Research and analysis

Egypt: economic dreams and realities

Published 13 May 2014

0.1 Summary

Egypt will see a stronger second half of the year with signs of modest increases in manufacturing output and growth expected at 2.4% for 2013/14. But the underlying economic malaise continues to worsen. There are fewer people employed in the formal sector now than in 2010, despite 3 million more workers. Sisi outlines his economic vision. Whoever wins the presidency will face a daunting task to stem and then reverse the deteriorating living standards of tens of millions of Egyptians.

0.2 Signs of hope?

The last quarter saw some respite from bad economic news in Egypt. The numbers of tourists are starting to rise again and are only now 27% below the same period last year, an improvement from the 91% drop last summer and 70% last autumn. Industrial production is also showing early signs of rebounding, with growth of 2.1%. FDI has increased by almost 15% since mid-2013, particularly in the oil sector with investments of $2.8bn. Although positive, these figures are taking the baseline of 2012/13, a woeful year for the Egyptian economy. Nevertheless, Egypt has also been able to use Gulf largesse to pay off some of its debts to Qatar, the Paris Club and private sector, including oil and gas companies.

As well as some positive developments in the economy, Government policy is showing some encouraging signs. Reform of the subsidised bread system is moving ahead, water and natural gas prices have been increased (though still a fraction of market prices) and electricity prices are to rise, particularly for energy-intensive industries and residential high consumers. While this shows positive intent, it is still marginal as the Government has again put off taking any decision on fuel subsidies, estimated to cost around $18.6bn this year.

The Government has also made an effort to listen to private sector investors, paying off some debts and introducing a new law to prevent third party legal challenges to state contracts. The proliferation of legal challenges since 2011, including court decisions to overturn 11 privitisations, has been a serious concern to investors. This law will be retrospectively applied and has been welcomed by the business community. Rights groups have, however, voiced their concern that this law reduces transparency and will aid the return of crony capitalism.

0.3 The grim reality

But these headlines on the economy mask the wider problems. The amount of credit going to the private sector is falling in real terms, which has led to total investment (domestic and FDI) levels falling for the fifth quarter in a row. This inhibits both growth and job creation; GDP growth is projected to be 2.4% this fiscal year, below the GoE target of 3%, and well below the 7% needed to absorb new entrants into the labour market.

More worryingly for the medium term, the traditional main driver of economic growth in Egypt, consumption, which has averaged 4-5% since the mid 2000s has seen a dramatic slide. Over the last six months it has fallen to 1.4%. This is ascribed to the impact of inflation (11% overall but almost 17% in foodstuffs) reducing people’s disposable income and the steady depletion of savings over the last few years. The high food price inflation rate is having a disproportionate effect on the poor, given their greater proportion of income spent on food. Recent evidence also shows a changing pattern of poverty in Egypt. The rate has climbed, with an extra million people entering poverty since 2011, meaning that more than one in four Egyptians are now living below the poverty line. In 2008 it was one in five. The geography of poverty is also changing with the largest increase being seen in Cairo and other areas of urban, Lower Egypt. This area has previously been the better off compared to rural and Upper Egypt. With weak growth, the proportion employed in the formal sector is falling, especially amongst the educated, and over the last three years the informal sector in Cairo has grown from 50% to 60% of those working. Official statistics on the formal sector show unemployment at its highest rate in 15 years.

0.4 Sisi’s programme

Presidential candidate Sisi has laid out some of his ideas on revitalising the economy. These include a $143bn plan to build 26 new cities and tourist resorts, develop . 22 mining areas, build 8 new airports and irrigate 4 million acres of desert land. The energy problem will be addressed by legal enforcement of all Egyptians using energy efficient lightbulbs and the state investing in solar power. He asked all citizens to pull together, and for expatriate Egyptians to contribute to the nation’s development financially. He clearly looks forward to continued support from Egypt’s main Gulf donors.

0.5 Disclaimer

The purpose of the FCO Country Update(s) for Business (”the Report”) prepared by UK Trade & Investment (UKTI) is to provide information and related comment to help recipients form their own judgments about making business decisions as to whether to invest or operate in a particular country. The Report’s contents were believed (at the time that the Report was prepared) to be reliable, but no representations or warranties, express or implied, are made or given by UKTI or its parent Departments (the Foreign and Commonwealth Office (FCO) and the Department for Business, Innovation and Skills (BIS)) as to the accuracy of the Report, its completeness or its suitability for any purpose. In particular, none of the Report’s contents should be construed as advice or solicitation to purchase or sell securities, commodities or any other form of financial instrument. No liability is accepted by UKTI, the FCO or BIS for any loss or damage (whether consequential or otherwise) which may arise out of or in connection with the Report.