Egypt: The economic harvest of 2015

Ahmed El-Sayed Al-Naggar
Thursday 14 Jan 2016

The main positive economic development in 2015 was the increase in growth rates. However, that development needs to be built upon

The end of a year and beginning of another is always a good chance to assess performance of the economy by analysing different indicators, taking into consideration the performance of different sectors, government policies, and the role of the private sector.

To guarantee the fairness of comparisons between government performance in different periods, only official data and the figures provided by the government to international institutions, published in the latter’s publications, would be used. This evaluation takes into consideration the overall political, economic and security situations in the local arena during the years of comparison. 

And as what really counts in assessing the success of any economic policy is its short and long term outcomes, on both the economic and social levels, there are many indicators that will be used to see how well the local economy is doing.

Topping these is the real growth rate of Gross Domestic Product (GDP). This rate is important as its increase means an increase in the income and therefore per capita income. But it is not enough to improve the living standards of the population. The way income is distributed among society's members, through wages, taxes and subsidies systems, and health and education spending, are much more important measures.

There is also a connection between growth and increased investment, or upping the productivity of existing investment and the levels of investment and savings in an economy.

Solid growth is translated in creating new jobs and in as far as economic growth is able to create a larger number of permanent and highly productive jobs, this helps in containing the unemployment problem. Moreover, the increase in production as a sub-product of economic growth increases the supply of services and commodities, and thus lowers their prices.

As for the employment rate, it is a socio-economic indicator that reflects social and political stability and helps in widening the scope of participation in decision making.

The inflation rate’s main importance lies in the stability of the economy as an increase in inflation rates leads to a fast hike in the value of assets in favour of owners. Meanwhile, salaries do not increase at the same pace. The difference in pace here reflects unfairness in income distribution between owners of assets and workers.

The public and foreign debt indicators are used to highlight imbalances in public finances and external balances. Foreign borrowing in particular affects the independence of political and economic decision making in any country. That is why any change in foreign borrowing, or in the cost of its service, is considered an important indicator of the independence of any economy and its vulnerability.

Improved growth and the importance of combating inflation
In its World Economic Outlook report coming out in October 2015, the IMF put real GDP growth rate in Egypt for the current year at 4.2 percent compared to 1.8 percent, 2.2 percent, 2.1 percent and 2.2 percent in 2011, 2012, 2013 and 2014 respectively.

This growth rate has been realised through high levels of both foreign and local borrowing, as revealed by changes in foreign and public debt figures.

Maintaining these growth levels necessitates increasing the low investment rate, which came at 14 percent in 2013/2014 compared to 14.2 percent and 16.4 in the two previous years.

Increasing this rate means the state would increase public investment, in particular injecting substantial financing to modernise all its ailing public factories. It also necessitates encouraging private investment of different scales. Moreover, banking policies should be altered to be more biased to finance these investments, rather than lending to the government which in return has to lift this burden from banks by finding different ways to deal with the public budget deficit.

According to official figures, 2015 witnessed an increase in the inflation rate to reach 11 percent compared to 10.1 percent 2014, 6.9 percent 2013, 8.6 percent 2012 and 11.7 percent in 2010.

The growth in producing services and commodities at a rate that ups the supply would help rein in inflation. However, facing production and trading monopolies might be an even better approach, linking the price of commodities to the cost of production and importing with a reasonable profit margin.

Back to the growth rate, which improved during 2015, there is a downside to it: it was not accompanied with the creation of a high number of job opportunities to thousands of unemployed, with the unemployment rate staying high. It is known that people start feeling improvement in the economy only when job opportunities start to be available. 

Dealing with unemployment
The unemployment rate increased from nine percent in 2010/2011 to 12 percent in 2011/2012, then to 12.7 percent in 2012/2013 and it peaked at 13.2 percent in 2013/2014 before it registered a marginal decline to 13 percent in 2014/2015. With the presence of such a high level of jobless people in society, it is hard for Egyptians to feel the improvement in growth rates.

Here it is important to point out that data related to the unemployment rate needs to be revised as while the official data states that the number of people at working age in Egypt is 56 million, CAPMAS puts the workforce at 27.9 million, which is a very low percentage, even if those in education or the military are excluded.

The workforce was 27.9 million in 2014 compared to 27.6 million in 2013, 27 million in 2012, 26.5 million in 2011 and 26.2 million in 2010. If newcomers from university or intermediate education exceeds 900,000 annually, and with the number of those who drop out of education at different stages or those who are illiterate added, the overall number would exceed 1.1 million persons. If we deduct from this sum the number of people who quit the workforce, either because they don’t want to work or because of death, we find that the net increase in the workforce ranges between 700,000-850,000 annually.

When compared to the registered increase in the workforce, we find a great gap that results in underestimating rates of unemployment.

Putting lower than real estimates for unemployment does not help in dealing with the problem in Egypt as we need mobilising social and governmental efforts to deal with it. This starts with being aware of the real scale of the problem through surveying the unemployed, their qualifications and geographical location in different Egyptian governorates ­so that we can have a reliable database from which to draw up practical solutions to the problem.

