How did Egypt’s economy survive before the revolution considering it was a ticking time bomb?
Why have energy subsidies, which swallow a fifth of the budget, only become a financial burden now?
What has changed?
The following hair-raising chart from London-based economist Ziad Daoud explains all:[caption id="attachment_1692" align="aligncenter" width="640"] Ziad Daoud[/caption]
Egypt’s economy has gone through a three-stage transformation, Daoud explains:
Phase 1: Before the Revolution
Foreign investments either through directly investing in infrastructure projects or buying factories, or financial investments into the Egyptian stock market or government bonds. These investments, up till the revolution that began in early 2011, were sufficient to cover the current account deficit (i.e., when a country’s total imports is greater than the country’s total exports, which can be dangerous if not kept in check).
As a result, the Central Bank of Egypt’s (CBE) reserves remained largely untouched and reached a peak of $36 billion at the end of 2010.
Phase 2: The Revolution
Three things changed after the Revolution.
1) First, despite the rise in remittances, the current account deficit grew larger mainly due to the fall in tourism.
2) Second, direct investments halted to near zero.
3) Third, foreign capital flows into the Egyptian stock and bond markets quickly reversed course and flowed out of the country (the light blue bar in the chart).
The changes put pressure on the pound but the currency was supported by the CBE’s intervention in the foreign exchange market using its international reserves. This meant reserves fell below the minimum safety level—estimated by the CBE to be around $15 billion—in the second half of 2012.
It also meant a change of strategy – the current account deficit and financial account deficit were now being financed by the CBE’s reserves.
Phase 3: After the Revolution
With international reserves all but exhausted, the government—loathed to accept a currency depreciation—started to look for alternative sources of external funding. It was during this phase that it reached a preliminary agreement with the International Monetary Fund (IMF) in November 2012 only to backtrack on the deal.
Instead, the government managed to finance the current account deficit with loans from Turkey, Saudi Arabia, Libya and especially Qatar. Most of these loans are in the form of deposits at the CBE, some of which can already be seen as the dark-grey bar in the chart and more are likely to show up when the CBE publishes the balance of payments figures for the latest quarter. Indeed, thanks to these loans the CBE announced last week that its foreign currency reserves had increased to $16 billion at the end of May.
Egypt is once again on the precipice of signing the IMF loan, saying a deal would be agreed by the end of this month. This could mark the Fourth Phase of Egypt’s economic transition, but as the government’s top advisor Essam El Haddad, complains to the Financial Times that it’s all the IMF’s fault, maybe we shouldn’t hold our breath…
While the economic impact of the revolution was not one that could easily be managed, the decisions to steer the country in the right direction could have been different.
Because, what does the above tell you?
It shows that every single cabinet elected after the fall of Hosni Mubarak, every prime minister and even the Supreme Council of the Armed Forces which coveted its role as a military caretaker government before President Morsi was elected in June 2012, have turned Egypt from an economy suffering because of its unstructured, inefficient welfare system, to an economy that is surviving on welfare – loans from others.
Isn’t it ironic, don’t you think?