• Economic growth has softened, the fiscal and balance-of-payments deficits have deteriorated, and foreign exchange reserves have fallen to a critical minimum level.

  • Two years after the Arab Spring uprising, Egyptians – many of whom are living below the poverty line – are still waiting to reap the full benefits of lasting social, political and economic change.

  • Egypt has potential both for structural transformation towards a more productive economy and for optimal use of its immense resource wealth, provided that vital policy reforms are introduced.

Overview

After toppling Hosni Mubarak in February 2011, Egyptians celebrated the election of Muslim Brotherhood candidate Mohammed Morsi on 24 June 2012, as the country’s first democratically elected president. A new constitution, drafted by an Islamist-dominated assembly and narrowly approved in mid-December 2012 by voters, has dramatically divided the country. A new parliament is expected to be in place later in 2013, following elections starting in April to replace the Islamist-dominated body that was dissolved by the Supreme Constitutional Court in June 2012.

As Egyptians wait to complete the transition to democratic government, they still face a number of challenges. The real gross domestic product (GDP) growth rate fell to 2.2% in the fiscal year ending June 2012, down from 5.1% in 2009/10, before the revolution. Continued political instability has undermined inflows from tourism and foreign direct investment (FDI). Economic growth is expected to remain depressed, at about 2% as of June 2013.

Delay in agreement about USD 4.8 billion in financing from the International Monetary Fund (IMF), which would be subject to conditions to increase taxes and reform subsidies and public employment, has pushed Egypt to the verge of a full-blown currency crisis. By end-January 2013, the Egyptian pound (EGP) had depreciated by over 12.5% of its value since the uprising. The market expects the pound to depreciate further, to between EGP 7 and EGP 7.50 to the US dollar, and a black foreign exchange market is emerging. In June 2012, Egypt’s domestic debt and fiscal deficit reached 80.3% and 10.8% of GDP respectively, narrowing the room for fiscal manoeuvre.

Poverty remains high, with 25.2% of the population living on less than USD 1.5 per day in 2010/11. The illiteracy rate is high at 27%, and there are wide income disparities. The Egyptian statistical agency reported that unemployment was 12.5% in the third quarter of 2012, although several sources indicate that the unemployment rate may actually be above 18%. Over 3.3 million Egyptians are unemployed, while the unemployment rate for 20- to 24-year-olds is 46.4%.

The government is working to address several of the structural and institutional problems that beset Egypt. It has developed a home-grown programme to reform the inefficient energy subsidy system and is promoting policies to fight corruption, foster societal inclusion and enhance equality of opportunity. However, the government’s reluctance to accept the IMF conditions before the elections of April 2013 reflects the difficulty of implementing necessary but unpopular entitlement reforms in a heavily divided society.

Figure 1: Real GDP Growth 2013 (North)

Table 1: Macroeconomic indicators

 2011201220132014
Real GDP growth1.82.223.5
Real GDP per capita growth0.10.51.23
CPI inflation11.18.710.611.7
Budget balance % GDP-9.7-10.8-11.4-9.9
Current account % GDP-2.6-3.3-3.1-2.4

Recent Developments & Prospects

Table 2: GDP by Sector (percentage of GDP)

 20072012
Agriculture, forestry & fishing14.114.8
Agriculture, hunting, forestry, fishing--
Construction4.14.6
Electricity, gas and water--
Electricity, water and sanitation1.91.7
Extractions15.515.5
Finance, insurance and social solidarity10.49.6
Finance, real estate and business services--
General government services9.810.4
Gross domestic product at basic prices / factor cost100100
Manufacturing1716.2
Mining--
Other services--
Public Administration & Personal Services--
Public Administration, Education, Health & Social Work, Community, Social & Personal Services--
Public administration, education, health & social work, community, social & personal services--
Social services2.83.9
Transport, storage and communication--
Transportation, communication & information10.39
Wholesale and retail trade, hotels and restaurants--
Wholesale, retail trade and real estate ownership14.214.4

Since the revolution of 25 January 2011, Egypt has experienced major political challenges and a period of transition to democracy. Despite the election of Mohammed Morsi in June 2012, as the first democratically elected president, political stability remains elusive. Riding high on the praise he earned at home and abroad for brokering a truce between Israel and Hamas in Gaza, President Morsi issued a constitutional declaration in November 2012, awarding himself broad powers above judicial scrutiny. This led to nationwide protests by his opponents, which were in turn violently countered by his supporters. Although the president later retracted that decision, a new constitution – drafted by an assembly dominated by the Muslim Brotherhood and its allies, and approved by a narrow majority of 63.8% in a referendum that saw a voter turnout of 32.9% – left the country deeply divided politically.

