it has started to accelerate since then to reach 9.1 per cent in November -- up from October's reading of 7.1 per cent. Food prices saw a higher rise of 11.6 per cent versus 8.7 per cent a month earlier.
This pushed the Central Bank of Egypt (CBE) to increase the interbank and discount rates in early December for the first time in two years, citing upside risks to the inflation outlook because of the re-emergence of local supply bottlenecks and distortions in the distribution channels.
On the issue of subsidies, the SCAF, former prime ministers Ahmed Shafik and Sharaf governments all ignored calls for lowering subsidies to energy-intensive industries such as steel and ceramics. It was only the government of Prime Minister Kamal El-Ganzouri that, at the end of the year, revealed an austerity plan that would consider lowering those subsidies.
So management did not shift towards a purely social economy, but the truth is that it had never been based on a pure, open market strategy either. Decisions to cancel selling contracts of five previously privatised companies and return them to public hands raised many questions about where Egypt was heading.
The trend began with Omar Effendi chain stores, which have always been a pain in the neck because of problems concerning the chain's selling price and post-sale workers' rights. However, the big bang was a court decision to cancel the contracts of Shebin Al-Kom Textile Company, the Tanta Company for Linen and Derivatives and the Steam Boilers Company. All these companies were privatised during the 1990s, because of illegal and suspicious selling procedures. Nile cotton Ginning followed suit in mid-December.
Another, similar decision was that of a criminal court annulling the licences of five steelmakers to build DRI modules. The decision was seen by many as a political one as in a part it targeted steel business tycoon and former president Hosni Mubarak's friend, tycoon Ahmed Ezz, who got two of the cancelled licences for free in 2008.
Then the government took a clear stance towards borrowing from abroad. In early May, when former finance minister Samir Radwan was making the final touches to the 2011/2012 budget, it appeared that Egypt would resort to the International Monetary Fund (IMF) for a loan.
An IMF team visited Egypt that same month and agreed in principle on the terms.
But according to sources close to the decision- making process, under SCAF pressure, Radwan said in June Egypt no longer needed the loan because it had lowered its budget deficit. The following months proved the government did its calculations wrong, because it started talking about borrowing again when Hazem El-Biblawi took the helm of the Ministry of Finance.
Nothing materialised and it was revealed early this week that the IMF cancelled a visit planned for January to negotiate a loan of $3.2 billion. The IMF attributed the decision to Egypt's credit rating, negative economic projections, instability, political unrest, and the CBE's reluctance to depreciate the Egyptian pound.
On the same day, Egypt's prime minister appealed to the G8 to help unlock billions of dollars in aid promised in September 2011, but which have not yet been delivered, under an initiative to support countries of the Arab Spring.
This came as the government increased its expected budget to reach LE182 billion for fiscal year 2011/12, representing 11.7 per cent of GDP. This is quite a jump from the originally projected LE134 billion, or 8.6 per cent of GDP.
In fact, the need to resort to borrowing from financial institutions comes on the back of Arab countries political stance towards Egypt after the revolution. Arab states have been unwilling, post-revolution, to assist Egypt.
The absence of external financial support to help restore confidence in the transitional period towards civil democratic rule was one of the reasons cited earlier this week by Moody's rating agency to downgrade Egypt's rating for the fourth time this year. Other reasons included Egypt's unsettled political situation and continued social unrest.
Further downgrading is possible given the country's deteriorating external balance-of- payments (BoP) position and growing pressure on government finances.
Meanwhile, Egypt is depleting its foreign reserves to meet its obligations. The reserves fell from an all-time high of $36 billion in January to $20.1 billion in November. SCAF sources believe it will drop to $15 billion in January, while the country would immediately lose $5 billion in the following month to pay off certain obligations. This would leave Egypt with enough to cover two months of imports compared to an internationally accepted level of 3.5 to four months.
There are two reasons why reserves are being depleted. First, foreigners are selling their holdings in Egyptian treasury bills, which became risky due to political unrest. Meanwhile, CBE policy to support the pound by selling dollars and buying pounds is also having its effects.
According to CBE statistics, foreign holdings of Egyptian T-bills fell to LE17.07 billion in August from LE59.35 billion before the uprising. Analysts believe that at least $1.5 billion have left the country since then. On the other hand the Egyptian pound-dollar exchange rate reached LE6.01 earlier this month, compared to LE5.8 in January.
The problem with currency depreciation is its negative effect on prices. Rising prices would depress private spending that contributes with more than 70 per cent of the country's GDP and thus negatively impacting Egypt's economic performance.
According to the Ministry of Planning, Egypt's economy has grown by 0.2 per cent in the first quarter of 2011-2012 -- ending in September -- compared to 0.4 per cent in the previous quarter.
The drop in growth is attributed to the deterioration of income from vital economic sectors such as tourism, manufacturing and construction.
Egypt's economy posted its first quarterly contraction of 4.2 per cent in the third quarter of 2010/ 2011 ending the fiscal year with a low GDP growth rate of 1.8 per cent.
The stock market suffered heavily from contradictory decisions and the lack of direction even before ongoing political unrest. The current climate has no doubt sent negative signals to investors. Market losses early in the year came on the back of the arrest and money freezing of owners and managers of some of its heavyweights then it reacted through the year to each and every news item on both the political and economic front. The market is ending the year almost 50 per cent lower than its level at the beginning of 2011.