Military


Egypt - Economy

Egypt continues to be a major regional economic, political, and cultural power. However, economic problems have frustrated many Egyptians. Egypt's per capita GDP was on par with South Korea's 30 years in the 1980s; today it is comparable to Indonesia's. There were bread riots in 2008 for the first time since 1977. Political reforms stalled and the Government of Egypt resorted to heavy-handed tactics against individuals and groups, especially the Muslim Brotherhood, whose influence continued to grow. A stable and enlightened Egypt could positively affect the whole area, the whole Arab world, and probably the Muslim world as well. But crony capitalism basically prevented the fruits of Egypt’s past economic growth from reaching the working class.

On February 11, 2011, President Hosni Mubarak’s 30-year rule came to an end under intense popular pressure as hundreds of thousands of Egyptians converged on Tahrir Square. Even as Egypt has chosen its first democratically-elected president and ratified a new constitution, the country remains divided politically, struggling with slow economic growth rates, collapsing foreign investment, and a dramatic drop in tourism, which is a vital foreign exchange-earner and a major employer. The government has so far been unable to address its budget woes, as it continues to spend more than 20 percent of its budget on non-targeted subsidies. Egypt had been in discussions with the IMF but by mid-2013 had been unable to reach an agreement on a loan package underpinned by economic reforms. A number of major donors were awaiting an IMF agreement before advancing their own assistance packages.

Two and a half years of political turmoil left Egypt on the brink of economic collapse, scaring away tourists and investors, shriveling hard currency reserves and threatening its ability to import food and fuel for its 84 million people. The army removed Egypt's first democratically elected after millions took to the streets to protest against him. Saudi Arabia and the United Arab Emirates pledged on 09 July 2913 a total of $8 billion aid to Egypt, showing their support for the Egyptian army's 03 July 2013 coup against President Mohamed Morsi, the country's first democratically elected leader. The $5 billion Saudi package included a $2 billion interest-free deposit in the Central Bank of Egypt, a $1 billion donation and $2 billion worth of oil and gas products. The UAE also said that it would grant $3 billion in aid to Egypt -- $1 billion of donation and a $2 billion interest-free deposit in the central bank. In a stark illustration of the desperate state of Egypt's economy, a former minister from Morsi's ousted government said Egypt had less than two months' supply left of imported wheat, revealing a far worse shortage than previously disclosed.

Experts agreed that priorities should be focused on improving security, and on political reforms that ensure good governance and accountability. These reforms should be coupled with a well-defined and forward-looking economic strategy that will restore confidence and bring back domestic and foreign investment. There is a lot to be desired in terms of legislation to fight corruption, red tape and bureaucracy. If the new government started to deal with the corruption and restoring security, investors will feel more comfortable to come back and help the Egyptian economy. Many Egyptians felt that after years of organized corruption, an economy dominated by government-protected business monopolies, and stark injustices in wealth distribution, there was a need to build a private sector that would put the economy back on its feet.

Economic reform momentum had slowed and high GDP growth rates of recent years failed to lift Egypt's lower classes out of poverty. High inflation, coupled with the impact of the global recession, resulted in an increase in extreme poverty, job losses, a growing budget deficit and projected 2009 GDP growth of 3.5% - half the 2008 rate.

In 1981, 21.5% of the Gross National Income (GNI) went to the wealthiest 5% of the population, while the poorest 20% of the population received a mere 5% of Egypt's income. In 2007, there remained the general sense that Egypt's economic growth was benefiting only a tiny portion of the population. At least 17% of the population liveed under the poverty line, almost identical to the percentage in 1981, and the poorest 20% of the population received 4.8% of the GNI in 2004/05, while the richest 10% of the population received 30% of GNI. Although statistically the standard of living had not dramatically deteriorated, neither had it improved, leaving Egyptians with the feeling that others had passed them by to a brighter economic future.

With the installation of the 2004 Egyptian parliament, the Government of Egypt began a new reform movement, following a stalled economic reform program begun in 1991, but moribund since the mid-1990s. The cabinet economic team simplified and reduced tariffs and taxes, improved the transparency of the national budget, revived stalled privatizations of public enterprises and implemented economic legislation designed to foster private sector-driven economic growth and improve Egypt's competitiveness. Despite these achievements, the economy was still hampered by government intervention, substantial subsidies for food, housing, and energy, and bloated public sector payrolls. Moreover, the public sector still controled most heavy industry.

In sectoral terms, agriculture was mainly in private hands, and has been largely deregulated, with the exception of cotton and sugar production. Construction, non-financial services, and domestic marketing were also largely private. The Egyptian economy, however, relied heavily on tourism, oil and gas exports, and Suez Canal revenues, much of which was controlled by the public sector and was also vulnerable to outside factors. The tourism sector suffered tremendously following the terrorist attack in Luxor in October 1997. The tourism sector feared a repeat of the downturn in tourist numbers when terrorists attacked resorts in the Sinai Peninsula in 2004 and 2005, though the sector did not suffer as greatly as expected.

The U.S. had a large assistance program in Egypt and provided funding for a variety of programs in addition to some cash transfers. A portion of U.S. assistance to Egypt under the 2003 Iraq war supplemental appropriations was provided in the form of bond guarantees, which were contingent upon Egyptian compliance with a series of economic conditions. Egypt met the conditions and in September 2005 issued $1.25 billion in 10-year bonds that were fully guaranteed by the United States. To support the Middle East peace process through regional economic integration, the United States permited products to be imported from Egypt without tariffs if they have been produced in Qualified Industrial Zones, and 11.7% of the inputs of these products originate from Israel.

