Egypt’s Economy Continues to Decline
Since the 2011 revolution that toppled Egypt’s long-time autocrat Hosni Mubarak, Egypt’s economy has been in decline. A series of leaders after the uprising have failed to improve the economy, resulting in increased hardship for citizens, especially the poor majority.
Despite Gulf allies pumping billions of US dollars into the ailing country’s economy after the military ouster that removed the Muslim Brotherhood-backed president Mohamed Morsi in July 2013, Egypt’s economy is still floundering. Foreign reserves have dropped from an all-time high under Mubarak of $35 billion to a dangerously low $15 billion in March 2016.
Tourism, one of the country’s main sources of hard currency, nearly ground to a halt following heightened safety concerns. A terrorist attack that brought down a Russian plane in October 2015, coupled with the accidental killing by the army of a group of Mexican tourists in the Western Desert a month earlier, dealt blows from which the industry is still reeling. In the first quarter of 2016, tourism revenue was barely $500 million, down from $1.5 billion only a year earlier. Hotels at the iconic Sharm el-Sheikh resorts and the archaeological city of Luxor reported occupancy rates dropping to 5%. An international flight from Paris to Cairo that crashed in the Mediterranean Sea on 19 May marks the third attack on airplanes in Egypt in six months, prompting some experts to expect this incidence to harm tourism further.
Meanwhile, the expanded Suez Canal, which cost the country over $8 billion, has yet to bring in the predicted traffic and income increase. This is due mainly to the global economic recession, which has decreased shipments between China and the European Union and the Americas.
A shortage of US dollars in the market, aggravated by the dwindling reserves and efforts by the government to conserve foreign currency, has caused a sharp decrease in the value of the Egyptian pound against the US dollar. Businesses have been forced to buy dollars on the black market, at a value much higher than the government official rate. The lack of dollars has also caused many businesses to default on payments and close their doors. Several international companies have moved offshore. This has slowed production across most of the country’s industrial sector.
This instability and the uncertainty it has generated has discouraged remittance payments by expatriates, who have opted instead to keep their money in offshore banks until the situation improves. This has exacerbated the problem by effectively cutting off Egypt’s primary source of hard currency.
In April 2016, $1 hit a peak of 11.80 Egyptian pounds (EGP) on the black market, compared to an official value of 7.80 EGP a year earlier. As a result, commodity prices skyrocketed, straining both the poor and middle class, further slowing the economy and creating a vicious circle. The government eventually stepped in, officially devaluing the Egyptian pound to 8.85 against the US dollar. The official devaluation relieved some of the market stress. It also brought the price of the US dollar down on the black market, but it remains well above the official value set by Egypt’s Central Bank.
Moody’s, a bond credit rating company, expects the devaluation to boost exports and foreign investments, which in the long run should balance the near-term inflation it will cause.
Many analysts predict more hikes in the US dollar price as the month of Ramadan, which is marked by substantially higher imports of goods, approaches.
Despite the government’s repeated promises of stability, foreign investors are still not too keen to pour money into the Egyptian economy. The main exception has been Egypt’s rich neighbours across the Red Sea.
During an April visit, Saudi king Salman bin Abdulaziz al-Saud promised a fresh round of aid worth $22 billion. A few days later, the United Arab Emirates’ crown prince Mohammed bin Zayed al-Nahyan pledged $4 billion to boost the country’s economy, with half of the money invested in development projects and the other half to be deposited in Egypt’s Central Bank as a bond to support the critically low foreign reserves.
Some analysts warn that this economic Band-Aid will only offer short-term relief, and will not solve the increasing fiscal deficit. The country needs to create new job opportunities and a friendlier environment for foreigner investors, they argue.
The economic woes have eaten away at the wide support that President Abdel Fattah al-Sisi has enjoyed since he led a popularly-backed military coup that toppled Morsi in July 2013. Rising food and commodity prices have caused anger, and the number of disgruntled and opposing voices has increased. Even richer segments of society that were previously al-Sisi’s staunchest supporters have become disillusioned since his government introduced high taxes on luxury goods and temporary limits on US dollar withdrawals while abroad.
In early February 2016, he was widely criticized, even in mainstream media, after a 4km-long red carpet was laid over public roads for his motorcade, just as he was giving a speech about the need for Egyptians to adopt austerity measures. Such criticism would have been unheard of a year earlier.
While anger at the president will not boil over into revolt anytime soon, there are strong indications that his honeymoon period is over. One month after coming to power, al-Sisi successfully decreased the fuel subsidies that his predecessors had been too afraid to touch, with little public backlash. Such an impressive feat may be much harder for the former general to pull off now.