Then & Now: February 11th 2011/2013

“Nightmare over!” said tailor Saad el Din Ahmed, 65, in Cairo. “Now we have our freedom and can breathe and demand our rights. In Mubarak’s era, we never saw a good day. Hopefully now we will see better times,” said Mostafa Kamal, 33, a salesman.

Egypt protests topple Mubarak after 18 days, Reuters, Feb 11, 2011

“We are not here to celebrate but to force those in power to submit to the will of the people. Egypt now must never be like Egypt during Mubarak’s rule,” said Mohamed Fahmy, an activist.

Five die in Egypt violence on anniversary of uprising, Reuters, Jan 25, 2013

Two years ago today, Egyptians made history sweeping Hosni Mubarak from power and sending a warning to other dictators across the world.

But as Egyptians and close watchers of the nation are well aware, the country’s political and economic situation is not better than 2011, and has in fact deteriorated in many areas.

The numbers speak for themselves.


As the political crisis has deepened, the currency has dipped to such a point that the public have lost faith in the pound and turned to the black market, the jobless rate has increased and the country’s twin deficits in the budget and balance of payments is putting further pressure on the level of GDP growth, which has slowed down to about 2%.  The government is well on its way to exceeding its original deficit target of 7.6% of GDP for this fiscal year.

Foreign direct investment may be in the green, helped by one-off investment deals including France Telecoms of Egypt’s Orascom Telecom Media and Technology, but the level is nowhere near the $4.1 billion in FDI Egypt recorded in the first half of 2010.

Before the crisis, Egypt had been receiving about $1.15 billion a month from tourism, $375 million a month from foreign direct investment and $1 billion a month from worker remittances and other private transfers, according to central bank figures.

Remittances, an important source of hard currency, are one bright spot in an otherwise negative outlook. But it is not enough to comfort economists and investors who say Egypt must apply harsh austerity measures for the fiscal situation to improve.

Capital Economics made some important points in a note this morning:

We estimate that fiscal tightening of 3% of GDP is needed just to stabilise the debt ratio. However, measures to put the public finances onto a more sustainable path will only be possible if the political situation calms down. Until then, the fiscal position is likely to worsen.

The deterioration in the Egyptian fiscal position is mainly due to rising wage costs and subsidy expenditures. The former have risen by 26% so far this fiscal year compared to the same period last year while the latter are up by a whopping 38%. We suspect that the government has been recruiting more workers and increasing pay in an attempt both to stem the rise in unemployment (which is now higher than before the start of the revolution two years ago) and to quell civil unrest. Particularly worrying is the fact that expenditure on wages and jobs is extremely difficult to pare back.

Large budget deficits over the past couple of years have, in turn, resulted in higher levels of government debt. Total government gross debt now stands at over 75% of GDP. This, coupled with rising interest rates on public debt (due to higher risk premia caused by political instability), has led to a 30% y/y increase in debt interest payments. These payments now account for over 20% of total government expenditure.

Talks with the IMF, apparently due to re-start soon, are likely to focus on fiscal consolidation.

There is no easy way of getting out of this situation. Egypt will have to impose some level of taxes on the middle class, cut spending on subsidies while enforcing new measures that mean cheap fuel gets to those who most need it, and reform the bloated public sector, where employees are overpaid and inefficient.

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