Sisi meets Egypt’s economic hurdles
 
 
Courtesy: shutterstock.com
 

The official results of Egypt’s presidential election were announced on Tuesday, confirming Abdel Fattah al-Sisi’s landslide victory after last week’s three-day poll. While he managed to garner 96.9 percent of votes (according to the Presidential Election Commission), not all the numbers are as favorable for the soon-to-be president elect.

Sisi will sit at the helm of a country whose economy is still reeling from three years of political turmoil, burdened by both deep structural problems and others that have reached a crisis after years of unrest. Key to understanding the magnitude of the underlying issues is deconstructing the mangled indicators and figures behind Egypt’s compound economic woes.

Inflation

Annual inflation ranges for the month of April stood at 9.1 percent, according to statistics agency CAPMAS. For ordinary Egyptians, this means their income buys a little bit less each month. The burden is particularly heavy since one of the primary drivers of inflation is food prices, and the average Egyptian family spends more than 40 percent of their income on food. 

Unemployment

Unemployment has been steadily rising since 2010. The official unemployment rate for the first quarter of 2014 was 13.4 percent, compared with 8.9 percent at the end of 2010.

For young people, the rate is always higher — according to 2012 census data, 28.3 percent of young people were unemployed. Female unemployment, meanwhile, stood at 24.7 percent.

Government figures are widely believed to be optimistic, and do not include people who are underemployed, or those working in the informal sector.

Not only does unemployment cause a lot of misery for individuals, it also means that there is a large, discontented pool of youth with plenty of time on their hands — not ideal for a leader who has campaigned almost entirely on a promise to bring stability.

Slow economic growth

Egypt’s overall economic growth has slowed to a crawl, hardly fast enough to keep up with the population and new entrants into the job market, which number an estimated 800,000 annually. Economists generally estimate that the GDP needs to grow by around six to seven percent per year for there to be enough jobs created to keep unemployment steady.

A sluggish economy also means less revenue for the government in terms of business and personal income tax, making it hard to balance the budget let along improve services and infrastructure. Since coming into power, the interim government has tried to kick start growth with a series of stimulus programs using billions of dollars of aid from the Arab Gulf. So far, these programs have not yielded measurable results, although their long-term effects remain to be seen.

Deficit and public debt

A weak economy, combined with low tax rates and poor enforcement of tax codes, means that the government simply does not collect enough money to meet its expenses. Most of Egypt’s annual budget is dedicated to inflexible expenses, and in most cases the yearly expenditure for each line item is rising.

Wages: A huge public sector means that paying salaries of government employees eats up one-fifth of the annual budget. An increase in minimum wage will drive that figure even higher — to LE209 billion in the 2014/15 draft budget, up 13 percent from this year ending June. However, high inflation erodes the purchasing power of employees, making such a raise necessary to maintain standards of living.

Subsidies: About a quarter of the budget goes to keeping fuel, electricity and staple foods cheap for businesses and consumers, rich and poor alike. According to Finance Minister Hani Qadry, 40 percent of subsidies benefit the rich, while only 10 percent go to low-income Egyptians. This is a spending area ripe for reform, but doing so is very difficult to manage without hurting the vulnerable or angering the powerful. The interim government has vowed to save money by better targeting subsidies to the poor, but so have past administrations.

Debt: A full 25 percent of public expenditure in the upcoming fiscal year will be allocated to service debt, according to Qadry. Egypt has become trapped in a vicious cycle, spending more than it brings in. The 2014/15 budget calls for the government to spend 12 percent more than it expects to bring in. To make up the difference, or finance the deficit, it has to borrow money. Paying off that debt puts a burden on future budgets, forcing the government to borrow more money, and so on.

Some of Egypt’s debt is owed to foreign governments or international organizations like the International Monetary Fund. With a massive influx of aid from the Arab Gulf, foreign debt reached US$45.7 billion at the end of 2013, up from $38.8 billion a year ago.

However, foreign debt is just the tip of the iceberg. Most of the money the government owes is so-called public debt, owed primarily to local banks that loan the state money by buying government bonds. Because Egypt is seen as risky by global bond purchasers, and because interest rates at local banks and local inflation are very high, the government has to offer very high returns to attract investors. Though they have fallen from highs of 16-17 percent in early 2013, yields on treasury bills are still hovering at 10-11 percent. With such high interest rates, it’s hard to get out from under debt.

Weak pound

The pound has been steadily weakening since the revolution, with a few periods of dramatic drops, recently topping LE7 to the US dollar. Tourism and foreign direct investment have plummeted, so there is far less foreign currency coming into the country. Meanwhile, Egypt still needs foreign currency, usually dollars, to import essentials like food and energy.

The declining supply of forex coupled with a steady demand for imported goods puts huge pressure on the pound. The government can either spend all of its reserves defending the pound, or let it drop.

To make matters worse, if reserves get too low, it’s considered a sign of an economic crisis, which then makes it more expensive to borrow money. The general guideline is having enough funds for three months of imports, or roughly $15 billion.

On the upside

There are a few bright spots in the economy. The consumer market is massive and robust — Egyptians are suffering but still need to buy basics like food and clothing. The stock market is also going from strength to strength, interrupted only by occasional dips due to political news, and more recently, news of a potential capital gains tax.

But any leader will have huge challenges to overcome.

Perhaps more importantly, fixing macro-level problems like GDP growth and reserve levels isn’t necessarily enough to guarantee success. Egypt’s post-revolution economy is usually measured against the end of the Mubarak era, when GDP growth was up to 7 percent, reserves were more than $35 billion and the pound was comfortably above six to the dollar.

However, there was a glaring lack of wealth distribution and negligible trickle down benefits of these so-called healthy indicators. And it was under these conditions that the populace rose up demanding bread, freedom and social justice.

Sources for charts:

Unemployment (both charts): CAPMAS 

Foreign vs. Domestic Debt: Central Bank of Egypt 

Net International Reserves: Central Bank of Egypt 

Exchange Rates: Exchangerates.org.uk

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Isabel Esterman