Sunday,22 October, 2017
Current issue | Issue 1181, (23 - 29 January 2014)
Sunday,22 October, 2017
Issue 1181, (23 - 29 January 2014)

Ahram Weekly

An uphill road to recovery

The economic challenges ahead are huge, but the picture may not be entirely gloomy, as two recent reports reveal, says Nesma Nowar

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eco2
Al-Ahram Weekly

Though it has been three years since the 25 January Revolution, political uncertainty continues to hamper economic growth in Egypt. The country’s GDP contracted by 3.2 per cent in the second quarter of 2013, and growth for the fiscal year ending in the same quarter amounted to two per cent, down from a modest 2.3 per cent in 2012, said the World Bank’s latest Global Economic Prospects report, which was issued last week.
It was not only Egypt’s economy that saw weak performance, however. The developing economies of the Middle East and North Africa (MENA) region also remain depressed. “Political turmoil in Egypt, stalemate in Tunisia, and an escalation of the civil war in Syria, with spillovers to neighbouring Lebanon and Jordan, have weakened activity in the oil-importing countries,” the report said.
The World Bank report said that regional growth was performing “well below its potential,” showing that it had contracted by 0.1 per cent in 2013 and was expected to remain weak with the outlook shrouded in uncertainty. Aggregate growth for the region is projected at 2.8 per cent in 2014, before firming up to 3.3 in 2015 and 3.6 per cent in 2016.
Egypt’s economy has been performing below its potential over the past three years. According to Sherine Al-Shawarbi, deputy minister of finance for economic justice, Egypt’s potential growth stands at 4.5 per cent a year, which has not been feasible due to the social and political instability experienced in the recent period.
With a population growth rate of two per cent, “Egypt needs to achieve an economic growth rate of at least three per cent,” Al-Shawarbi said.
The bank report’s outlook for Egypt and the region thus looks grim, saying that the countries of the region were expected to remain weak during the forecast period, which ends in 2016. Under the report’s baseline scenario, marked improvement in the political uncertainty that has plagued the region is not expected. In developing oil-importing countries, consumption will be underpinned by large public outlays on wages and subsidies, while public investment will likely be constrained in the forecast period by large fiscal deficits.
However, according to Al-Shawarbi, the report was based on assumptions and estimates that were made three months prior to the report’s launch, a period in which things might have got better. In Egypt, she said, positive steps had been taken, such as the endorsement of the new constitution, which had given the economy greater confidence, and the government’s two stimulus packages, which would inject billions of dollars into the economy.
“If we base our outlook on the assumptions of regaining stability and the whole society working collectively together, Egypt will achieve a higher growth rate than the one projected by the World Bank,” she said.
Al-Shawarbi said that the government was aiming at a three per cent growth rate in the current financial year, which will end in June, adding that after holding the presidential and parliamentary elections and achieving greater stability, Egypt might achieve a growth rate of 4.5 per cent in the next financial year.
However, the road to economic recovery was hard. A recent government report published by the ministry of international cooperation also showed that Egypt was facing uphill economic challenges, indicating that the country’s economic performance had been weak since the 25 January Revolution, which in turn had yielded negative economic impacts in the period from January 2011 to June 2013.
Most notably, the slowdown in the sectors driving economic growth such as manufacturing, construction and tourism, the fall in the private sector’s performance and contribution to GDP due to a lack of confidence in the investment climate, and the unclear legal and political direction of the state had all led to declines in domestic and foreign demand, capital outflows, and a drop in foreign currency revenues, the report said.
As a result, economic growth in the financial year 2012/13 had dropped to 2.1 per cent, unemployment and poverty rates had soared to 13.2 and 26.3 per cent, respectively, the budget deficit had increased to 13.7 per cent and the domestic debt had grown to constitute 75 per cent of GDP. This was in addition to dwindling foreign reserves, which had dropped to $15 billion and a widening trade deficit of $31.7 billion.
The report said that in addition to such poor economic indicators, the economy had inherited some financial problems that had made the situation even worse. Such financial burdens lay in the huge debts of public economic entities and companies, increased debt-servicing charges, soaring commodities and petroleum products import bills, and the dangers of the international arbitration cases filed against Egypt in the fields of petroleum, privatisation and land permits, it said.
The World Bank report also underlined the numerous challenges brought on by the continued political instability. It said that tourism arrivals in the MENA oil-importing countries had plunged dramatically because of security uncertainties in the wake of regime change in Egypt in 2013.
Meanwhile, it said that the balance of payments pressures in Egypt had eased in 2013 thanks to exceptionally high bilateral borrowing from the Gulf countries, increased exchange rate flexibility, and weak economic activity, adding that the current account deficit had also narrowed in response to high inflows of remittances and a smaller non-oil trade deficit.
The bank report also cited a drop in capital flows to the developing countries of the region in 2013 to an estimated $28.9 billion, after recovering to $32.7 billion in 2012. “The deterioration reflected a decrease in net foreign direct investment [FDI] flows to Egypt and Tunisia, which fell 14.5 per cent because of the political turmoil. Overall, net FDI levels remain well below pre-Arab Spring inflows and are not projected to recover to those levels until 2016,” the report said.
However, despite these challenges the government report said that the Egyptian economy had ended 2013 in a more stable condition than in the first half of the year and that the economy has all the components, from human resources to a sizable market, to get out of its plight should a more stable environment be achieved.
In the short term, the report said that the government was seeking to follow policies that aimed at alleviating the economic burdens on the people, stimulating the economy, and implementing organisational and legislative change to help achieve social justice and eliminate corruption.
Last year, the government embarked on social-friendly policies such as exempting students at state schools from tuition fees and payment for books, cancelling farmers’ debts with the Agricultural Credit Bank under Law 123/2012 which benefited some 72,000 farmers whose debts did not exceed LE10,000, setting a minimum wage of LE1,200 per month in the public sector, and increasing pensions by 10 per cent, to go into effect starting this month.
As for stimulating the economy, the interim government has announced two stimulus packages that aim at breathing life into the country’s struggling economy.
The first was announced in August 2013 and was worth LE29.7 billion. The report said that the money had been spent on various projects, including developing roads and transport, supporting local industry and local development, and developing heath services. There had also been some social-friendly programmes, such as subsidising children’s milk and the provision of daily meals to children in school.
The second LE30 billion stimulus package will be funded in part by a grant from the United Arab Emirates and the rest will be provided by the state, the report said. This package will be directed at building 50,000 residential units, establishing 25 wheat silos, the completion of sanitation projects, building 100 schools and the provision of 600 public buses.
Aside from the Gulf financial aid Egypt has received following the ouster of former president Mohamed Morsi last July, the report stated that the government had cooperated with international donors to finance various projects that would help it in its aim of achieving social justice and stimulating the economy.
Total monies directed to development projects had amounted to $4.6 billion, of which 69.2 per cent were grants and 30.8 per cent were easy-term loans, the report said.
However, the World Bank report warned that spending pressures in Egypt exacerbated by rising borrowing costs had pushed interest expenditures to about 8.4 per cent of GDP, or 25 per cent of total expenditures in fiscal year 2012.
“To finance its revenue shortfall, Egypt has relied heavily on domestic borrowing, increasing the exposure of the banking sector to sovereign risk, crowding out private-sector borrowing, and pushing domestic interest rates higher,” the report said.

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