Despite the political upheaval, Egypt’s stock market performed relatively well compared to other emerging markets, posting returns of over 45% in 2012. However, the prolonged political transition has hindered economic growth. Real GDP growth has not returned to the pre-revolution rate of over 5.1% in fiscal year 2009/10. The growth rate accelerated slightly in 2011/12 to 2.2%, as against 1.8% in the previous fiscal year. Although the parliamentary elections scheduled for early 2013 will mark the end of the transition period, economic growth is expected to remain subdued at about 2% when the fiscal year ends in June 2013 and pick up to 3.5% by June 2014. On the demand side, economic activity during 2011/12 was driven by private and public consumption, which compensated for declining investment and a widening trade deficit. Total private and public consumption accounted for 90.9% of GDP and investment for 15.3% in 2011/12, compared to 87% and 16.7% respectively in the previous year. Egypt’s economic growth was driven in particular by private consumption, which rose to 79% of GDP in 2011/12 compared to an average of 73.7% over the 2005-11 period. Finally, exports and imports stood respectively at 12.9% and 22.2% of GDP in 2011/12, compared to 11.7% and 23.5% in 2010/11.

At the sectoral level, the main contributors to GDP growth in 2011/12 were agriculture (2.9% growth, 14.8% of GDP), construction (3.3% growth, 4.6% of GDP), telecommunications (5.2% growth, 4.4% of GDP) and real estate (3.2% growth, 2.9% of GDP). In contrast, poor performance in the manufacturing and tourism sectors, which expanded weakly at 0.7% and 2.3% respectively, weighed heavily on GDP growth in 2011/12; in 2009/10, before the revolution, these sectors had posted growth of 5.1% and 12% respectively.

Egypt’s foreign income earning has been undermined by Europe’s economic distress, unfavourably impacting the balance of payments. Merchandise exports, which went primarily to Europe, Egypt’s main trading partner, decreased by about 0.1% to USD 27 billion in both 2010/11 and 2011/12, more than 8% below the level achieved in 2007/08. Tourism has been hard hit by political instability, security problems and border attacks in Sinai. As a result, tourism revenues decreased by 11% to USD 9.4 billion (3.1% of GDP) in 2011/12. Suez Canal receipts stabilised at about USD 5 billion (2.1% of GDP) in 2010/11 and 2011/12, a rather positive development given the downward trajectory in canal revenues in the four previous fiscal years.

Net foreign direct investment (FDI) inflows declined for the fourth year in a row, levelling off at about USD 2.1 billion (0.8% of GDP) in both 2010/11 and 2011/12, down from a peak of USD 13.2 billion (8% of GDP) in 2007/08 prior to the global financial crisis. In 2011/12, net private transfers (mainly Egyptian workers’ remittances) amounted to USD 18 billion (7% of GDP), up 43% from the previous fiscal year. Remittances from Egyptian workers abroad have been on an upward trend since 2007/08.

Total investment (excluding changes in inventory) reached USD 39 billion (15.3% of GDP) in 2011/12. Crude oil and natural gas attracted the largest investments (approximately 25% of the total), followed by transportation and communication (19%) and housing and real estate (16.7%). Manufacturing and petroleum products attracted 8.7% of total investment, while health and educational services received only 1.6% and 2.4% respectively.

The economy has suffered from the climate of uncertainty as the political crisis has deepened and the standoff between the executive and judiciary has worsened. Crucial tax increases and austerity measures that are conditions for the IMF loan were postponed because of the political unrest that followed President Morsi's decision to fast-track implementation of the new constitution. While such adjustments could depress domestic demand, their postponement means that Egypt will continue to be unattractive for foreign direct investment. Furthermore, the economy is suffering from high interest rates on government bonds: the three-month treasury bill (T-bill) rate spiked to a monthly average of 13.1% in June 2012, up from 11.5% a year earlier. These high rates are partly to blame for driving the fiscal deficit to unsustainable levels.

Furthermore, a currency crisis is looming. Egypt’s net international reserves have dropped to a critical minimum that barely covers three months of imports (USD 13.6 billion as of end-January 2013). Foreign reserves averaged USD 35 billion during the three fiscal years preceding the revolution. The local currency shed over 4.5% of its US dollar value in a few weeks in January 2013 and has fallen by more than 10% since the revolution. As anxious Egyptians rush to buy dollars in the wake of the currency’s fall, the dollarisation ratio in households is bound to rise above the 15.5% level it had reached at end-October 2012.

In January 2013, Qatar bolstered the Egyptian pound (EGP) by providing USD 2.5 billion, over and above an earlier financial package of the same amount. Nevertheless, the Central Bank of Egypt (CBE) ran down over USD 20 billion of reserves over 2010/11 and 2011/12 to defend the local currency. The CBE has limited options as it attempts to control a slow depreciation of the pound.

As social unrest persists and the population continues to grow, Egypt’s social and human development challenges continue to mount. About 20 million Egyptians live on less than USD 1.5 a day, and over 3.3 million are unemployed.

Egypt’s need for external financing is urgent. The IMF estimates the gap at USD 14.5 billion. In January 2013, the IMF and Egypt resumed talks to move forward a November 2012 staff level agreement that had been postponed due to the political unrest that emerged when President Morsi fast-tracked the contentious new constitution. The IMF financing package amounts to USD 4.8 billion and would mobilise additional lending from other multilateral and bilateral development partners. The fiscal reforms demanded from Egypt as conditions for the loan have proven challenging for the government, owing to the country’s current state of social and political division. It is unlikely that an agreement will become effective before the new parliament is in place.

