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Tuesday, 27 July 2021

Coronavirus: A defining moment for Egyptians

As the economy grapples with the fallout from coronavirus new priorities and opportunities are emerging

Niveen Wahish , Wednesday 8 Apr 2020
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Workers in a number of factories are now producing medical suits and masks, as Egypt ramps up efforts to counter the spread of COVID-19 (photo: Reuters)
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While for the past two weeks many of Egypt’s white-collar workers have been doing their job from home, wrestling with Internet connections and getting to grips with video conferencing, most blue-collar employees have been turning up for work.
 
Mohamed, manager of a downtown Cairo electrical supply store which employs 15 staff, says “none of the employees at the store can afford to stay home.
 
“They can hardly get by as it is,” he says.
 
In normal times, he explained, they receive their weekly wages on Saturday, yet before end of week they are already asking for an advance.
 
“None of them have savings to help them get by. They live day to day.”
 
So far they have been getting their wages in full though if the curfew is extended Mohamed thinks the store owner could reduce their pay.
 
On 25 March Egypt began a two-week curfew under which all non-essential shops must close between 5pm and 6am.
 
Mohamed was pleased, however, to hear that many construction companies, which comprise the bulk of his store’s customers, were getting back to work this week.
 
Mohamed argues that though precautions against the infection are necessary and the number of workers should be reduced “neither the people nor the economy can afford” a wholesale stoppage. In making the argument he joined the debate triggered this week by several leading businessmen who have argued that work needs to resume despite the possible loss of life due to the infection. They have received vociferous criticism for not paying workers so as to allow them to stay at home.
 
Maha, a young cook who cannot afford to heed the stay home advice because she depends on her LE200 a day earnings to make ends meet, is grateful to those of her customers who have continued to pay her even after telling her not to come.
 
“They fear that since I take multiple means of transportation and visit different homes I may be carrying the infection,” she says.
 
A number of initiatives have been launched by the government and civil society to help people like Maha get by.
 
On Monday President Abdel-Fattah Al-Sisi said irregular day workers would receive a one-off payment of LE500. He also issued several decisions aimed at helping the economy withstand the fallout from Covid-19. The decisions include postponing dues by the tourism sector without fines or accumulated interest and extending cheap financing to tourism establishments to enable them to keep running and keep on staff.
 
“The economy was just beginning to pick-up before all this happened,” says Mohamed.
 
Last year saw a marked improvement in Egypt’s economic indices after a three-year economic reform programme which included multiple austerity measures. The country’s budget deficit came in at 8.2 per cent of GDP for fiscal year 2018-19, compared to 10.9 per cent in 2016-17 and 12.5 per cent the previous year. Unemployment fell to 7.5 per cent, its lowest level in 30 years, in the second quarter of 2019 compared with 13 per cent six years ago. Foreign reserves were recorded at more than $45 billion compared to $17 billion three years ago.
 
“We enter the crisis with a strong fiscal and foreign exchange buffer,” said Minister of International Cooperation Rania Al-Mashat during a video conference with development partners earlier this week. She cited $13 billion in tourism revenues, $26.8 billion of remittances and $5.9 billion of Suez Canal revenues.
 
If it had not been for the role of reforms in stabilising the economy, things could have been much worse, said an economist who preferred to remain anonymous. However, she added, there is a risk all the gains could be wiped out by the disruption to the economy caused by social distancing measures.
 
According to Al-Mashat, remittances, which represent 10 per cent of GDP, could be affected by the drop in oil prices and employee dismissals. As for tourism receipts, which make up five per cent of GDP, inbound reservations have dropped by 80 per cent in comparison with the same period last year. Furthermore, she said the decline in global trade and transportation could have a negative effect on Suez Canal revenues. Al-Mashat warned the ongoing oil war which has led to a sharp drop in international oil prices, exacerbated by the collapse in global demand, could impact the sector in Egypt. And Egypt could see more expensive commodity goods of which it is a big importer.
 
“It is very difficult to predict how big a toll this crisis will take on economic growth, especially with uncertainty clouding the duration of the pandemic,” Christine Kamel, senior economic analyst at Dcode Economic and Financial Consulting, told Al-Ahram Weekly.
 
At its lowest point, economic growth post the 2011 uprising reached -4.3 per cent in the first quarter of 2011, said Kamel.
 
