Despite all the political instability, economic prospects have improved over the past few months. A US$4.8b IMF loan, agreed in November 2012, combined with substantial financial support from other multilateral and bilateral partners, will lower financing strains and the risk of a disorderly devaluation of the pound. By providing an anchor for economic policies the IMF program will hopefully boost business confidence and crowd in private capital, which has largely deserted the country since the political transition began.
However, large risks remain. The lengthy political transition has left Egypt with much reduced economic buffers if the transition stalls or if the IMF program is terminated. FX reserves have slumped to below 3 months of imports, the fiscal deficit is 11% of GDP, and growth has slowed to a crawl. Moreover, attempts to rein in the fiscal deficit and boost private investment will have to be carefully balanced against popular demands for ‘social justice’ and income re-distribution.
The economy has weakened sharply since the start of the political transition. Over the 18 months to June 2012, GDP grew by just 2% pa, and unemployment increased from 9% to 12½% ― though unofficial estimates are much higher. Investment has been weak as businesses have put plans on hold, and in some cases withdrawn capital, while exports and Suez canal dues have been hurt by downturn in the EU. Growth is expected to accelerate in 2013 and 2014, but this requires political stability. Egypt is very sensitive to weak growth, because per capita income is low, the labour force is expanding rapidly, and the budget deficit is large.
Most industries slumped sharply during Mubarak’s overthrow. The subsequent recovery has been tepid, held back by political uncertainty, security problems and regional economic weakness. Tourism arrivals are still 25% below previous peaks due to the downturn in the EU and persistent fears about domestic security. Meanwhile, industrial production rebounded quickly through 2011, but has eased through 2012 as labour unrest and weak export markets discouraged production.
Investors withdrew large amounts of capital from Egypt in response to the political turmoil, slump in growth, and uncertain investment climate. All up, net capital outflows were US$20 billion from March 2011 to June 2012. To offset the outflow, the central bank has run down its reserves rather than allowing a sharp fall in the pound. The fears that this would end in a balance of payments crisis have faded in recent months, as multilateral and bilateral partners begin to fill financing gaps. Egypt has been offered US$14.5b on favourable terms from its bilateral and multilaterals partners. FX reserves have stabilised at around US$15b, or 2½ months’ imports.
The budget deficit for FY2011-12 was 11% of GDP, and public debt-GDP ratio 83% – both extremely high. Under its IMF program, the government will try to put the budget on a more sustainable footing by curtailing subsidies – 25% of total expenditure – and by reforming sales and income taxes. Effective communication will be vital if these reforms are to be implemented. Economic reforms are viewed with suspicion by many, as reforms to liberalise the economy during the Mubarak-era chiefly benefited the elite. Ratings agencies have downgraded Egypt’s foreign debt over the last two years to well below investment grade ― Standard & Poor's to B, Fitch to B+, Moody's to B2. All agencies have negative outlooks.