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July 29, 2014

Egypt’s Economy and the Fall of the Beblawi Government

Mohammed Samhouri
March 12, 2014

The unexpected resignation of the entire interim cabinet of Egypt on February 24 should serve as a reminder of just how acute and intricate the economic crisis is that faces the country since Mubarak's ouster three years ago. The latest manifestation of this crisis came in the form of escalating waves of labor strikes that hit several parts of the country in recent weeks: doctors, pharmacists, public transport employees, low-ranking policemen, pensioners, post office employees, workers in the textile industry and several other state-owned enterprises, and garbage collectors; all demanding higher salaries and better working conditions. Widespread shortages of cooking gas along with frequent power outages over the past few weeks have added to the pressure on the government and ultimately led to its sudden departure.

Appointed days after the army removed president Mohammed Morsi from office on July 3 last year, the largely technocratic government—headed by the renowned liberal economist Hazem el-Beblawi—was tasked, among other things, with the tough job of easing out of the economic crisis that had crippled the country since the 2011 revolution.

The statistics of the crisis when the interim government took office in mid-July were not pleasant and depicted a picture of an economy in a continued state of decline: an anemic Gross Domestic Product (GDP) growth rate of 1.8 percent during the fiscal year (FY) 2012-2013; an unsustainable fiscal deficit that reached 14 percent of the GDP; a mounting public debt that was fast approaching the size of the economy; a weakened national currency that had lost 12 percent of its value against the U.S. dollar six months earlier; rapidly depleting foreign reserves that, at 14.9 billion dollars then, hit a “critical level” barely covering two and a half months of imports; a deteriorating sovereign debt standing that had been downgraded six times by international rating agencies since the popular uprising of 2011; and an increasingly restive Egyptian public that was eager to get a break fromsoaring prices, high youth unemployment, and rising poverty.

Such was the country’s economic situation when the interim government took office last summer. Despite this, the new interim government got off to a good start, thanks in large part to a swift aid package from Saudi Arabia, Kuwait, and the United Arab Emirates worth a total of 12 billion dollars (later increased to 15 billion dollars) in cash deposits, grants, and fuel and gas shipments.

The positive impact of the Gulf aid pledged in support of the July 3 regime change in Egypt was quickly felt on several fronts: their cash deposits in the Central Bank of Egypt (CBE), about 6 billion dollars of the total aid package, helped to stabilize the sliding pound, and fuel and gas shipments,valued at 4 billion dollars, mitigated the widespread shortages that crippled the country during the last months of Morsi’s rule. The grants component (mainly from the UAE) enabled the government to plan a second stimulus package worth 4.9 billion dollars, mostly in public investment projects, after a first 4.1 billion-dollar stimulus package was funded by cashing what is known as “the Gulf Deposit”—an interest-bearing deposit that was kept in a special account in the CBE since the first Gulf War.

Both of the stimulus packages—together about 3.5 percent of Egypt's GDP—were intended to usher in a policy shift toward an expansionary fiscal policy that would turn the foundering economy around and deliver some public goods and services. An accommodated monetary policy that cut official interest rates three times (by a total of 1.5 percentage points between August and December of 2013) was implemented in support of the government’s expansionary policy. This policy also included the implementation of a new minimum wage law for the country's civil servants, effective January 2014, in addition to a 50 percent increase in social security pension payments.

But financial relief provided by the generous, exceptionally large, and virtually cost-free Gulf aid proved to be ephemeral; it was insufficient to bridge Egypt’s growing financial needs or to meet the demands of an impatient Egyptian public that in latest polls viewed the Beblawi government as mediocre and slow-performing. The Beblawi interim government was harshly criticized on several grounds, including a problematic minimum wage law that was hastily enacted and implemented (creating more troubles than it was intended to solve, as seen by recent workers’ strikes), a partially executed first stimulus package that aimed to implement infrastructure-related projects, and their procrastination in dealing with the grossly inefficient food and fuel subsidy systems that in the 2012-2013 fiscal year consumed 30 percent of the government budget and accounted for 9 percent of Egypt's GDP.

On the macroeconomic front, the latest official figures continue to show an economy in a state of distress. The growth rate is sluggish, with output only up one percent in the first quarter of the current FY 2013-2014; the high unemployment rate currently stands at 13.4 percent—close to 70 percent of the unemployed are youth, and 82 percent of the jobless are educated. Inflation also continues to rise, presently at 11.4 percent, thus exerting more and more pressure, particularly on the poor, who represent 25 percent of the country's growing population. Public debt, both domestic and foreign, is also soaring and by the end of 2013 it reached 268 billion dollars (about 107 percent of Egypt's GDP). The fiscal deficit is expected by international observers (the World Bank and the Institute of International Finance) to remain this year in the double digit territory despite stated government efforts to bring it down. And the currency black market is making a comeback, with the dollar currently trading at 6 percent above the official exchange rate despite continued CBE intervention

These are the daunting economic challenges that have eventually sealed the fate of the Beblawi post-revolcouption government and are certain to confront the new interim government headed by Ibrahim Mehleb and, later this spring, the future elected president of Egypt. Whether they will be able to put the economy back on the road to recovery remains to be seen.

For now, however, at least three major and interrelated factors will ultimately make or break their efforts. First is whether or not they will be able to restore political stability and improve the internal security conditions that have ravaged the country over the past three years (but more so since the ouster of Mohammed Morsi), which were the principal reasons for Egypt’s current economic decline. Second is their ability to secure more financial resources—from rich Gulf countries and other potential donors—that are badly needed to fill Egypt’s large and growing funding gap. And third is whether or not the new leadership of Egypt will finally embark on a socially balanced economic course to restore the state fiscal balance and to structurally reform a long-constrained economy. How these tough and politically charged questions will be addressed will largely determine Egypt’s economic prospects for years to come and, with it, the fate of the country as well.

This article is reprinted with permission from Sada.  It can be accessed online at: 
http://carnegieendowment.org/sada/2014/03/04/egypt-s-economy-and-fall-of-beblawi-government/h2cl

Mohammed Samhouri is a Cairo-based economist and a former senior fellow and lecturer at Brandeis University’s Crown Center for Middle East Studies in Boston. He is a regular contributor to Sada.

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