“We believe the hit from the current episode will be stronger, given the global nature of the crisis and the unprecedented way it has spread its tentacles to almost all economic sectors due to social distancing. We may even see growth during the crisis going in the negative territory.”
 
The magnitude of the impact and recovery post-crisis will be primarily a function of its length, she stressed quoting research carried out by Dcode.
 
“Should it last until the end of 2020 it could take up to two years to recover. First, slowdown in investments will affect potential GDP growth. Second, a protracted economic slowdown will force more businesses to shut down, making it more difficult for the economy to reboot.”
 
Meanwhile, the government has revised its GDP growth projects for the current fiscal year downwards to 4.2 per cent, according to Planning Minister Hala Al-Said. She said third quarter growth will be around 4.5 per cent while the fourth quarter will see one per cent GDP growth, down from the four per cent forecast. Egypt’s GDP grew 5.6 per cent in the first half of fiscal year 2019-2020, slower than the six per cent the government had originally targeted.
 
Consumption will be key to growth. According to research by Dcode, if the crisis lasts beyond June the consumption slowdown will accelerate as both savings and confidence are eroded.
 
“To be realistic in our estimates, growth forecasts should be slashed in half,” United Nations Special Envoy for the 2030 Finance Agenda Mahmoud Mohieldin said earlier this week at a webinar organised by the Egyptian Centre for Economic Studies (ECES). The International Monetary Fund has said it expects a global recession this year that will be at least as severe as the downturn during the financial crisis more than a decade ago, followed by a recovery in 2021.
 
Amid all this, there is also a risk to the exchange rate triggered by capital outflows. Kamel points out that by the end of February foreign investment in government treasury bills stood at $19.8 billion.
 
“We expect that most, if not all, of this will have flown to safety by June, exerting pressure on the currency. It is highly likely that we see more depreciation of the pound going forward.”
 
However, while it is difficult to predict exactly what will be the exchange rate, she said a potential upside could be the slowdown in imports.
 
“Our import bill stands at $66.5 billion a year, so a drop should help cushion the shock and slowdown of the depreciation.”
 
While everything seems to be up in the air the government has had to present its 2020-21 draft budget to parliament for discussion. The government said it was expecting revenues of around LE1.3 trillion verses LE1.7 trillion in expenditures, and a cut in the budget deficit to 6.3 per cent of GDP compared to the 7.2 per cent target in the current budget is being trageted.
 
Currently, these numbers are not realistic because of additional spending by the government and the reduction in revenues related to slowing economic activity, says the anonymous economist.
 
Kamel agrees that achieving these numbers will be very challenging given the expected drop in tax revenue and the potential need for further government intervention down the road. In this context, it is likely that revisions are made to the budget in the next few months.
 
The crisis, says the anonymous economist, means the government must revisit its spending patterns, prioritising the health sector and targeted social and economic assistance to vulnerable groups. The draft budget includes health spending of around LE96 billion, up from LE73 billion, and LE132 billion for education.
 
MohieldinCalled for a review of the priorities of the public budget where the state plays a greater role in the healthcare, education, and localisation of investment in technology and infrastructure without crowding out the private and family sectors. He also stressed the need for a universal basic income for everyone after they finish their education and until they find a job as a buffer against hard times.
 
But while the situation appears bleak there are opportunities to be found. Maha Saleh, executive director at the Engineering Export Council of Egypt, said the crisis has shown the world that it cannot depend on suppliers from just one or two countries. Supply chains were disrupted because of the dependence on Chinese products, she says.
 
“This is an opportunity for Egyptian exporters to present themselves as potential suppliers to the African, Arab and European markets… Egyptian exporters from the Engineering Export Council can produce many final products and product parts that are consumed in those markets,” she argues.
 
“It is also no longer a luxury to invest in research and development and in technology transfer,” stresses Saleh.
 
Home appliance factories and automakers are the most suited to making simple ventilators for which most countries are in desperate need in these hard times, she says. All the factories need are licences and guaranteed local buyers or a licence to export, presenting “an opportunity for Egypt to come out of the crisis as a manufacturer of medical equipment which we must grasp”.
 
According to Saleh, Egyptian producers depend too much on imported inputs. However, she points out that in the past two years there have been lots of efforts towards increased localisation and it is time to make the most of them.
 
“Industry is what we have to rely on now, with tourism and other hard currency earners hit hard.”

*A version of this article appears in print in the  9 April, 2020 edition of Al-Ahram Weekly

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