In 2011, even while the uprisings were taking place, the global Egyptian diaspora sent home $14 billion, double what it sent home in 2009. To put things in perspective, remittances to Egypt have always been larger than revenue from the Suez Canal. And that made Egypt the fifth largest recipient of remittances in the world. Most Egyptians spend remittance money on household goods, but this also stimulates the greater economy. When people buy things from the stores,” Ratha said, “that creates profit and employment. Thus, there is a multiplier effect that benefits the population in general. In addition, nearly 20 percent of Egyptians abroad reportedly invest money directly into the Egyptian economy, i.e., real estate, small business, agriculture, transportation, group saving schemes or industry.

The 2011 revolution prompted a downward spiral of currency weakness, capital flight and crumbling state finances. Egypt’s economy took a tremendous hit during the uprisings of the Arab Spring. Egypt’s GDP growth rate fell from 7.2 percent in 2008 to a paltry 1.5 percent forecast for 2012, and as many as 40% of Egyptians were believed to be living below the poverty level. With the elections in mid-2012, many Egyptians hoped that their country was back on the path to political stability, and that assistance and investments from abroad, including from expatriates, would soon follow. Many factors were major sources of Egypt’s economic malaise: the loss of foreign capital influx, the decline of tourism, slumping foreign direct investment, and capital flight after some Egyptians decided to just “liquidate and leave.”

The national debt, was estimated in 2011 at $35 billion, and the fact that Central Bank reserves are being used to pay for minimum wage increases. Foreign currency reserves had dropped from $36 billion to $26 billion since the revolution, according to the Egyptian Center for Economic Studies. There was also the issue of costly subsidies, such as the $70 billion the Egyptian government spends to support petroleum products. There is general agreement among economists that such subsidies should be slashed drastically with monies only going to the most vulnerable enterprises. They say that the huge resulting savings could help improve education and job training.

As uneven as the distribution of wealth was under the old government, the interim period of military rule may have been even worse. Uncertainty and unrest kept both foreign tourists and investment at bay, hurting millions who relied on related industries.

When Islamist candidate Mohamed Morsi became Egypt’s president in mid-2012, Islamists seemed willing to invest in the country, but more liberal and Coptic Egyptians in the diaspora were reluctant to contribute to Egypt’s economy because they did not know what role they might play in an Islamic-style state. With a budget deficit that accounts for 10 percent of the GDP, an unemployment rate of 12 percent, an 11.8 percent rate of inflation, a 33 percent drop in tourism and a 12 percent decline in the value of the Egyptian pound relative to the Euro, the prospect of economic recovery was gloomy.

Morsi was under pressure to move quickly to create some tangible improvement in the daily lives of his fellow Egyptians, who are suffering from high unemployment, rising prices and shortages in basic commodities. The election of Morsi boosted Egypt's economic prospects, with the stock market rising on news of his victory and the prospect that, for now, protests will subside. But tensions remained between the elected government and the military, which has claimed for itself considerable new powers including oversight of defense and the budget. Estimates vary on the extent of the military's economic enterprises, which range from mining to microwaves, pavement to pasta. There are no official figures, but some put it as high as 40 percent of the Egyptian economy.

Prior to January 2011, tourism was Egypt’s second-largest foreign currency earner and a significant source of employment. In 2005, Egypt removed restrictions on foreign property ownership in a number of tourist areas, including resorts on the Red Sea and along the Mediterranean coast west of Alexandria. However, land ownership policies remained complex and unclear in many cases. Requirements to build on land to maintain tenure encouraged rapid, large-scale development over conservation and more sustainable projects. In 2010, the sector brought in $12.5 billion in revenue, accounted for 13% of GDP, and employed 2.5 million Egyptians—over 10 percent of the workforce. Political instability since the revolution led to a dramatic drop in foreign tourists, particularly in higher-end cultural tourism. Beach resorts fared better, but cut rates to remain competitive. According to the Ministry of Tourism, Egypt received 11.5 million visitors in 2012, and the sector brought in nearly $10 billion in revenue. This suggested improvement since 2011, but business leaders noted that actual numbers were likely lower than reported.

Egypt continued to honor its pre-revolution laws, international treaties, and trade agreements. It was party to 111 bilateral investment treaties and is a member of the World Trade Organization (WTO), the Common Market for Eastern and Southern Africa (COMESA), and the Greater Arab Free Trade Area (GAFTA). In most sectors, there was no legal difference between foreign and domestic investors. There were, however, special requirements for foreign investment in particular sectors, such as upstream oil and gas development, where joint ventures were required. There were also legal challenges to privatizations of formerly state-owned enterprises, including sales of state assets from as far back as 1996. Egypt devised several schemes intended to attract foreign direct investment into special economic and trade zones. The General Authority for Investment (GAFI) implements Egypt’s policies and procedures to facilitate doing business, including maintaining Egypt’s one-stop shop for investors. GAFI's one-stop shop, which aspired to process approvals for new investments within 72 hours, brought together several of the major government ministries needed to establish a new investment. The Egyptian tax code taxes personal income and corporate profits for both foreigners and nationals at 20% and lower for incomes below LE 1 million and 25% for incomes above LE 1 million. According to the World Bank’s Doing Business Index for 2013, Egypt (ranked 109 out of 185 economies) made significant progress prior to the revolution in easing the procedures for opening a business. Foreign direct investment accounted for less than 25% of all investment in Egypt prior to the revolution and had fallen tremendously since.

In the two years since the falll of Mubarak, prices of various items were up, and so was unemployment. And with the poverty rate rising from 20% to 25%, businesses felt the pinch. The high political risk associated with the transition has really impacted negatively and led to disinvestment in the country. Some of the companies actually tried to find more a stable market to invest. The economy was a victim of the political transition.




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