Egypt: Economic risks on the rise amid deteriorating monetary dynamics and security issues
November 25, 2015
The economic situation in Egypt has taken a turn for the worse in recent months. Many of the issues that are now making headlines had already been brewing for quite some time, but were momentarily overshadowed by other developments. During the course of this year, the government has been touting its plans to revitalize the economy after the years of turmoil that followed the 2011 revolution. The centerpiece of its efforts was the expanded Suez Canal that was inaugurated in August. The discovery of a massive offshore gas field in the same month, coupled with pledges of increased foreign investment in large infrastructure projects, suggested that Egypt was poised for an important turnaround after years of economic and political instability. However, these developments only promised to lift the economy in the long-term at best. Meanwhile, a precarious security and political situation has exacerbated underlying monetary problems.
On 31 October, a plane taking off from the airport in Sharm el-Sheikh, a resort town in southern Sinai and jewel of the Egyptian tourism industry, crashed and all 224 passengers aboard were killed. The Islamic State (ISIL) claimed responsibility for the event. Less than a month later, on 25 November, a suicide car bombing also attributed to ISIL killed several people at a hotel in the northern Sinai region. Expectations for growth in the tourism sector, which had shown signs of being on the mend this year, have largely been dashed as a result of the attacks. Given that tourism represents around 10% of GDP and up to 20% of foreign exchange reserves, the direct economic fallout will likely be significant. Moreover, these events will also weigh on already-weak investor confidence and put further pressure on the Egyptian pound.
Egypt had already been struggling with a severe shortage of foreign currency reserves prior to these developments and pressure will likely build going forward. At the end of September, reserves came in at USD 16.4 billion, which represents only about three months’ worth of imports and is a far cry from the USD 36 billion it held before the revolution at the end of 2010. A lack of reserves is making it harder for the Central Bank to defend the pound, although the Bank had allowed the pound to depreciate three different times between February and October amid concerns over the impact of rising inflation. Despite a surprise reverse move to increase the value of the pound in early November, the currency is about 10% weaker today than at the close of last year. A depreciated currency and lack of foreign exchange are driving up the price of import goods, including basic foods. Tarek Amer, who took over as Central Bank governor on 26 November, faces the difficult task of managing further currency depreciation without causing social backlash over further inflation.
Meanwhile, a second stage of parliamentary elections were held 23 November. Public apathy due to high levels of corruption and lack of faith in the political system has led to low voter turnout, particularly among younger people. Final results are set to be revealed in December. Egypt has been without a parliament since 2012, and while analysts predict that the new parliament will largely support President Abdel Fattah el-Sisi, domestic political stability is far from guaranteed. Moreover, it is unclear if President el-Sisi will be able to successfully steer the economy through turbulent times and push ahead with a much-needed reform agenda. Further reductions to energy subsidies and a planned increase in the VAT will be complicated due to a large fiscal deficit and the risk of increased social unrest.
Author: Carl Kelly, Economist