Egypt's economy underlined by "delicate balance," says report

Alex Dziadosz
6 Min Read

CAIRO: Characterized by the wild fluctuation of commodity prices, a financial meltdown and the ongoing conflicts of globalization with economic nationalism, 2008 was a turbulent economic year by any yardstick.

This was no less true in Egypt, as an annual economic report issued by the Oxford Business Group (OBG) notes.

In a cautiously optimistic analysis of Egypt’s economic health, the report concludes that while the economy has seen many gains in recent years, it is still underlined by the “delicate balance required to deal with challenges such as inflation and the lingering influence of “Arab socialism.

“While the general consensus with regards to Egypt’s economic future is positive, the occurrences of 2008 have increased the uncertainty that unexpected events could change the picture quite rapidly, the report says.

The report gives much of the credit for Egypt’s recent successes, including gross domestic product (GDP) growth of over 7 percent last year, to the administration of Prime Minister Ahmed Nazif.

Nazif’s task since he came into power in 2004 has largely been to dismantle the “remnants of Arab socialism, which still make up a large part of Egypt’s economic structure, the report says.

This has led to an economy which exhibits an increasingly “Anglo-Saxon quality, the report goes on to say, in that it emphasizes private firms’ involvement in public services and the decentralization of decision-making.

A jump in foreign direct investment (FDI) has been the “marquee metric of Nazif’s reforms, according to the report’s analysis. In 2001, FDI was “close to zero, but reached almost $20 billion last year.

The state has also improved the tax structure significantly, thereby boosting revenues, and diversified the country’s exports by moving into readymade garments, steel and other sectors, the report notes.

The new Egyptian Competition Authority, which recently won a case against major cement producers over price-fixing, and the Consumer Protection Agency have helped allay the threat of monopolies and reduce the influence of the informal market.

Other systemic changes, such as the introduction of economic courts and “one-stop shops for business owners helped Egypt garner the World Bank’s “most improved award in their annual “Ease of Doing Business report last year.

But many of these gains have been tempered by ongoing difficulties, the report says. The government runs a sizeable deficit, poverty is rampant and the black market still accounts for up to half of consumer activity, according to the report’s estimate.

The report points out that inflation, a central issue last year as consumer and producer price indices hit record levels, is not new to Egypt. Since the state removed the Egyptian pound from its peg to the United States dollar in 2003, inflation has swung from 20 percent to 5 percent three times, partially due to the state’s “start-and-stop efforts to reduce subsidies, the report says.

The accompanying interest rate risk has caused the nascent bond market to “go haywire, the report says. Banks, unsure how inflation – and thus interest rates – will fluctuate from one year to the next, are unwilling or unable to offer long-term loans and mortgages.

In addition, “inflation has exacerbated income disparity in Egypt, as the poor are disproportionately affected by price rises, primarily in food, the report says.

Additionally, Egypt’s mix of “Arab Socialism with free market capitalism makes for an “occasionally explosive combination, the report says, pointing to the deadly riots in the industrial town of Al-Mahalla Al-Kobra last April.

“As Egypt continues on its path toward greater liberalization, temporary imbalances will doubtless lead to further labor contention, the report says.

The “skills gap poses more challenges, the report says, as many technology and manufacturing firms have trouble finding qualified employees despite high employment and an abundance of college graduates.

While former president Gamal Abdel-Nasser expanded higher education in the 60s, he did not anticipate that “a population upsurge would end up delivering hundreds of thousands of college graduates annually to the job market, when what the country really needs is more skilled factory workers, the report says.

The OBG report makes detailed mention of most of last year’s major events, including the killing of an Egyptian sailor by an American warship in the Gulf of Suez, the arrest of real estate mogul Talaat Moustafa, the cancellation of the Agrium plant planned for Damietta and the Grand Hyatt’s alcohol ban.

But with the economic landscape shifting so quickly, some of the information rings a bit stale already. The report predicts, for instance, that Egypt’s economic growth is “likely to fall to . around 6 percent in the years to come, which may appear overly rosy to analysts who are now predicting a fall to less than 5 percent this year.

In general, the report says, economist are waiting to make further predictions about the Egyptian economy until the longer-term effects on inflation, exchange rates, the current account and GDP become clear.

“The hope is that a moderate global slowdown will eventually reduce the pressure on commodities, thereby easing inflation, but only to a greater extent than it will dampen demand for Egyptian exports, the report says.

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