Samuel Perriman
Last updated: 29 May, 2012

The future of Egypt’s economy

We look into Egypt's troubled economy and fears from investors that the presidential candidates won't live up to the expectations. Much is at stake as the powerhouse of the Arab world attempts to move forward.

Economics sparked the Arab Spring. When police confiscated the fruit and vegetable cart of Mohammed Bouazizi in December 2010, leading him to set himself on fire outside the local governor’s office, they did so because he could not afford a trading license. Once he lost the cart, he lost his livelihood. When the pro-democracy protests that he sparked reached Egypt in January 2011 they were buoyed along by popular frustration with unemployment and economic stagnation.

Although Egypt managed to rid itself of its authoritarian regime and is now on the way to some form of democracy, the economic consequences of the revolution in Egypt have been severe. In 2011 the country saw its GDP decline from 5% to 1%. Inflation is on the rise across the board, most dramatically in food prices, where inflation is estimated to be around 40-50%. Unemployment is also rocketing. The official rate places the figure at 13% but youth unemployment is reckoned to be at least 25%, a worrying figure in a country where more than half the population is under 25.

A drop in tourism has undoubtedly added to these woes. Blessed by Luxor and the pyramids, Egypt has long relied on tourism to bolster its economy. The industry is one of the largest employers outside the state; some 15 million Egyptians depend on an income from the previously steady stream of foreign tourists.

There are many reasons for this downturn but foremost among them is the climate of instability in Egypt. Demonstrations against the Supreme Armed Forces Council (SCAF) are a continuing reality of everyday life in Cairo and violent clashes between the army and protestors still occasionally break out. The discredited police force has withdrawn from many districts, leaving the job of keeping the peace to gangs of local youth. There are no reliable figures for crime rates but anecdotal evidence suggests that robbery and petty crime have increased significantly in the capital.

A wave of strikes across Egypt has added to the instability. After years of fearing repression, workers now feel free to express their frustration through industrial action. As one commentator recently put it, often this is a case of workers “just trying it on, seeing what they can get”. The authorities and courts are uneasy about reigning in the strikes, unwilling to be seen as impeding social justice.

The ability to do business in post-revolution Egypt is also hampered by a culture of inaction within the state machinery. Officials in the government bureaucracy, as well as the SCAF leadership, shy away from making any tough decisions, knowing that for the first time they might be held accountable if things go wrong.

Unwilling to accept bribes, corrupt officials have simply stepped away from their responsibilities. The result of all this is that ministries already draped in red tape have become even less user-friendly to foreign and domestic businesses.

Although Egypt’s new rulers have enthusiastically investigated cases of corruption committed during Mubarak’s reign, the well-intentioned campaign has stymied the flow of foreign investors who fear that their new partners in Egypt might find themselves the target of a case. State prosecutors will have to draw a line under these cases for the sake of future economic progress, even if it means letting a few corrupt businessmen escape unpunished.

It’s not all doom and gloom. At a recent conference on the state of the Egyptian economy held by the Middle East Association (MEA) in London the mood was one of cautious optimism. Economic forecasters and prospective investors shared the same opinion: things can only improve.

As the most diversified economy in the Middle East and North Africa, Egypt has enormous potential. A booming population and a growing middle class combine to create a large appetite for consumer goods. The Cairo branch of Carrefour, the French owned supermarket, has more retail value per square metre than its equivalent in Dubai.

The IMF says that it is willing to provide technical assistance and loans to balance the books and rebuild foreign reserves. In February 2011 Egypt agreed to sign a loan agreement worth $3.2 billion from the IMF, which would provide a much-needed lifeline and send a good signal to investors.

In the end much will depend on the country’s political trajectory and its new leadership. In the first presidential poll since Mr. Mubarak’s departure, Egyptians headed to voting booths on 23 and 24 May. As no candidate won more than half the vote in the first round, a run-off will be held on 16 and 17 June. A new head of state will bring some stability. A president with legitimate popularity and a strong mandate should reassure businesses and investors.

But given the course of the elections so far, it is also increasingly likely that Egypt’s future president will be a decisive figure unable to rally the country behind him. News that Ahmed Shafiq made it through to the run-off elections sparked angry protests in Alexandria, Suez and Tahrir Square. Attackers also set fire to Shafiq’s Cairo headquarters. As a former prime minister under Mubarak, Shafiq is widely considered to be a remnant of the old regime.

Although the Muslim Brotherhood commands popular support across the country, the Islamist group has investors worried. The Brotherhood’s Freedom and Justice Party (FJP) won the largest share in the recent parliamentary elections and their candidate Mohammed Mursi will be vying for the presidency in the run-off elections. But even though the FJP has reassured the business world that it is friendly to free markets and property rights, not all investors are comfortable with what could be an increasingly Islamic society. The Salafist Nour party may find itself in control of the Ministry of Education and, as one participant at the MEA conference exclaimed, “for the business community, that’s pretty petrifying”.

Egypt may be on the path to economic recovery but its new leaders have some convincing to do. Egypt’s first democratically elected president will take office without a constitution defining his powers and on the back of a messy electoral process. The drama of the uprising has come to an end but the serious work of rebuilding political trust and economic stability is only just beginning.