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Outside looking in: An international perspective on Egypt’s economy

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Reform is needed to boost investor confidence and bring back higher levels of FDI

Bessma Momani has a PHD in political science with a focus on international political economy. She is an associate professor at the Balsillie School of International Affairs at the University of Waterloo and authored the book IMF-Egyptian Debt Negotiations.

Momani highlighted three key areas investors view as intersecting with politics: confidence, perception and reform.

Confidence

“Confidence is a vital characteristic [which] investors always require,” Momani stated.  ”One-hundred years ago, investors did not rely so much on confidence; however, now that globalisation is advancing, international markets are meticulously studied, entered and exited quickly. For the international community, the perspective is not similar to how Egyptians view the situation… it’s extremely frowned upon for a military backed government to take control; this affects confidence extremely.”

Momani stressed the importance of globalisation, saying that currently, “the financial world is interconnected and considering Egypt’s heavy reliance on external capital in terms of tourism and investment, investors do not have enough confidence to put money in Egypt.”

International perception and the international community play a huge role in altering the Egyptian economy, as it relies heavily on tourism, which has recently been negatively affected. Momani said: “If the international business world believes that Egypt’s transition is a genuine process and all these potential democratic processes are really materialising, confidence will be restored. However, if there’s continuing violence from the state and terrorism from other parties, assurance will not return and investors will not return.”

The government is claiming that this transitional phase will be over by February and March, after presidential and parliamentary elections are scheduled, “which will present an injection of confidence within the international community allowing the economy to kick start,” she added.

Perception

The International Monetary Fund (IMF) loan was a topic of debate among officials and the public alike in the era of ousted president Morsi and that of the transitional interim government. While some stipulated that it was much needed in terms of financial aid, others, namely interim Deputy Prime Minister and Minister of International Cooperation Ziad Bahaa Al din, believe that Egypt is not in “urgent need of the $4.8bn IMF loan.”

“The IMF loan is only about perception,” Momani clarified, “It’s a sign to the international world that the Monetary Fund places trust within Egypt…monetarily speaking, it will not save Egypt from the economic woe it is currently going through.”

Egypt has almost $18.7bn in foreign reserves, mainly due to loans provided by Gulf States and their pumping of money into the economy ever since the 30 June revolution. However, Momani highly doubts the continuation of the provision of money due to the discomfort of Gulf citizens because of their governments spending large amounts on Egypt, adding that these “loans are not real money and will not cure Egypt’s problem especially with the growing poverty in the Middle East.”

Reform

Reform is the third area to which investors will concentrate on, and even though Egypt has high corruption in the public sector and problems with setting a minimum wage, according to Momani, the main predicament Egypt is facing with regards to reform is the halting of subsidies.

Momani explained that subsidy reform has to commence “especially where an extremely rare resource in Egypt, energy, is being subsidised extensively, it’s highly doubtful Egypt will advance.”

The government’s total budget expenditure registered EGP 582.7bn, a 23.7% increase compared to the previous year’s EGP 471bn. According to the finance ministry, 59% of this expenditure went to subsidised commodities and the repayment of public debt.

Momani was highly doubtful that the IMF would give the loan to Egypt as the country is highly reliant on subsidising energy which, according to her, “poses the main threat to the stagnant economic advancement.”

Petroleum subsidies climbed from EGP 95.5bn to EGP 120bn, a 25.6% increase and other subsidised commodities also surged by 5.6% to EGP 32.5bn.

For the IMF, phasing out energy subsidies was a condition for providing the loan to Egypt.  Reform in Egypt should start with energy being at the top of the agenda. “The IMF will not sign an agreement until a functional government and parliament is formed; however, more than 10-15 years ago, the IMF’s main rhetoric started heading towards energy reform, something Egypt lacks,” Momani stated.

In an article she wrote for The Economist on 9 July, Momani said: “If the military-backed government is to rectify Egypt’s economic woes, it will need the IMF’s loans… in 1977, the last time Egypt tried to eliminate…subsidies at the IMF’s behest, the country saw street protests and clashes, the sacking of ministers, and a restoration of the subsidy…But through the power of the armed forces, [the sacking of subsidies is currently an option]“.

However, Momani modified this assumption and now believes that subsidy reform will not occur through the current military backed regime: “Due to the military now riding on so much nationalistic popular support, it will not risk losing it and would rather put pressure on the next regime”.

In her article, Momani highlighted how subsidies play a major role within the economic retraction, saying that one of the main reasons why Morsi was ousted was that “the government spent millions on subsidising imported energy products as well as imported wheat, a staple grain for the majority of Egypt’s citizens who are overwhelmingly poor… The deposed government of Mohamed Morsi refused to curb these subsidies on imported goods.”

Kassem Mansour, head of the Egyptian Economic Center, explained several problems affecting the Egyptian economy from the uprising on 25 January 2011 until the most recent wave of protests on 30 June.

According to Mansour, for international investors to be attracted Egypt, the country first must find stability, decrease taxation on investment and provide for the needs of international startups.

“The economy is facing major trouble with legislation, bureaucracy and the overall economic politics,” Mansour said. “Many factories in Egypt are currently shut down due to constant strikes by workers who are calling for the application of minimum wage, while many others attempting to start up are not given official permits for unannounced reasons. These are all problems catalysed by an inactive government which does not address these problems… international investors are repelled by this commotion.”

Mansour also shed light on Egypt’s potential export market which “could be immense” but heavy tariffs, legislation and permits, which represent the main challenges, have not been properly addressed.

“Heavy reform is required and the interim government should start addressing these problems before it gets late,” he said.


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