Top 7 Ways For Egypt To Improve Its Economy

Egypt has formally requested a $4.8 billion loan from the International Monetary Fund, up from the $3.2 billion that had been discussed since last year.

A loan package would add credibility to economic reforms needed to restore investor confidence.   The IMF loan should be signed by the end of November, or the beginning of December and will probably cover 5 years at an interest rate of 1.1%, the Egyptian prime minister Hisham Kandil told reporters today.  

It offers some reassurance to investors that Egypt’s meeting with the IMF delegation has been fruitful.  But there is a long way to go.

The nation’s economy has been crippled by 18 months of political turmoil in the wake of last year’s popular uprising against former president Hosni Mubarak. The country’s balance of payment problems have worsened – the balance of payments deficit doubled to $11.2 billion in the first nine months of 2011-2012 compared to a shortfall of $5.5 billion a year earlier.

Foreign investors have fled and are reluctant to return partly because of fears that a sharp currency devaluation could wipe out any returns .  Foreign direct investment fell to a meagre $218 million in the nine months that ended in March compared with $2.1 billion a year earlier.

Foreign reserves have also fallen to well under half the levels seen before last year’s uprising, plummeting to $14.42 billion at the end of July, from $36 billion at the end of 2010.

The crisis has left local banks taking on much of the short-term and other lending to the state and the government has also borrowed directly from the central bank.  State borrowing costs reached their highest in well over a decade in late June.

Time is running out for Egypt.  Rebel Economy interviewed half a dozen economists and came up with the following (chronological) list of what needs to be done to revive Egypt’s economy.

1) IMF loan to be rubber stamped: 

Egypt needs to get some stability on the balance of payments front or it will eventually face a major crisis.  Securing a loan with the International Monetary Fund would encourage foreign investment inflows and provide the seal of approval for the direction of economic policies as well.  It is looking like this may happen by the end of this year.

2) Devaluation of the Egyptian pound:

Some economists say this needs to happen either right after the IMF deal or simultaneously.   Investors and economists have repeatedly called for a devaluation to ease pressure on reserves.  The central bank has helped limit the pound’s fall to 4% since the beginning of the uprising last year, but the currency is expected to fall 9% in the coming year– to a historic low.

As long as there is a managed devaluation, rather than disorderly, the costs of devaluation should be manageable.  Higher inflation as a result of devaluation should be moderate given that the economy is weak and global commodity prices are likely to fall.  Plus increased costs of subsidies after devaluation should be partly offset by higher revenues from energy exports and the Suez Canal, meaning the impact on public finances will probably be limited.

3) Reforming Public Finances:

Restructuring the budget to cut the deficit.  At the moment, Egypt’s draft budget shows the deficit is projected to rise 12.5% to 135 billion Egyptian pounds ($22.26 billion) in the fiscal year that began on July 1 even though the government is already struggling to deal with its current shortfall.  It must have a plan to limit wasteful consumption spending (i.e., inefficient subsidies) so that spending can shift to urgent priorities:  targeted social support, education and health spending, public infrastructural projects and incentives to mobilize growth and employment in the private sector.

4) A Wholesale Reform of the Public Sector:

Egypt’s out-dated bureaucracy will keep holding the economy back until a really tough reformer begins to tackle problems, including drawing a line under Mubarak era corruption trials that have dragged on since last year.   The new government is made up of a group of technocrats with little political experience.  There are tens of regulators in Egypt that are charged with keeping tabs on various sectors of the economy (stock market, telecoms, electricity etc), yet all seem to ignore one another and are largely toothless.  The Illicit Gains Authority, which is attempting to tackle high profile embezzlement and investigation the wealth of the former regime, appears to be making a string of public announcements without acting upon them.  A reformer needs to be brought in who has vision, ambition and charisma to persuade others to accept the difficult decisions that will have to be made.

5) Focus on Private Sector:

Embracing a proactive plan to provide support to the private sector, particularly small and medium enterprises to ensure credit availability and structure a broad umbrella of institutional support.  This will ease existing hurdles of setting up a business and ensure the success of the new operation.  Earlier this month the World Bank approved $200 million for SMEs, a tidy sum considering the sector represents almost 90% of enterprises in Egypt and provides the main bulk of private sector employment.

5) Education and Employment:

For Egypt, a skilled workforce will be key. Egypt has one of the highest illiteracy rates in the Arab world. Boosting literacy rates alone could increase GDP growth a percentage point or two in the medium to long term.  Unemployment in Egypt hit 12.6% in the second quarter, against 11.8% a year earlier – equivalent to 3.4 million out of work.  But that data doesn’t include the large informal economy which evades taxes, engages in monopolistic and cartel behaviour. That in turn raises prices, prevents growth and makes it difficult for the government to know how many people are unemployed, a key metric for public policy.  There is a need to formalize this sector, which is predicted to be worth around $248 billion, according to Hernando de Soto, the Peruvian economist who was hired by  the Egyptian government in 2011 to legalize the informal sector.

