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Analysis: Egypt economy to avoid contraction with help of Arab aid, consumption

Donations from Gulf Arab states to Egypt and domestic demand may avert economic contraction. Egypt may see 'mild' growth in current fiscal year, say economists

Ahmed Feteha, Thursday 22 Aug 2013
Egypt economy to avoid contraction with help of Arab aid, consumption
A delegation from the UAE met with the Egyptian cabinet on Tuesday (Photo: Egypt government)
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The Egyptian economy is likely to avoid a major contraction due to the ongoing political crisis, thanks to generous support from Arab Gulf countries and sturdy domestic demand, economists told Ahram Online.

However, a real recovery, along the lines of the 4 percent GDP growth rate in 2013/14 that Mohamed Morsi's government had predicted while in power, is unlikely to materialize. What Egypt can hope for is a "mild" 2.5 percent growth in the current fiscal year, according to Wael Ziada, head of research at Cairo based investment bank EFG-Hermes.

Security has broken down across Egypt since police and army forces began a bloody crackdown on the Muslim Brotherhood last week. Widespread outbreaks of violence have claimed the lives of at least 900 people since 30 June.

Key sectors, such as tourism – accounting for roughly 8 percent of GDP – have reached a near full halt. Companies and banks nationwide, including major foreign investors such as General Motors and Electrolux, have reduced their working hours due to security concerns. A 7pm curfew, imposed last Thursday, turns the restless capital city of Cairo into a ghost town at sundown every night.

"Economic growth this year will more or less match the increase in population" Ziada adds. "It will be mainly driven by consumption of foodstuffs, non-durable goods and key services."

Egypt went through similar circumstances in 2011 when a popular uprising toppled Hosni Mubarak. Economic growth fell to 1.9 percent, down from 5.1 percent, a year earlier.

"In 2011, we were coming from a higher base in terms of investment activity, hence the sharp decline." Ziada explains. "But now we are in a situation where investments were already weak in the period of comparison, so we are unlikely to see a contraction."

Foreign donors were not as excited about Mubarak’s ouster as they are about Morsi’s. Right after tanks rolled to topple the Brotherhood-affiliated president on 3 July, Saudi Arabia, Kuwait and the United Arab Emirates pledged a total of $12 billion in loans, grants and fuel shipments. Of that, $5 billion have already arrived.

Ahmed Galal, Egypt's interim finance minister, said that the government will not use the Gulf money to raise salaries or current expenditures, but will utilize it to stimulate the economy through government investment in infrastructure projects.

The generous assistance will help the government reign in its ballooning budget deficit while avoiding painful measures such as  raising taxes and cutting spending. Budget deficit stands at an estimated LE243 billion ($38.2 billion) or 14 percent of GDP in the fiscal year ending in June, according to Galal.

With a weak expected growth rate, the government will find it harder to solicit sustainable resources to cover the deficit. On the plus side, the cost of government borrowing is already below peaks reached in Mohamed Morsi's time, despite the bloodshed on the streets.

Yet it remains to be seen whether Arab aid will compensate for the drop in foreign and domestic investments, which had driven the 6 percent average growth rate that Egypt witnessed in the five years prior to 2011.

"The political risk is just too high for FDI [Foreign Direct Investment] to pick up to previous rates," Alyaa Mamdouh, an economist covering the MENA region at CI Capital, explained. "It makes more sense that the government continues stalled or pending projects than to wait for entirely fresh ones,"

During the past decade, the European Union and the United States were Egypt's main source of FDI inflows, followed by Arab countries. But messages from Egypt's Gulf patrons suggest that this picture might substantially change.

On Tuesday, a high level government delegation from the United Arab Emirates visiting Cairo said the UAE will support Egypt "in whatever way [Egypt] sees suitable."

Sultan Al-Jaber, the UAE's state minister, said that in addition to loans and grants, his country will devise programs aimed at restructuring several sectors in the Egyptian economy, including energy, spinning and weaving and steel.

A day earlier, Saudi Arabia, which boasts more than $100 billion in budget surplus, promised to compensate Egypt's military-backed interim government for any aid cuts from Western countries.

Unlike aid from IMF, which Egypt is not seeking now, Gulf Arab assistance does not come with economic policy conditions. Rather, it is driven by the monarchs' desire to support Egypt in crushing the Muslim Brotherhood, which they see as threat to their own domestic stability.

Labor Action

The slowdown of economic activity coupled with an inflation rate that hovers around 10 percent is raising tensions in the workplace. Workers, cornered by economic hardship, have repeatedly downed tools in the past two years as the revolution's initial hopes of prosperity were shattered on the rocks of economic reality. According to one report, the number of labor protests grew from 530 in 2010 to some 2,000 in 2012.

Samir Radwan, the finance minister who served in the months that followed Mubarak's ouster in February 2011, sees a threat to economic growth coming from workplace disturbances.

"The labor action that followed the uprising in 2011 took a harsh toll on the state –which abruptly raised wages – and on economic activity." Radwan believes proactive measures must be taken to avoid a repetition.

He proposes a social contract signed by representatives of the labor unions, business leaders and civil society groups to halt labor strikes for one year. Such a contract, Radwan explains, would be coupled with the quick implementation of a minimum wage rate.

Consecutive governments have since 2011 promised to enforce a minimum wage rate for private sector jobs and streamline its implementation in the public sector and the government. Such promises, however, have not materialised. The interim government said it is preparing new minimum wage legislation, details of which have not been disclosed.

"I am not calling for the infringement on the right to strike; but this temporary measure is essential at this point." Radwan added.

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