Macroeconomic Policy

Fiscal Policy

Egypt’s fiscal deficit widened by 24% in 2011/12 to USD 27.5 billion (10.8% of GDP), from USD 22.6 billion (9.7% of GDP) a year earlier, as the government increased spending in response to the social and political demands of the revolutionary movement. While revenues increased by 14.5% to USD 50 billion in 2011/12, they were outstripped by year-on-year expenditures, which rose by 17.2% to USD 77.7 billion over the same period.

Taxes increased by 8.2% year-on-year to USD 34.2 billion in 2011/12. The main components of taxation are taxes on incomes and profits (45%) and on consumption (40%). In 2011/12, state-owned enterprises contributed 76% of all taxes on income and profits – the Egyptian General Petroleum Corporation (EGPC) alone paid 37% – while individuals contributed only 24%. Grants from foreign governments, which are part of non-tax revenue, increased substantially in 2011/12 to USD 1.5 billion, compared to USD 0.15 billion in 2010/11.

About 80% of government spending is allocated to recurrent expenditures – interest payments on public debt (22%), wages and salaries (26%), and subsidies, grants and social benefits (32%) – rather than to capital goods. Public investment spending, which averaged 4% of GDP in 2009/10, before the revolution, contracted to 2% of GDP (USD 6 billion) by end-June 2012. As of June 2012, interest on government debt had risen by USD 2.8 billion year-on-year to USD 17 billion (8.9% of GDP). Interest on domestic debt accounts for 97% of total interest payments paid by the government. Subsidies to consumers (71% of which are for energy products, the rest for food items), increased by USD 3.9 billion year-on-year to reach USD 22.4 billion by end-June 2012.

To contain the growing fiscal deficit to about 9.9% of GDP in 2013/14, the government is cutting energy subsidies and raising taxes. The 2012/13 budget proposed a USD 12 billion reduction in petroleum products subsidies, but midway through the fiscal year much of this reduction has not yet been implemented. Electricity rates have been raised, however, and the subsidy on high-grade 95-octane petrol was eliminated in November 2012. Cutting this subsidy may bring only negligible savings, as users could shift demand to subsidised 92-octane petrol, but it is a positive development that Egyptians are now openly discussing the need for reforms to the inefficient energy subsidy system (the low efficiency of subsidies generally is discussed below, in the “Social Context and Human Development” section).

Egypt is mobilising further tax revenues as well. Taxes on cigarettes have been raised. The government has announced increases in the progressivity of income taxes and aims to broaden the general sales tax into a full-fledged value added tax. However, implementation of such economic reforms remains uncertain because of the ongoing political turmoil. A capital gains tax has been introduced on initial public offerings on the stock exchange.

In its effort to diversify financing away from the domestic banking sector, the government is seeking an IMF package that would mobilise about USD 14.5 billion in loans and deposits from the IMF itself (USD 4.8 billion) and from other bilateral and multilateral lenders. This would provide fiscal relief from the high interest rates on government T-bills: the rate for three-month T-bills, for example, averaged 13.1% in June 2012, up from 11.5% a year earlier.

Table 3: Public Finances (percentage of GDP)

 200920102011201220132014
Total revenue and grants27.121.618.918.618.218.1
Tax revenue15.313.413.813.313.112.7
Oil revenue10.77.54.84.84.84.8
Grants------
Total expenditure and net lending (a)33.729.428.629.429.728
Current expenditure29.625.525.826.626.825.2
Excluding interest24.519.717.617.718.117.4
Wages and salaries7.36.96.96.76.35.8
Interest5.15.88.38.98.87.8
Primary balance-1.6-2.1-1.4-1.9-2.6-2.1
Overall balance-6.6-7.9-9.7-10.8-11.4-9.9

Monetary Policy

Since 2004, Egypt has pursued a managed float exchange rate regime that aims to hold the rate at EGP 6 to the US dollar. With the onset of the political crisis, this policy has been increasingly difficult to maintain in the face of a sharp drop in foreign earnings and capital inflows. As a result, in January 2013 the exchange rate fell to over EGP 6.5 to the dollar, and net international reserves (used by the CBE to support the exchange rate), dropped by end-January 2012 to USD 13.6 billion, from USD 26.6 billion in June 2011.

Current foreign reserves held by the CBE cover just about three months of imports, which the central bank considers to be a critical minimum. The CBE has said that the remaining reserves would be used only to finance external debt service, cover strategic imports and respond to emergencies. The central bank therefore introduced currency auctions and other foreign currency controls in December 2012. Support from the IMF is now needed urgently if Egypt is to avoid a disorderly domestic currency devaluation that would trigger higher food prices and further social unrest.

