Egypt’s Economy, a New Regime Attempts to Foster Growth

IT WAS a rare example of Egypt doing something that pleased economists. On July 5th fuel prices rose as the government removed a portion of its generous subsidy. The price of a litre of the most commonly used petrol rose by 41% to 2.6 Egyptian pounds ($0.36); the price of a cubic metre of compressed natural gas, used mainly by taxis, rose by 175% to 1.1 pounds. Despite the odd protest and much resentment among the poor, Abdel Fattah al-Sisi, Egypt’s new president, appears to have pulled off a reform long urged by the IMF and long postponed by previous presidents.

Mr Sisi seems determined to fix Egypt’s economy. It has struggled during the past three years of political turmoil (see chart), which turned off investors and caused tourism to collapse. Earlier this month he refused to sign the budget until the finance minister cut the planned deficit for the coming fiscal year from 12% to 10%. Whether the new sums add up is not clear, but already this year Egypt has introduced a tax on stockmarket gains and plans to bring in value-added and property taxes too.

This, plus an influx of money from Gulf countries keen on Egypt’s new regime, has led to a cautious improvement in investor sentiment. Last month PepsiCo and Almarai, a Saudi food company, said they would invest $345m in an Egyptian joint venture. Wealthy local businessmen have been sweet-talked or coerced into announcing that they too will be investing at home. One of them, Naguib Sawiris, has promised to spend $1 billion, though on what is uncertain. With Mr Sisi likely to bring stability, albeit by squelching dissent, the economic picture looks rosier than it has since Hosni Mubarak’s ousting in January 2011.

Yet such moves fall far short of the overhaul Egypt’s economy needs. The country had decent growth rates from 2004 to 2011, but a lot of it was driven by “real estate rather than productive activity”, says Muhammad al-Komi of the American University of Cairo. As well as political turbulence, he blames a large, inefficient bureaucracy and poor education for hobbling growth.

Egypt needs to spend more on education, health and research—a goal enshrined in the new constitution. But much of its budget is eaten up by subsidies, along with salaries for the sprawling bureaucracy and interest payments on its debt. The government has built up huge debts to the firms that produce Egypt’s oil and gas. That, in turn, has prompted the energy firms to cut investment and production, exacerbating the government’s fiscal woes.

Egypt’s private sector remains dominated by big conglomerates; thanks to a lack of access to capital and land, small companies struggle to grow. A recent World Bank study found that only 17% of Egyptian firms, and only 13% of smaller ones, had borrowed from formal financial institutions. These are hard things to fix, and Mr Sisi may be loth to upset his base in the civil service or risk more discontent at a time when he is already suppressing dissent.

Even more worryingly, the army has reclaimed its prominent role in the economy in recent months, leading a project to redevelop the Suez canal, for example. Mr Sisi’s speeches suggest a belief in an economy guided by a benevolent, paternalistic state; there is little talk of an innovative and productive private sector. That is a shame, says Mr Komi. “Countries such as Turkey show it’s possible to transform the economy,” he says. “But I worry that rather than implement modern policies, Egypt’s officials still live in the Pharaonic period.”

Source: The Economist

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