Egypt recovering from the political turmoil, economic freefall and social instability of the 2011 Arab youth uprisings, has according to the International Monetary Fund (IMF) overtaken South Africa to become the second largest economy in Africa in 2015.
The IMF states that during the 2012 to 2015 period Egypt’s gross national product (GDP) in US dollar terms grew by an average of 7.5% per year. Furthermore, states the IMF, that Egypt’s pound depreciated a much slower level against the US dollar. The Egyptian pound is at around 7.83 per US dollar. The Central Bank of Egypt (CBE) devalued the Egyptian pound against the US dollar three times in 2015, before appreciating it in November 2015.
In 2015, Egypt’s grew 4.2%. The IMF predicts that Egypt’s GDP will expand 3.3% in 2016. According to the central bank of Egypt, the nominal US dollar value of Egypt’s GDP in 2015 was US$324bn.
Over the same period South Africa experienced a decline in the US dollar value of its economy, because both as a result of a slowdown in economic growth, as well as the massive depreciation of the rand. The IMF states that the nominal US dollar value of South Africa’s GDP declined by 7% per year during the 2012-2015 period. The South African rand declined from an average of R8.20/$ in 2012, to R12.74/$ in 2015. South Africa’s GDP, measured in US dollar values is US$313bn. Furthermore, South Africa during this period has seen many of its local companies and high-net individuals divesting their money abroad, not only shrinking the economy, but choking the economy of the capacity, funds and ideas to grow further.
Some Egyptian economists have been questioning rosy economic statistics coming from official institutions. Early this year, the respected Egyptian economist, Ibrahim Alsahary, asked: “How does the Egyptian economy really look like?” Alsahary suggested that official Egyptian GDP figures may not be entirely reliable.
Nevertheless Egypt’s economy is more broad-based than most African countries which more often than rely on a singly commodity. For example, Egypt has a growing manufacturing sector – crucial for African economies to create wealth, jobs and reduce inequality. More recently, the country has seen the expansion of its ICT sector. Egypt also has a relatively skilled workforce – a crucial ingredient for economic take-off – compared to many other African countries.
Egypt’s economy is facing some tough challenges. Violent attacks by fundamentalist groups, including the downing of a Russian plane in the Sinai October last year, human rights abuses and crack downs on democratic activity, has deterred tourists, undermined investor sentiment and slashed factory production. The crash of EgyptAir flight 804 last week is likely to further hit the economy.
Egypt’s tourism revenues in 2015 dropped 15%. Non-petroleum exports from the country dropped 14.5%. Unemployment in Egypt was 12.9% in 2015, and the IMF predicts it would be 13% in 2016.
The global oil price slump have caused a decline in remittances from abroad and of development aid – whether from Egyptians working in neighbouring oil producing countries experiencing economic slowdowns or from Western countries where growth has also been sluggish. Aid from oil-producing Gulf countries has also dropped. Egypt has recently experienced foreign exchange shortages.
The 2011 youth uprisings caused an outflow of more than US$10bn in portfolio investment. Since 2011, Egypt has used heavily drawn on its foreign exchange reserves to hold up the value of its currency. As a result the country’s foreign reserves fell to import cover of 3 months only. Egypt’s pound lost 9% of its value against the US dollar in 2015, with many local analysts arguing that the currency is overvalued.
Since the 2011 uprisings fellow Gulf Arab states have provided US$20bn in grants, cash deposits to the Central Bank of Egypt and new investments. The recent oil price drop initially slowed such assistance.
However, in 2015 Egypt secured US$36.2bn in aid and investment pledges from members of the Gulf Cooperation Council (GCC), the oil-rich countries in the Gulf region. In addition, Egypt also secured US$18.6bn in pledges for investments in power plants.
More recently, Egypt has sought to secure loans from international institutions to plug ballooning deficits in its current and fiscal accounts. Late last year, Egypt secured US$1.5bn from the African Development Bank for economic development and budget support which will be distributed over three years.
Egypt also recently signed an agreement with Russia to build the country’s first nuclear power station. Russia’s nuclear corporation, Rosatom, will build a plant that will become operational in 12 years. Russia will loan Egypt US$25bn credit to build the nuclear power plant. The loan will cover 85% of the costs. It will be repaid over 22 years, with the first repayment scheduled for 2029, at an annual interest rate of 3%. Russia will provide the scientists, engineers and technicians to run the plant.
In January this year, the World Bank unveiled details of a US$3bn loan to Egypt, on condition the country implements a structural adjustment program which includes reducing the public service wage bill, abolish energy subsidies to poorer communities, and raising electricity prices and taxes.
Egypt also has to commission private sector driven renewable energy generation and increase the production of renewable energy from zero megawatts in 2015 to 1500 megawatts by the end of the 2018/2019 financial year. The World Bank loan will also mean that the bank will have close supervision of Egypt’s monetary and fiscal policies. The World Bank has put together a Country Partnership Framework (CPF) for Egypt to oversee the implementation of the new structural adjustment program for the country.
The 2011 youth uprisings in Egypt was as a result of a combination of rising inequality between the small political and economic elite and ordinary people, and high unemployment, particularly youth unemployment levels, combined with political repression. In the run-up to the 2011 Egyptian youth uprisings, World Bank and IMF inspired structural adjustment economic reforms which pushed government to cut subsidies to the poor, privatisation of public services and foreign investors, brought economic growth, without equity and without increasing employment. In fact, it entrenched the economic and political power of elites.
Egypt is heavily depending on foreign loans to grow the economy. The downside of this is that the country will be stuck with a high debt burden with excessive policy conditions. High indebtedness combined with lack of domestic control to come up with appropriate policies have often caused the destruction of many African economies.
To turn around Egypt’s economy, the country will have to seriously tackle inequality between the rich and ordinary citizens, provide a social security net for the vulnerable and reduce unemployment. A key requirement for economic prosperity is for the country to boost democracy, human rights and freedoms. Economic reforms without these requisites are likely to be heavily opposed by ordinary citizens and could lead to a second “Arab Spring” revolution in Egypt.
*This article was published in the African independent.