Moreover, there are many policies to increase employment through facilitating new investment and returning closed factories to operations. For example, the location of the Tanta Flax and Oil Company, which is built on 83 feddans in Meet Hebbesh area near the Cairo-Alexandria agricultural road can be utilised in a better way. Around 16 feddans (67,200 square meters) can be used in real estate developments, commercial activities and establishing entertainment facilities, the return on which can be invested in upgrading the factory’s equipment.

The factory itself can be moved to a new industrial city to be surrounded by houses and educational and medical facilities for workers while using the old premises in housing and commercial projects to finance the rehabilitation and upgrading of the relocated factory.    
There is a pressing need to set up a national authority to deal as an incubator for small and medium sized enterprises enjoying a high degree of independence and that can be financed from various sources. This includes allocations from the state budget and what can be collected from society in the form of alms and donations. The third source could be grants from other countries that would benefit from Egypt dealing with the unemployment problem, especially European countries that need to stop illegal migration from Egypt. One last source would be the state's private funds.

This incubator should help those who want to set up small and medium sized projects and cooperatives to choose their fields and make sure they don’t invest in projects similar to or competing with others existing, in addition to providing them the needed finance.

What is even more important is linking these small projects with those of larger size by specialising in certain production inputs in a way that guarantees good marketing of these products.

The increase in public debt
The last few years witnessed an increase in public debt. Also foreign debt started to accumulate in 2012/2013 at a fast pace. According to Central Bank of Egypt figures, the value of the foreign debt now stands at $48.1 billion compared to $46.1 billion in 2014, $43.2 billio in 2013, $34.4 billion in 2012 and $34.9 at the end of 2011.

The surge in foreign debt has been accompanied by the depletion of foreign currency reserves which dropped from $35 billion in January 2011 to $22 billion by the end of the same year. While it is true that the government did not borrow from abroad then, it has not managed the economy as it should in an emergency or crisis. This opened the door to withdrawing from reserves and pushed Egypt into a vicious circle of borrowing and gaining grants to be injected into the reserves, and using these to start looking for more grants and loans.

This situation will never end unless the deficits in external balances and the budget are dealt with. The trade deficit for the year 2014/2015 reached $38.8 billion compared to $34.1 billion in 2013/2014, $30.7 billion in 2012 /2013, $34.1 billion and $27.1 billion in 2011/2012 and 2010/2011 respectively.   

As for the current account, which includes both the trade balance and transfers, it is expected to have a deficit equivalent to 3.7 percent of GDP this year compared to 0.8 percent in 2014 and 2.4 percent in 2013, 3.9 percent in 2012 and 2.6 percent in 2011.

Dealing with this deficit needs a firm stance and the introduction of tough measures. While imports mount to $65 billion, reducing them even by 10 percent would mean saving half the current account deficit. This can be accomplished by rationalising imports on unnecessary items for three years, as if we are in a state of war.

Also, we can increase our exports by upgrading quality standards in agricultural production and improving packaging in a way that opens for us new markets, especially the Russian market after it stopped importing Turkish fruit and vegetables.

As for internal debt, it reached LE2.1 trillion in mid-2015 compared to LE1.8 trillion, LE1.5 trillion and LE1.2 trillion in mid-2014, 2013, 2012 respectively. This is another vicious cycle and a huge burden on the shoulders of generations to come.

The budget deficit is a national priority
The government has to reach consensus with economic experts, both independent and those affiliated to political parties and opposition forces, to decide on the best way to deal with this persistent problem through increasing public revenues while tightening expenditures as much as possible.

Concerning increasing revenues, the tax system can be developed as the rate on the highest income bracket, after the recent reduction, is now 22.5 per cent, which is low compared to both emerging and advanced economies including those that attract the most investment. The average rate on the highest income bracket is 40 percent (with China 45 percent, 43 percent in the US, 40 percent in the UK, France and Italy, 57 percent in Sweden and 62 percent in Denmark.) 

Also, we should reconsider imposing some taxes like those on stock market gains and reintroducing stamp taxes on stock market transactions as a mechanism that cools down speculation in the market. Here the government should be firm against the objections of stock market traders and their representatives in the media.

Another source of income would be imposing a levy on using natural resources, as the state's share of agreements in the metallurgical and mining industries is minimal and cannot be compared to what local and foreign producers get.

On the expenses side, the country should squeeze energy subsides as much as possible, making them available only for the poor. While it is true that the drop in global oil prices has contributed in capping the subsidies bill, this should not stop efforts to reform energy subsidies. This might even include providing subsidised fuel for one car per individual and with a certain quota. Whatever exceeds this should be sold at cost price. Such a practice can only be adopted through the coupon system, which seems to be frozen for now.

Coming out of 2015, we can say that the main positive development is the increase in growth rate and that it started to move from the borderline of recession, a situation that had lasted for four years. This positive development should be built upon.

As for other sides of economic performance, including the need to realise social justice, we find a lowering in the tax rate on the highest income bracket, granting exceptions to the maximum wage ceiling (despite the fact that we could have increased the minimum wage and it would have automatically pushed the maximum level up), in addition to canceling the capital gains tax and reducing the percentage of GDP allocated to education.

We have to get used to the idea that choosing between development strategies should be based on consensus between real experts, whether officials or private, or opposition, because important national dilemmas are dealt with in this way, where all involved parties are responsible for reaching a solution and implementing it.

The writer is chairman of the board of Al-Ahram Establishment.

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