Interest rates have been maintained at their November 2011 level (overnight deposit rate, 9.25%; discount rate, 9.5%; overnight lending rate, 10.25%; and seven-day repo rate, 9.75%). This represents a delicate trade-off between the need to revitalise growth (with lower interest rates) and the need to curtail inflationary pressures (with higher interest rates). The interest rate adjustments of November 2011 caused the above-mentioned spike in the three-month T-bill rate. As of June 2012, yields on one-year T-bills were about 14.8%, compared to 11.5% a year earlier, and they have continued to rise, reaching 15.8% by end-August 2012. The CBE cut reserve requirements on deposits in local banks from 14% to 12% in April 2012, and further to 10% by end-June 2012, but this accommodative monetary policy appears to have had little impact in terms of curtailing the rise in interest rates.

The year-on-year headline inflation rate, as measured by the urban consumer price index, slowed from 11.8% in June 2011 to 4.66% in December 2012 as economic activity continued to contract because of political unrest. Core inflation also dropped from 8.94% year-on-year to 4.44% over the same period. However, the central bank foresees local supply bottlenecks for food and butane, and distortions in the distribution channels for food products as inflationary risks and wants to take a more proactive role in managing them. It has formed an inter-ministerial persistent inflation group with a mandate to address directly the structural causes of inflation.

Economic Cooperation, Regional Integration & Trade

Egypt’s trade deficit increased slightly, from USD 27.1 billion (11.8% of GDP) in 2010/11 to USD 31.7 billion (9.2% of GDP) in 2011/12, and is no longer offset by tourism and investment receipts, now in decline. Driven by the depreciation of the Egyptian pound and (despite incipient reforms) an inflexible subsidy system for fuel and food, the mounting import bill of USD 58.7 billion, up 8.5% from the previous year, continued to be the driving factor behind the deficit. Overall export growth was flat, as exports totalled USD 27 billion in both 2011 and 2012. Within that total, however, non-petroleum exports declined and petroleum exports increased. The services trade balance was positive (USD 5.4 billion) but continued its stark downward trend from USD 10.3 billion in 2009/10 and USD 7.9 billion in 2010/11. The driving factors here were declining receipts from tourism and investment. The current account deficit widened from 2.6% of GDP in 2011 to 3.3% in 2012. Remittances from Egyptians working abroad increased by about 43% to USD 18 billion in 2012, preventing further deterioration of the current account position.

The European Union (EU) continues to be Egypt’s major trading partner, absorbing USD 11 billion of Egypt’s exports and supplying USD 19.3 billion of its imports in 2011/12. Within the EU, Italy accounts for the largest share (20.7%) of merchandise exports. Between 2007/08 and 2010/11, the EU accounted for an average of 36% of merchandise trade, the United States for 10%, and the Arab world and Asia for a fifth, while Africa (excluding Arab countries) accounted for only 2% of exports and 1% of imports. Since the revolution, the authorities have stepped up efforts to deepen the Egyptian private sector’s participation in infrastructure projects in the rest of Africa and to support training and capacity-building initiatives on the continent.

Investment has suffered from heavy short-term and long-term capital outflows. Net portfolio investment doubled its negative balance in 2011/12 to USD 5 billion. The net FDI balance remained positive at USD 2 billion (0.8% of GDP), but outflows have doubled over the last two years to USD 9.7 billion, compared to inflows of USD 11.8 billion. The EU accounted for 82% of gross FDI inflows to Egypt in 2011/12.

Table 4: Current Account (percentage of GDP)

 2004200920102011201220132014
Trade balance-10-13.4-11.4-11.8-9.2-8.1-7.3
Exports of goods (f.o.b.)13.413.410.811.712.91312.8
Imports of goods (f.o.b.)23.426.822.223.522.221.120.1
Services9.66.66.763.63.44.3
Factor income-0.30.1-2-2.6-2.6-2.6-2.8
Current transfers54.44.75.85.24.43.9
Current account balance4.3-2.3-2-2.6-3.1-2.9-2

Debt Policy

Egypt’s gross domestic debt had risen to 80.3% of GDP (USD 205 billion) by end-June 2012, from 76.2% of GDP (USD 176 billion) a year earlier, as the government continued its policy of financing the widening budget deficit by issuing T-bills. The stock of T-bills and bonds reached USD 178.7 billion (87% of gross domestic debt) by end-June 2012, an increase of 18% year-on-year.

Yields on T-bills rose in 2011/12 to an average of 15%, compared to an average of 12% in 2010/11. As a result, interest payments rose by 24% (USD 3.2 billion) to reach USD 17 billion by end-June 2012, and total government debt service increased from USD 19.4 billion in 2010/11 to USD 23.4 billion over 2011/12. To mitigate the increased costs of borrowing and enhance foreign reserves, the government in August 2012 launched auctions of one-year euro T-bills. The August auction saw the major banks buying EUR 513 million of T-bills at an average yield of 3.245%, exceeding the government’s expectations of EUR 400 million.

Foreign debt levels remain manageable, however, at about USD 5.7 billion in both the 2010/11 and 2011/12 fiscal years. The ratios of debt service to exports and debt service to current receipts stood at 6.1% and 4.4% respectively at the end of June 2012, compared to 2005-12 historical averages of 6.6% and 5.5% respectively.

