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Are economic indicators pointing to broader recovery?
 
 

As Egypt’s government gears up for a major economic conference next week, it has been presenting a relentlessly positive picture of the economy. The messaging is consistent: Egypt is open for business. Egypt is stable and in recovery. Egypt’s economy is back on track. The new Egypt is like the old Egypt again.

As it attempts to lure investors with promises of growth and stability, the government has also been relying heavily on economic growth to shore up its domestic legitimacy, especially as citizens have been asked to tighten their belts and put their demands for change on hold. 

So how well do these claims stack up? And what exactly is Egypt recovering from?

GDP growth

The most impressive of indicators put forth by the government to date is the 6.8 percent year-on-year growth in Gross Domestic Product during the first quarter of the 2014/15 fiscal year, followed by 4.3 percent in the second quarter, according to the Ministry of Planning. While GDP has its shortcomings as a measure of overall economic wellbeing, it is the most comprehensive figure available from the government. In a general sense, a growing economy should translate into more jobs created, stronger businesses and more tax revenue available for government programs.

annual gdp growth

This growth is certainly promising, but it comes with a few caveats. First, GDP growth is a relative measure, so year-on-year growth depends a great deal on how the economy was doing in the quarter it is being compared to — in this case, the first quarter of the 2013/14 fiscal year, a particularly bad quarter. Had growth in Q1 2013/14 been a more typical 2.2 percent, growth in Q1 2014/15 would have been around 5.7 percent, still substantial but less remarkable.  Likewise, the growth rate for the second quarter of 2014/15 got a bump from weak performance in the same quarter the year before.

On the demand side, government and private consumption drove much of the growth in the first quarter, which could very well be continuing as the third quarter draws to a close at the end of this month. The supply side is more complex.

tourist arrivals

Tourism, which grew steadily from July to September and contributed 1.3 percentage points to GDP growth in Q1, has been declining since November. (Figures for the second quarter are not yet available.)

Note as well that tourism plummeted after July 2013 and reached a nadir after August 2013, when the Muslim Brotherhood’s sit-in at Rabea al-Adaweya was violently dispersed, a curfew imposed and travel warnings put in place by foreign governments. Tourism neither returned to pre-revolution levels nor has it exceeded 2012 levels, although much of the recent decline is due to external factors, such as the collapse of the Russian ruble

The government has also not released manufacturing data since Q1, when the sector contributed 4.1 percentage points to GDP growth. In the absence of official data, HSBC’s Production Managers Index — which tracks the business environment based on reports about output orders — can provide a hint at what the coming months might hold.

PMI and GDP

These graphs are put together for ease of comparison only. The PMI tracks sentiment in one small part of Egypt’s economy, the non-oil private sector. As is clear from 2014 numbers, it is not an accurate predictor of overall growth. However, it’s worth noting that business sentiment turned positive in August and peaked in September, then dropped into negative territory in January and hit a 17-month low in February.

Beyond GDP

Other metrics have not performed as well as GDP.

quarterly unemployment

President Abdel Fattah al-Sisi has repeatedly promised that his policies will bring about “inclusive growth.” Macroeconomic indicators generally aren’t great at measuring the impact of policies on ordinary people, but unemployment figures are one of the most revealing.

The most recent unemployment figures available from state statistics agency CAPMAS are from the third quarter of the 2014 calendar year, which ended this past September. The figures show a slight improvement, dropping from 13.3 percent at the time of Sisi’s election to 13.1 percent.

However, unemployment remains well above pre-revolutionary levels of around 8.9 percent, and is roughly on par with unemployment during the final months of deposed President Mohamed Morsi’s time in office.

As always, it is worth mentioning that official unemployment figures are widely regarded as optimistic, and do not include people who are underemployed, or the roughly 40 percent of the workforce employed in the informal sector.

Debt

foreign and domestic debt

Egypt’s debt has mushroomed since the revolution, growing under each administration, although no official figures have been released since June 2014. Not only does the government have to devote around a quarter of its budget to servicing this debt, it also risks crowing out the private sector, since the government and local businesses both rely on domestic banks for financing.

Inflation

inflation

Rising prices can be a sign of growth, since inflation is driven in part by consumer demand. But for ordinary people, whose wages and savings buy fewer goods, inflation can translate into hardship.

Annual consumer price inflation at the end of January 2015 measured 9.7 percent. Interestingly, this is very close to the 9.8 recorded at the end of Morsi’s presidency. It’s also not far off of the 10.28 percent recorded on the eve of the revolution in December 2010. However, as the graph shows, the products driving inflation are very different under Sisi, with “regulated items”— goods for which the government controls the price — making up a much larger share than in the past.

Much of this comes down to two factors

First, Sisi’s government has raised prices for many of these regulated items. Most significantly, the government slashed fuel subsidies in July, sending prices up overnight. The effect of this can be seen in the large increase in inflation due to regulated prices from July on.

Prices for electricitynatural gas, cigarettes and alcohol also went up in 2014. More recently, prices for butane gas cylinders have shot up, causing great hardship for poorer families who rely on the fuel to cook and heat water.

Although local fuel prices have jumped since July, that has not translated into a spike in core CPI, which measures most of the goods and services people buy, from flour and beans to mobile phone services.

This is largely thanks to the decline in global oil prices, which has driven down international commodity prices. Oil dropped from around US$115 per barrel in June 2014 to around $50 in early March, driving down Egypt’s energy subsidy bill as well as the cost of imported food and consumer goods. It has also forced local manufacturers to keep down prices to compete.

The timing was, largely, a matter of good luck, but it has kept core inflation from skyrocketing, and given the central bank flexibility to pursue policies aimed at stimulating growth, such as interest rate cuts implemented in January.

A weak pound

After holding steady more or less since Sisi came into office, the Central Bank allowed the official exchange rate to slide by around 5.5 percent from mid-January to mid-February.

exchange rate

The move was generally welcomed by both local and international economists, who believed the pound had been overvalued for months, putting Egypt’s economy at risk. By remaining tightly pegged to the dollar as that currency strengthened, the pound climbed against currencies like the euro — used by Egypt’s most important trading partner — without a corresponding rise in the country’s economic fundamentals.

reserves and import cover

Businesses were driven to the black market and reserves hit record lows, dropping below the amount needed to finance three months worth of imports, which is regarded by international finance institutions as a critical threshold. The current government has so far avoided the credit downgrades Egypt was slapped with when Morsi’s government approached this threshold in 2013.

Overall, the statistics paint a mixed portrait. The GDP growth figures released since Sisi became president are impressive, and the economy has other bright spots, such as the stock market. On the other hand, other figures such as debt, reserves and the exchange rate seem to be in an almost uninterrupted decline since the 2011 revolution.

Meanwhile, tourism and unemployment have seen a slight improvement in recent months. Still, the recent gains have done little more than reverse some of the damage unleashed by the overthrow of Morsi in 2013 and the subsequent violence and security crackdowns. This, however, is not a message the current government is likely to present to potential investors.

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Isabel Esterman