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Political reconciliation and economic recovery look distant in Egypt

January 27, 2014 at 1:23 pm

As the bloodshed in Egypt worsens, the country’s economic situation has been consigned to a postscript in most news coverage, while death tolls, political grappling, and western intervention make the headlines.

Yet the economic problems which contributed to downfall of President Mohammed Morsi last month remain, and are set to get worse.

Egypt has an economy of $256 billion. To give some context, in the three years leading up to the global financial crisis of 2007, it grew by 7 per cent annually. Even as the worldwide recession peaked, Egypt’s GP continued to grow at a healthy rate of 5 per cent. Ever since dictator Hosni Mubarak was ousted at the beginning of 2011, this has slowed to around 2.5 per cent. This is perhaps to be expected during a time of intense political uncertainty. World Bank figures show that growth is slightly slowing, with just 2.4 per cent in July-December 2012, and 2.2 per cent in the first three month of this year. Forecasters suspect that this is going to fall further given the current unrest in the country.

As the political crisis worsens, one immediately visible impact is on tourism. This is a major industry in Egypt which ordinarily employs around 10 per cent of the workforce. Tourism has suffered ever since the 2011 revolution. In 2010, there were around 14 million tourists, and last year, just 10.5 million. Yet it remains a lucrative and vital industry. Although the number of visitors in 2012 was reduced by almost a third, tourism still brought $10 billion into the economy that year. It was reported this week that both Russia and France are arranging contingency plans to get their citizens out of Egypt if necessary. The US government is urging its citizens to leave Egypt and advising against all “non-essential” travel. The British Foreign and Commonwealth Office (FCO) notes that “most” visits to Egypt are trouble free, but warns that there have been deaths at public demonstrations, and “more than forty rapes and sexual assaults of Egyptian and foreign women.” It exempts the Red Sea resorts from its warnings, but across the board, the travel advice is hardening.

If other governments follow the US’s example and advise against all non-essential travel to Egypt, it could have a very serious impact. Once a government advises against travel to a particular location, tour operators face problems with insurance, and may stop offering packages altogether. Nor is tourism the only problem. There has also been a drastic fall in foreign direct investment has fallen from as much as $10 billion a few years ago to $1.3 billion in the first nine months of Egypt’s fiscal year.

In the short-term, Egypt’s interim government is okay. Any immediate contraction of the economy has been staved off by the fact that the new regime has managed to secure an injection of $12 billion from Saudi Arabia, Abu Dhabi, and Kuwait. However, western diplomats have told Reuters that they expect this to last less than a year. The money certainly buys time for the interim government to attempt to iron out its political problems, but it is by no means an infinite resource. The interim finance minister, Ahmed Galal, has said that the money will be used to invest in infrastructure and kick-start the economy.

Another potential problem is the reduction of western aid. As yet, the European Union has stopped short of immediately cutting financial or military aid to Egypt. The US has come under pressure over the $1.3 billion it pumps into the Egyptian army every year, but has thus far refused to halt the payments. In part, this reluctance to cut aid comes from a concern that to do so could shut dialogue with Cairo’s military rulers and further damage the ability of the EU or US to mediate in future negotiations to end the current internal strife in Egypt. That is the current position, but aid money is by no means secure. The US, under increasing internal and international pressure, has said that continued bloody crackdowns against protesters could affect the commitment to aid, while EU foreign affairs ministers are reviewing their financial assistance.

While the Gulf states could step up to replace western aid money in the event of cuts, this would not solve all of Egypt’s problems. For starters, there is a limit to how much money any foreign state will be willing to pump into a floundering economy with a ballooning deficit. Secondly, if ties to the US are cut, it will not be merely a matter of money. As the New York Times reported this week, Egypt also relies on contracts for military equipment from US contractors. America’s arrangement with Egypt is the same as with Israel. Both nations can make large advance orders for weaponry and equipment that takes years to deliver, as it is assumed that Congress will continue to renew the yearly sum of aid money. Egypt already has orders stretching forward to 2018.

The interim government has expressed willingness to resume talks with the International Monetary Fund. Talks, over a $4.8 million loan package, have been on hold ever since Morsi was deposed. During his presidency, there was little progress on agreeing a deal. While the interim planning minister Ashraf El-Arabi has said that the IMF loan will form an “essential” part of plans to revive Egypt’s economy, agreeing a deal will not be easy. With an IMF loan comes a set of conditions, and given the fraught political situation in Egypt, a programme of austerity may be impossible to implement. As reconciliation looks ever more distant, so do prospects of immediate economic recovery.

The views expressed in this article belong to the author and do not necessarily reflect the editorial policy of Middle East Monitor.