The IMF package under discussion could enable Egypt to diversify its borrowing away from reliance on increasingly unsustainable domestic debt. Furthermore, it could enhance investor confidence in the Egyptian economy, and the rating agencies Moody’s, Standard and Poor’s, and Fitch are expected to reverse their downgrades of the country’s sovereign ratings.

Figure 2: Stock of total external debt and debt service 2013

Economic & Political Governance

Private Sector

The private sector has accounted for 62% of GDP and employed 70% of Egypt’s workforce over the past five years. Before the revolution, Egypt suffered from an overburdening bureaucracy, corruption and insufficient competition in many sectors. Favouritism, lack of transparency and protection of market segments prevailed. Consequently, one of the demands of the revolution was an overhaul of the relationship between government and the private sector. Although crucial for Egypt’s competitiveness in the long run, this demand has linked the government-business relationship to the drawn-out process of political and legal transition, resulting in widespread uncertainty and timid private sector investment.

Standard measures of competitiveness reflect some of these problems and uncertainties. Egypt ranked 107th out of 146 economies on the World Economic Forum’s Global Competitiveness Index in 2012/13, down from 81st position in 2010/11. In the World Bank report Doing Business 2013, Egypt ranked 109th out of 183 economies, down from 108th in 2011 but up from 110th in 2012. The reliability of contracts and the capacity to have them enforced through the legal system rank among the chief concerns. Egypt ranked 144th out of 184 countries on the “enforcing contracts” sub-index. Other major weaknesses were noted in paying taxes (145th place), dealing with construction permits (155th) and resolving insolvency (137th). Egypt continues to have the highest share of complaints about corrupt practices as major obstacles to business. Customs clearance delays have been cut, though perceptions associated with trade facilitation remain negative. Import and export procedures remained time-consuming in 2011 (12 days for each, according to Doing Business 2012).

Since the revolution, steps have been taken to change the situation reflected in these indicators. A large number of corruption investigations have been started and several high-profile indictments made against business and former high-ranking officials and ministers. Several land allocations made by the former government through direct contracts have been withdrawn, and privatisations of former state-owned companies in the oil and manufacturing sectors have been reversed. A special committee established to settle land disputes with investors expects to net about USD 3.3 billion by the end of 2013. In addition, the new constitution establishes a national anti-corruption commission.

Financial Sector

Egypt’s financial sector has recovered markedly from its overextended position in 2007, but it remains inefficient at providing credit to the private sector. In 2012, the problem was the opposite of that in 2007: uncertainty over the speed of recovery and transition led to a build-up of liquidity in banks. The loans-to-deposits ratio stood at 49.8% by end-September 2012, and non-performing loans amounted to a comfortable 9.9% of total loans at end-June 2012. The government remains the largest borrower, squeezing credit for private sector investment.

Accommodative monetary policy has had some effect in getting the liquidity in banks into the real sector of the economy: credit to the private sector grew by about 7.3% between 2011 and 2012. However, deposits also rose by 6.4% to USD 172.7 billion. Insufficient access to finance was rated among the top obstacles to business growth by firms in the 2008 Enterprise Survey of Egypt. The government has sought to increase financing for the private sector. In 2010, access to credit information was expanded with the addition of retailers to a private credit bureau database. At the time of writing, the deposit requirement for lending to small- and medium-sized enterprises (SMEs) was 0%. The central bank’s training institute works with banks to build capacity for lending to small firms, and the Bedaya Center of the General Authority for Investment is working to develop SMEs in Egypt.

The banking sector is struggling with both fragmentation and a lack of competition between institutions. Efforts to privatise state-owned banks have stalled owing to the financial crisis and subsequently the revolution. As a result, sizeable amounts of money are tied up in inefficiently small institutions. To counteract further fragmentation of the banking sector, the CBE has capped the number of operating licences for commercial banks. Thus, acquisition of an existing bank is the only way to enter the sector. At the same time, however, high yields and insufficient access to finance, especially for smaller firms, suggest that competition between banks for loan and investment opportunities is insufficient. Allowing small banks with new business models focusing on SMEs to enter the market without requiring a joint venture or purchase of an existing bank might address these shortcomings.

Egypt’s stock market is lively and active, but its capitalisation is low compared to deposits in the banking system. Market capitalisation was USD 71 billion before the revolution (end-June 2010) and had fallen by 4% to about USD 64.8 billion as of October 20121. The latter figure corresponds to 33% of total deposits in the banking system, indicating the comparatively low importance of equity stocks.

Public Sector Management, Institutions & Reform

Revamping Egypt’s public sector to transform it from a post-socialist provider of large-scale employment with a presence in most parts of the economy into a modern, efficient administration oriented towards service delivery is among the most important and difficult challenges facing the government. Egypt has a large, inefficient, underpaid civil service subject to political pressure. In the long run, the size of the public administration is to be restrained by replacing only those who retire. However, post-revolutionary governments have continued to use the public sector as a tool to meet social pressure and demands for job creation, including increases in minimum wages, making future reform even more difficult. Egypt’s public sector employs around 5.8 million persons, with an additional 0.5 million temporary workers.

