Egypt’s economy, battered by three years of political chaos that have seen the removal of two presidents, is beginning to firm as Arabian Gulf countries pump in aid and investment, the streets become safer and companies start to spend money on expansion.
While the recent bout of oil price declines may weaken the amounts of money flowing into Egypt from the Gulf, mostly from tourism dollars as well as remittances from Egyptians working here, the Cairo government’s finances look set to improve because the cost of the oil it purchases for its huge subsidised energy programme will decline.
However, most economists say it is unlikely lower oil prices will dampen the resolve of Gulf governments to keep supporting Egypt, although they will increasingly try to spread that burden. In that respect, Saudi Arabia and the UAE have taken the lead in organising an investment conference in the seaside resort of Sharm El Sheikh in March to attract much needed hard currency into the Arab world’s most populous nation.
“I am not sure that lower oil prices will affect the way the Gulf aids Egypt,” says Simon Williams, the London-based chief economist for central and eastern Europe, the Middle East and Africa at HSBC. “At the margins it may have some impact but my sense is that Egypt is a policy priority for the Gulf and they are committed to providing support to stabilise it and allow it to find its feet and to eventually begin to recover, and I don’t think the drop in oil income is going to affect that.”
The price of crude oil, the engine of all the economies of the Gulf, has dropped nearly 40 per cent since June to about US$68 a barrel, flirting perilously close to the minimum price that many of the governments in the region need to meet their spending needs. Still, while the drop is unwelcome, economists point out Saudi Arabia, this country and most other Gulf nations have built huge reserves of cash in the past decade when oil prices averaged about $80 a barrel. The UAE alone is estimated to have at least $1 trillion in cash and assets.
That, say economists including Mr Williams and Farouk Soussa, the London-based chief Midddle East economist at Citigroup, will make it unlikely for them to immediately change the way in which they provide support to their allies overseas.
Still, that aid may not last forever. The UAE, Saudi Arabia and Kuwait, which have given Egypt at least $12bn in aid since last year, are keen to persuade the North African country to take measures to reduce its budget deficit, which is running at 11.5 per cent of GDP. Sultan Al Jaber, the UAE Minister of State responsible for overseeing assistance to Egypt, has said the country needs to get its public finances back in shape to attract much-needed foreign investment. At the behest of the UAE, western advisers are drawing up plans for reshaping the Egyptian economy. Mr El Sisi, since taking power this summer, has already started to reduce energy subsidies, although economists say much more needs to be done and that it will take time.
Even though not all economists agree that lower oil prices will be a boon for Egypt, all concur that there has been marked improvement in output since the chaos that began in 2011 sparked by protests that started on January 25. Eighteen days later the former president Hosni Mubarak was removed, to be replaced the next year by the Islamist candidate Mohamed Morsi. In turn, he was ousted in 2013 following similar street protests that toppled Mr Mubarak and Mr Morsi was replaced by the army strongman Abdel Fatah Al Sisi.
Following years of economic growth averaging more than 7 per cent, the country’s GDP growth slowed to 2.2 per cent in 2012 amid the chaos, according to the World Bank. In the three months that ended in September, the economy grew 1.1 per cent.
“Egypt is in transition but my sense when I was there recently is that the new political order is coalescing, security in Egypt itself is strong and policy making is starting to improve after three, four years of hiatus,” says Mr Williams.
“I could begin to see a pick up in economic activity as well but to me this is a long transition process,” he adds. “Egypt is stabilising, although there are still a number of difficult issues for Egypt to work through and once we go through that stabilisation process that we will begin to see economic activity stabilising. We’re not at that phase yet.”
It has been a struggle for Egypt to pick up the pieces. The country’s foreign reserves, crucial for commodity imports such as wheat, sugar and oil, which are priced in US dollars, have halved since 2011 to about $16bn as the central bank defends the Egyptian pound by pumping dollars into the banking sector.
The Egyptian pound has depreciated by 18 per cent against the dollar since January 2011 and shortages of hard currency have created a vibrant black market for dollars in which the greenback is sold at a premium of 10 per cent versus the official rate. That is because the Arab nation, which relies on tourism, Suez Canal receipts and remittances from abroad to provide it with hard currency, has struggled to rebuild its economy, which was heavily reliant on outside sources of income.
Tourism, which is estimated to have accounted for 13 per cent of GDP in 2010, has been particularly damaged by the violence of the past three years, during which thousands have been killed. Many of the country’s sites such as the Pyramids remain woefully bereft of visitors.
Mr Soussa does not think falling oil prices will necessarily be good for Egypt because, among other things, of an expected decline in Suez Canal receipts – which are linked to the price of oil – as well as stalled tourism from the Gulf and remittances even though the cost of oil Egypt buys will decline.
“We do not expect the recent fall in oil prices to result in the sort of economic stop we saw in 2009,” says Mr Soussa. “However, in a low-price environment, we expect growth in Gulf jobs and salaries to slow and to result in stagnation of remittances in absolute terms.”
“We are more sanguine with respect to the prospects for continued government aid from the Gulf in a low oil price environment,” he adds.
“We consider this aid to be motivated by wider geopolitical calculations and the willingness and ability of Gulf governments to prop the Egyptian government is unlikely, in our view, to be very sensitive to oil revenues, at least in the near to medium term.”
The Egyptian economy had been in crisis mode on and off even before Mr Mubarak’s departure, struggling to make ends meet since the 1952 revolution after which many industries were nationalised and subsequently mismanaged for decades. During this time the country had been urged by the likes of the IMF to remove subsidies and sell off state enterprises.
But when the former president Anwar El Sadat tried to remove food subsidies in 1977, national riots ensued. Sadat reversed his decision and successive rulers of the country have put off the task, only making piecemeal concessions to the economy. Energy subsidies alone cost the government, which has been running enormous fiscal deficits, about $19bn last year.
mkassem@thenational.ae
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