6) Boost Trade Relations:

Egypt must widen the scope of trade relations to increase access to markets that would boost exports and attract investment.   The emphasis should be on building trade agreements, particularly with the US, but also tap emerging markets that are likely to lead global growth going forward.  So Egypt could look to Africa and widen trade relations with Arab neighbours.  President Mohammed Morsi plans to visit China at the end of this month to promote trade ties between the two countries.  China has been among the only big economies to continue investing in Egypt post-revolution, while others like the US have scaled back.

7) Central Bank Policy:

The central bank should ensure more flexibility in managing the exchange rate.  It should also limit the monetary policy to prevent expensive fiscal spending to continue. Finally the CBE should focus on reforms that increase competition and fight monopolistic practices that have unduly increased inflationary pressures and the cost of living while threatening the competitiveness of exports.


  • Sherif El Refaei
    Posted August 24, 2012 at 8:18 pm | Permalink

    Can we know the names of the half-dozen economists who support/suggest this scheme?

    • Posted August 25, 2012 at 9:02 am | Permalink

      Dear Mr El Refaei,
      The economists I spoke to would rather remain anonymous, because they are mostly employed by government institutions that do not appreciate their economic-thinkers waxing lyrical to journalists and bloggers. However, two of the economists I contacted are Said Hirsh, from Capital Economics in London and Emad Mostaque, of Religare Capital Markets. The list is Rebel Economy’s perception of what should be done, and doesn’t necessarily represent the views of the economists. What would your list look like? I’d be delighted to write an addendum to the current article. Thanks for you comment.
      Rebel Economy

      • Sherif El Refaei
        Posted August 25, 2012 at 1:34 pm | Permalink

        Dear Ms Halime
        Thank you for your reply. Unfortunately I’m not an economist, so adding my input will probably be useless. I asked who are the economists who suggested this scheme because it seemed to me a list that is not far from the Washington consensus. This looked rather odd when you read it in a place called rebel economy. The first step in the list is the IFM loan. The main value of the loan -as said by many including yourself- is to encourage forign investments, evidently suffered severe regression in the last year. So far no one was able to tell us what kind of reforms and regulations the government will have to make in order to get the loan. The rumors that the IFM have learned from previous mistakes and will not ask for any financial reforms is too good/naive to be true. On the other hand, how critical is the accumulation of forgn investments? According to the rules of neoliberalism, this is very important. But should we follow the same rules, even after its last disasterous effects? Allow me to refer you to an article by birdsall and fukuyama discussing this issue.
        Best regards

        • Posted August 25, 2012 at 5:00 pm | Permalink

          Yes, I agree. The list isn’t very “revolutionary”. Also, I think you bring up some very interesting points re: the economic reforms as a prerequisite of the loan (especially if we think of the last time the IMF came to Egypt’s rescue in the 90s…). They are quite run of the mill solutions suggested by the economists I spoke to. But perhaps Rebel Economy needs its own alternative “Top 7” for Egypt’s economy. What do you think? Any suggestions for the alternative ways Egypt can improve its economy without going to the IMF, etc? Many thanks for your comments. Farah

  • Rasha
    Posted August 26, 2012 at 2:36 pm | Permalink

    This will never fix our economy, what is this for God’s sake? This is just a symptomatic cure. We need to have solid economy on solid grounds.

    • Posted August 26, 2012 at 2:56 pm | Permalink

      Hello Rasha,
      Thanks for your comments.
      What is it missing from the list? How should it be changed and what points should be included to reflect a real solid change?

  • Said
    Posted September 9, 2012 at 7:22 pm | Permalink

    As one of the economists approached I thought I should add something here. We have to first distinguish between what Egypt needs immediately and what should happen in the long term. To this effect, the IMF loan and a devaluation will probably do nothing more than achieve some macroeconomic stability and rebalance the economy in the next three years or so. It will not however change egypt’s fortunes in the long term. This is of course not bad since it will free up policymakers and Egyptians to the important task of setting out a vision and plan for Egypt in the longer term. For example, Latin Americans focused on their foreign and public debt issues in the early years of reform following the ouster of their own dictators. To be clear, I am not advocating the IMF but Egyptians have to work within the current global framework. As the economy hopefully stabilises and given if politicians and the people do not become complacent, building a solid base could start. I should add that this task is the most difficult one and in many countries this only happened after a massive economic and political shock, a lot worse than what Egypt has seen. It also takes a very long time to achieve. In the West, this happened over tens of years if not hundreds. And although china’s reforms have started well over 30 years ago, it is still in early stages. I would suggest reading “why nations fail: the origins of power, prosperity and poverty” for a historic overview of how countries changed their fortunes.

    • Chris
      Posted July 13, 2013 at 9:23 am | Permalink


      I am interested in your suggestions. I would like to communicate with you directly on this as I am helping in organizing a think tank for an economic plan for Egypt. Can you please email me

      Thank you.


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