Egypt has more state-owned enterprises than the average for developing countries. Many of these public entities are overstaffed and underequipped, needing investment and staff reductions if they are to become competitive. In addition, the Egyptian military holds a substantial share of state economic corporations, but little is known about the extent or productivity of these holdings. Privatisation, which could transform these companies, is hampered by the legacy of high-profile corruption cases in past (Mubarak-era) privatisation projects. The new constitution explicitly makes it difficult to sell state assets.

Decentralisation could help make public sector management more efficient. A national strategy for decentralisation, launched in July 2009, is based on ensuring the rights of local communities to decide on their own needs and priorities. The finance ministry is developing a fiscal decentralisation plan, but in the meantime local communities have no authority to raise revenue or create revenue sources on their own.

In enacting the new constitution, Egypt has taken the first step in the arduous process of transforming its political, social and economic institutional frameworks. Successful completion of the elections scheduled to begin in April 2013 would be another step forward. In the future, it will be imperative for the government to work in partnership with empowered civil society and private actors to build more accountable state institutions that deliver efficient basic public services and enforce the rule of law.

Natural Resource Management & Environment

Egypt was ranked 60th out of 132 countries in the 2012 Environment Sustainability Index, a slight improvement over the 2010 ranking of 68th out of 142 countries. With its numerous world cultural heritage sites and renowned biodiversity hotspots, and given the economic importance of tourism, Egypt carefully conserves its natural and cultural heritage.

Only 3.45% of Egypt’s land area is arable. The encroachment of urban areas into farmland, which has only accelerated since the revolution, is therefore a worrisome trend. In the absence of effective land management, farmland is being increasingly enclosed and divided up by urban sprawl, undermining productivity in the agricultural sector. Climate change risks, including rising sea levels in the Nile Delta area, are another source of concern.

Deteriorating water quality and decreasing quantity are major concerns. Population growth has reduced per capita water use to less than 1 000 m3 per year, while demand from households, agriculture and industry has increased. This heightens the potential for conflict with the Nile Basin riparian countries, as Egypt’s annual share of Nile water resources remains fixed at 55.5 billion m3.

Egypt’s energy strategy, adopted in 2008, aims to increase the share of renewable energy sources to 20% by 2020. This increase will be obtained mainly by scaling up wind power to 12% (7 200 MW), as solar power remains costly and internal hydropower capacity is nearly exhausted.

Collection of municipal solid waste covers only 65% of the 55 000 tonnes of waste that accumulate daily, posing serious environmental challenges.

Political Context

In 2012, Egypt held its first free parliamentary and presidential elections in more than 60 years, although the parliamentary elections were later annulled by the Supreme Court and rescheduled for early 2013. Mohammed Morsi of the Freedom and Justice Party (Muslim Brotherhood) was the victor of the presidential election. The transition from a de facto military regime to a democratically legitimised one has been an important step. The year closed in a less conciliatory tone with the adoption of a contested new constitution by referendum on 15 December 2012. The referendum was preceded by two weeks of sometimes violent protest by both opposition and government supporters. The opposition considered that the constitution did not sufficiently protect individual and religious freedoms.

The conflict over the drafting of the constitution brought to the fore the rifts in the political landscape. The initial anti-Mubarak coalition gave way to a strong opposition made up of liberal and conservative forces. Considering the re-emergence of severe violence between protesters and government forces in January 2013, the political camps seem bent on a strategy of confrontation. The 2013 parliamentary elections will mark an important milestone and determine the new balance of power between, on one hand, the Muslim Brotherhood and other Islamists, and on the other, the secular, liberal camps in the opposition.

Social Context & Human Development

Building Human Resources

By international standards, the government allocates a substantial amount of public spending to education (3.6% of GDP and 12% of total spending in the 2012/13 budget), and universal primary education, one of the Millennium Development Goals (MDGs), has been achieved. Nonetheless, the existing system is arguably of low quality and does not respond to the needs of the labour market: only two out of ten higher education graduates find jobs after graduation. Furthermore, the system exacerbates inequalities between the well-off, who can afford access to high-quality education from private providers, and the poor, who cannot. The new constitution commits the state to eradicating illiteracy (which currently affects 27% of the population) within ten years.

The 2012/13 budget allocates about 5.4% of total public expenditure (1.6% of GDP) to health. Despite an extensive network of health facilities, there are urban-rural inequalities in access to health care. Egypt’s Health Insurance Organisation covers only half the population, providing incentives for the growth of private sector providers, which remain unregulated. HIV/AIDS prevalence among 15- to 49-year-olds is low – about 0.03% according to the World Health Organization, or 0.10% in 2009 according to the World Development Indicators – but there is a dearth of information on people living with HIV/AIDS.

