Egypt Economy Near Collapse.
Egypt on the Brink.
Egypt Going to the Dogs.
Egypt’s Financial Armageddon.
Those are just a small selection of headlines used in the past few months.
Egypt’s economy, it’s fair to say, is close to financial ruin. The government’s reluctance to change its spending habits, or raise money (by raising taxes even just marginally for the middle and upper class), has left the country in economic paralysis.
The lack of a decent economic reform plan has stalled negotiations with the IMF for a $4.8 billion loan, undermining the credibility of the Morsi administration, and prompted investors to stay away.
But what is worse is that all the government’s mistakes have been so high-profile, and embarrassing, for Egypt.
Even behind closed doors within government, officials have begun blaming each other of complacency.
What are the disasters in the making that are hastening the speed of an economic fallout?
1) FOREIGN CURRENCY RESERVES
This number has become ubiquitous with the fast decline of Egypt’s economy. International reserves have dropped more than 60% since the beginning of the revolution, falling from $36 billion at the end of 2010 to $13.4 billion in March.
The Central Bank used billions of dollars to prop up the value of the Egyptian pound (even though many investors saw it as overvalued and still do – hence the black market).
Here’s the problems:
1) Cash injections have come in from Qatar, Turkey and to a lesser extent Saudi Arabia, helping Egypt keep its coffers fairly full. But this is not sustainable.
The “Gulf tap” is not infinite and could be turned off at any point.
Plus, money from the Gulf to keep plugging reserves, that in turn helps to pay off debts that keep rising, is just like burning money. What’s the point of investing in a country that uses money to pay off a cycle of debts rather than for investing in restructuring and reforms?
2) The other problem with the dangerously low level of reserves, is that it leaves Egypt highly vulnerable to any currency/commodity price crash.
Exhibit A: Last week the price of gold crashed, falling from a high of $1,900 an ounce at one point to less than $1,400 an ounce.
Egypt, which before the revolution, would not have been phased by this drop, this time felt the impact.
The country lost $500 million worth of currency reserves from the gold rout, Pharos Holding, Cairo-based brokerage firm said a few days ago. That’s because Egypt has around 75 tonnes of gold, so if the commodity crashes, so does its value for the Central Bank.
3) The less hard currency Egypt has, the less money it has to fund fuel and wheat imports, the more shortages and blackouts, and the higher the risk of social unrest (more here on the energy crisis and related debt problems). As just one indicator, the US has warned Egypt that it is overestimating the size of its upcoming domestic wheat crop in a sign that pressures are mounting on the country’s depleted foreign currency reserves.
While reserves have lingered at around $13 billion to $15 billion in the last six months, this is not a situation Egypt wants to be in. If reserves drop further, it could find itself struggling to control a parallel black market where the pound is trading at 8 or 9 pounds to the dollar.
The statistics say it all, and even those numbers don’t depict the true state of unemployment in Egypt (because they ignore the huge informal market that churns along quietly alongside legal business).
Egypt’s jobless rate stood at 12.7% in 2012, up from 12% in 2011 and 9% in 2010, according to figures from the country’s statistics agency. Even that annual figure is tame in comparison to the latest quarterly figure that showed the unemployment rate was 13% in the latest quarter of 2012.
The startling figure, however, is that of the total unemployed, almost 77% (up from 74% just a few months ago) are between the ages of 15 and 29.
The fact that most Egyptians who are unemployed are in this age bracket is extremely dangerous for the Morsi administration, which has consistently failed to get critics and the opposition on side.
Some international lenders are making small moves to help with funding small businesses and offering advice to burgeoning entrepreneurs. But more work needs to be done. The president and the government need to convince international players that they are working for the good of Egypt, not for their own political wins.
Without a doubt, as the number of people out of work ticks higher, so will resentment and anger and that can only mean a repeat of January 25, 2011.
Unsurprisingly, Egypt announced today it will exceed its budget deficit target this year because frankly all the delays in enacting spending cuts have all but evaporated.
The deficit may reach 11.5% to 11.7% of economic output in the year that ends in June compared with 10.4% targeted earlier, Egypt’s finance minister El-Morsi Hegazi said.
The government wants to reduce the gap in the 2013 to 2014 fiscal year to 9.6 percent of gross domestic product, according to a draft budget he presented.
In the meantime, Egypt’s credit rating has been lowered to junk or near-junk status by the three largest ratings agencies: Moody’s, Standard & Poor’s and Fitch. Major economists and lenders are also cutting their growth forecast for Egypt (the IMF cut its 2013 growth forecast for the Egyptian economy to 2%, down from the 3 percent initially predicted last October).
As mentioned above in previous blog posts, the Morsi administration has repeatedly made ad hoc decisions, which seemingly disconnect from one another and stray far from a long-term economic plan. That has meant a delay in major spending cuts, and revenue-generating initiatives.
In fact, if anything, Egypt has increased spending where it least needs it. It spends an extra $1.6 billion every three months on inefficient energy subsidies (on top of what is already budgeted), and has hiked the bill for public salaries by 80% to $25 billion as the Islamist-led government appears to try to appease the public with more money ahead of parliamentary elections in October.
What’s more, revenue generation is weak. Falling short of making any dramatic tax increases, Egypt regularly misses tax collection targets, losing out on billions of Egyptian pounds every fiscal year.
WHAT HAPPENS NOW
All of the above really points to one conclusion: the President and his band of loyal Brothers have failed, after nine months in power, to improve the lives of Egyptians.
Yes, considering the scale of the political transition, change was never going to be easy, but the government’s repeated blunders have undermined confidence in Egypt and overseas, and left them with an even more difficult job.
But Morsi must act now, reach to the other side for consensus, and convince Egyptians and international lenders he is not a fraud grappling for power, or prepare to be held accountable by the people.