High turnover in the civil service is slowing the change in social policies demanded by Egyptians. As a result, poverty and unemployment rates remain high, and public service delivery in health and education remains weak. To overcome these challenges, the government in March 2012 proposed an 18-month National Plan for Priority Economic and Social Measures, the central objective of which is a “New Social Contract” that guarantees higher social protection, better education and health services, and inclusive growth. Furthermore, to remove constraints on public service delivery, the new constitution commits the state to provide improved health care and education services, free of charge for those who are unable to pay, and guarantees sufficient allocation of public spending to these services.

Poverty Reduction, Social Protection & Labour

Egypt has made progress on human and social development and is on track to achieve the Millennium Development Goals. Nevertheless, much remains to be improved and regional gaps are widening. The 2011 UNDP Human Development Index ranked Egypt 113rd out of 182 countries. Extreme poverty and hunger have been curtailed; infant mortality and malnutrition have been halved; life expectancy has risen from 64 to 71 years; and there has been demonstrable improvement in maternal health and the fight against HIV/AIDS. According to World Bank estimates, however, some 22% of Egyptians have incomes lower than USD 2 per day per person, while rural poverty rates reach 44%. There are large regional disparities in income, infrastructure, access to finance, education and labour markets. The rural-urban gap has been widening, with Cairo alone producing over half of Egypt’s GDP. The World Bank estimates that Upper Egypt, with only 40% of the population, accounts for 60% of poverty and 80% of the severely poor. Dependence on low-value agriculture and disparities in the investment climate are major contributors to the rural-urban divide.

Egypt spent USD 22 billion (9% of GDP) during the 2011/12 fiscal year on social safety nets, mainly for subsidies on energy (USD 16 billion, 6% of GDP) and food (USD 5 billion, 2% of GDP). These expenditure items have been relatively constant over several decades. While social safety nets could make a measurable difference to the poor, less than 25% of Egypt’s subsidies actually reach their intended targets, while the subsidy system contributes to unsustainable fiscal deficits. Distribution mechanisms are untargeted and disproportionate across regions. As a result, the top 40% of the population enjoys about 60% of energy subsidies, leaving the bottom 40% with only 25% of the benefits. These disparities are wider in urban areas: the top 40% of the urban population receives about 75% of energy subsidies and over 90% of petrol subsidies. The government has initiated steps to reform the inefficient energy subsidy system through the introduction of smart cards that would cap the amount of petrol available to a consumer over a given period of time.

The situation of labour in post-revolutionary Egypt is uncertain. Since the revolution, strikes have become a regular occurrence across sectors and regions. Although the government has taken sporadic measures to address structural labour market problems, weak labour rights and standards remain a source of concern. Unemployment protection schemes and social insurance laws protect only workers in the formal sector. The government’s minimum wage policy shows a lack of clarity and progress. In June 2011, Egypt’s interim administration set the monthly wage rate for civil servants at USD 120 (EGP 700) per month. Some sources suggest that this minimum rate will be raised to USD 200 (EGP 1 200) monthly within three years under President Morsi’s Renaissance Project, yet even the implementation of the earlier rate of EGP 700 has proven problematic: over half a million temporary workers in government have not received the promised minimum wage, and it was unclear whether the minimum wage also applies to the private sector. If it had been fully implemented in the civil service, the upward adjustment to the wage structure could have added USD 1.5 billion to government spending in fiscal year 2011/12. The new constitution requires the government to establish a minimum wage, a pension scheme, social insurance and health care that would guarantee decent livelihoods for workers and in some cases the unemployed. Labour laws need to be strengthened in turn.

Gender Equality

In post-revolutionary Egypt, the economic and political empowerment of women is uncertain and their status may be deteriorating. Women’s participation in the democratic process remains challenged by the emerging agenda of Islamist political forces. Recent political developments in the country demonstrate that it is difficult to guarantee the enforcement of measures to promote gender equity in the current climate. Interim governments after the revolution were criticised for not protecting women’s rights, particularly concerning crimes against women that occurred during the protests at Tahrir Square. Sexual harassment is a major concern and, given Egypt’s international commitments, a liability. The National Council for Women is addressing this issue, but it needs stronger political support.

Women remain marginalised in economic activities. Data from Egypt’s statistical agency show an unemployment rate of 24% among women during the third quarter of 2012, more than double that of men (9.1%). Although women make up 30% of the professional and technical workforce, only 9% of Egypt’s administrators and managers were women in 2007.

Thematic analysis: Structural transformation and natural resources

Egypt’s economy is among the most diversified in Africa and does not depend on a single abundant natural resource for future growth. Nevertheless, energy resources have played an increasingly important role over the last decade relative to agriculture, manufacturing and services. Between 2000 and 2011, agriculture, manufacturing and services each lost 2 to 3 percentage points of their contribution to Egypt’s GDP, whereas extractive activities gained 7.6 percentage points. The weak performance of services is largely explained by the sharp decline in tourism following the revolution. Financial services gained about 1 percentage point of GDP and telecommunications doubled its contribution to 4%. Public administration gained 2 percentage points.

Structural reforms that opened the country up for investment and improved the business climate drove economic expansion before the revolution. FDI reached USD 10 billion in 2006, up from USD 1 billion in 2000. Investments largely went into oil and gas exploration and extraction, leading to a significant expansion of reserves, as well as into various service industries, especially tourism, finance and telecommunications. In contrast, much of the manufacturing sector suffered from trade liberalisation following Egypt’s accession to the World Trade Organization in the late 1990s. The textile sector in particular suffered heavily, as this largely inefficient state-owned sector began to face competition from cheaper imports, in both domestic and export markets. Egypt has also managed to attract a significant car manufacturing industry, but it produces largely for the domestic market, which enjoys high import barriers.

Oil, natural gas and derivative products are the most important items in Egypt’s natural resource basket. Egypt has also begun to mine and export gold, but so far only in small quantities. Extractive industries accounted for 15.6% of GDP in 2011/12. Exports of oil products and derivatives amounted to USD 13.5 billion in 2011/12, accounting for just over half of all exports. Soft commodities come a far second, with USD 2.5 billion in agricultural exports in 2010. The biggest line items are oranges (16% of exports in 2010), onions (7%) and cotton (6%). Gas production has expanded significantly over the last decade, thanks to foreign investment into the sector. In 2011, gas production reached 2.17 trillion cubic feet (tcf), up from 0.74 tcf in 2000. According to the Egyptian Natural Gas Holding Company (EGAS), known reserves increased from 53 tcf in 2000 to 77 tcf in 2011 (quoted in Oxford Business Group). Yet-to-find reserves that should be discovered by 2040 are estimated at 90 tcf. Despite this strong growth, existing production capacity is insufficient to meet both export and domestic demand. As its export commitments to European and Asian markets are set in long-term contracts, Egypt intends to build infrastructure for gas imports.

The oil sector presents a similar, if more mature, picture. Proven reserves increased from 3.7 billion barrels (bbl) in 2010 to 4.4 billion barrels in 2012, due to exploration activity by international investors (Oil and Gas Journal, January 2012 estimate). Despite these new finds, Egypt’s oil production has been in decline. The US Energy Information Administration (EIA) reports that production in 2011 (727 000 bbl/day) was only 78% of its 1996 peak (EIA, International Energy Statistics). Domestic oil consumption, in contrast, has grown by over 30% over the last decade and reached 815 000 bbl/d in 2011 (www.eia.gov/cabs/Egypt/Full.html), surpassing production since 2008.

The puzzling contradictions of high and growing domestic demand, abundant natural resources and insufficient production are explained by artificially distorted prices. Egypt has established a massive energy price subsidy scheme that now carries the risk of undermining the very resource wealth whose benefits it was meant to spread. As a result of the subsidy, Egypt’s energy consumption is well above that found in comparable economies and continues to grow much faster than elsewhere. Consumption of natural gas grew by 15% in 2011, a year of economic contraction. As world market prices for oil have risen, the government’s losses from providing cheap fuel to industry and households have become increasingly heavy, exceeding USD 1 billion per year as of 2010 (Egypt Independent, www.egyptindependent.com/news/egypt-joins-list-mazut-importers). The supply-side instrument of the energy pricing system is the monopsony of Egyptian Petroleum Corporation (EGPC). Oil producers are required to sell their production to EGPC at a price below the world market price. EGPC then feeds the crude oil into its refineries or sells it on international markets. Existing oil fields have delivered sufficient margins under this system, but these fields are maturing and newly discovered reserves are increasingly difficult and expensive to access. As a result, investment in new production has been insufficient, as potential investors expect better returns. This situation is exacerbated by the current economic and political uncertainty, which further deters investment.

Up the value chain, Egypt prides itself on having the largest petroleum refining sector in Africa. Refining crude oil to higher-grade petroleum products is the first step in the petroleum value chain and could be an important stepping-stone to other higher value-added industries in the sector. Like most government-run industries in Egypt, however, refining suffers from underinvestment and outdated capital. Most of Egypt’s refining capacity is at a low technological level and cannot meet domestic demand for refined petroleum products such as diesel and fuel oil. An important improvement to the situation will be Egyptian Refining Corporation, the first internationally financed (USD 3.7 billion) and privately run refining plant on a modern scale, which will supply 50% of Egypt’s diesel demand. Construction of the refinery began in 2012. Given Egypt’s sizeable domestic market for refined petroleum products, further upgrading of the refining sector through public-private partnerships (PPPs) could ensure the sector’s survival.

Egypt boasts substantial potential for both structural transformation towards more productive activities and for making the most of its immense resource wealth. To achieve these goals, it must tackle two challenges. First, liberalising the energy prices facing producers, refiners, households and businesses would do much to bring incentives back into line with the long-run objective of sustainable investment-driven growth. Second, attracting much-needed investment to upgrade capital-intensive industries is crucial to making Egyptian industry competitive. The biggest obstacles are the ossified market structures in these sectors, which are often dominated by a few oligopolistic or monopolistic firms that are either government-owned or in the hands of oligarchs following privatisation during the former regime.

Notes

  1. The US dollar value of market capitalisation captures the effect of a lower exchange rate. As of early February 2013, the Egyptian pound had lost over 18% of its value compared to June 2010.

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