Egyptian Spring Economic Fall May 25, 2013 Egyptian Canadian League Toronto, Ontario Canada

Atif Kubursi
Egyptian Spring Economic Fall
May 25, 2013
Egyptian Canadian League
Toronto, Ontario Canada

1)  Egypt is currently experiencing its Worst Economic Crisis since the Great Depression.

2)  Industrial Production Growth which was at a healthy rate of 5-7 percent a year before the revolution has fallen to 1% in 2012.

3) The official unemployment rate rose to from 9 to 12.5% between 2010 and 2013.

4)  About 95% of the unemployed are youth (with about 24.7% unemployment rate) with secondary education.

5)  Nearly ¾ of those who are lucky to find a job end up working in the informal sector where wages range between $2.60-3.70 a day.

6)  Government deficits are rising. They were 8% of GDP in 2010, they are now 12%.

7)  The entire deficits are financed by domestic borrowing at high interest rates (16%).

8)  Debt to GDP ratio is 80% and the domestic debt ratio rose from 60% in 2010 to 70% in 2012.

9)  Government is sucking liquidity from the domestic financial markets, crowding out domestic investment.

10) 1500 factories have closed since 2011.

11)  Foreign reserves that stood at $35 billion in 2010 (about seven months of imports) have now been depleted to less than $14 billion. They have fallen to a dangerous level of less than three months of imports.

12)  Egypt imports 60% of its wheat and a large share of its fertilizers and fuel (diesel) uses.

13)  Reserves are lost in part due to the futile attempt of the Central Bank to prevent the Egyptian pound from depreciating. This effort is now suspended as reserves have fallen to a dangerous low.

14)  Foreign losses continue because of capital flight.

15)  Egypt had endured a long period of capital flights before the revolution (average losses at $6 billion a year) that only got worse after the revolution.

16)  Portfolio losses (stock market losses) were high during the world recession in 2008/09. Egypt suffered a $9.2 billion loss and leakage in 2009. In 2010 it realized a gain of $7.9 billion. The last two years these losses have exceeded $7.6 billion. This is a major problem as no controls have been put on this segment of the financial market. Controls are now in place on the ability of foreign corporations to withdraw money above $100,000.

17)  Foreign direct investment peaked at $13.2 billion in 2007; it has dwindled to 2.2 billion in 2011 and to $1.6 billion in 2012.

18)  Tourism that used to bring in $12.5 billion a year is now down to less than $2.5 billion.

19)  The drain on the balance of payments will likely escalate.

20)  Exports have always been below half of imports. In 2012, imports accounted for $58.8 billion rising from $55 billion in 2011; Exports were $28.4 billion and stagnant.

21)  Current account deficit is over $8.4 billion and rising. Remittances and Suez Canal royalties finance part of the deficit on the current account.

22)  Moody downgraded Egypt’s debt to CAA (poor Standing with High Risk).

23)  Corruption is on the rise with 6,000 corruption cases have been investigated since February, 2011. In 2010 Egypt ranked 98th on Transparency International Corruption Perception Index. In 2011 it deteriorated to 112th and in 2012 it deteriorated further to 118th.

24)  Currently 25.2% of Egyptians are below the poverty line ($1.25 a day). In addition, 23.7% hover just above it at the $2 a day. More than 85% of Egyptians live on less than $5 a day.

25)  What can be done? How dangerous is the situation? How more gloomy can it get?

26)  Many talk about the next Revolt of the Hungry. Egyptians are taking Income distribution in their own hands (Robberies have increased by 350%) between 2011 and 2012.

27)  I am optimistic about the future. I do not see that Doom and Gloom will happen; but no one can predict accurately the likely scenario. Egypt is a large economy, it can rely on itself. It has a large pool of talented and skilled people and can tap into a rich Diaspora of infinite talent and resources.

28)  But a few changes are in order. These do not include the current short-sighted plans of pursuing the IMF loans, recovery of Mubarak’s loot, resumption of US and European aid, and charity from Qatar or Libya.

29)  An IMF loan for $4.8 billion is being sought by Egypt. This is not necessary and it is not sufficient (Galal Amin). It is not necessary if Egyptians can reconcile their differences and stabilize the situation so that tourists would start coming and FDI flows recover. If they fail to stabilize the political situation and the Government fails to put in place a pro-poor fiscal policy then the $4.8 billion loan is not sufficient to deal with the economic problems.

30)  Samir Radwan (ex. Finance Minister) thinks it would work. I wonder how. It is at best just a temporary stop-gap measure. It cannot stave off the dismal scenario.

31)  US Aid is withheld for now, Kerry donated $190 million (this is a drop in the bucket). The loan from the IMF invariably comes with conditions. The EU is withholding $12 billion in aid support until the US gives the green signal. The IMF will not advance the money, without US permission. The conditions are typically political dictates and often impose narrow economic options. They all presumably seek REFORM.

32)  But what does their REFORM mean and what would it entail?

33)  So far REFORM is a code name for AUSTERITY (Witness Greece and Cyprus cases). But The Egyptians are already living a crippling austere existence? You cannot draw blood from a stone?

34)  In my opinion, there are a few better options open to Egypt.

First, The Government can Rationalize its expenditures and Taxes. (Eliminate wasteful subsidies that go to the rich (fuel), preserve food subsidies for the poor, raise taxes on the rich (the tax burden is below 13%; there is ample room to raise taxes on the rich that are coupled with higher expenditures on the poor), put in place regulations that stop the profuse drain on foreign reserves (much of what was done in Thailand and Taiwan in 2000s where the latter closed for a year the stock market and eliminated any capital flows that do not seek a three years investment period) (Mahmoud Elkhafif).

But before that, Egyptians have to first reconcile their conflicts and political issues and build an open society for all. It is time that Egyptian Brotherhood and Sisterhood should supersede Muslim Brotherhood.

The Issue is to build an INCLUSIVE POLITY and develop a supporting INCLUSIVE Economy.


Targeting the poor would put purchasing power in the hands of those that have high Marginal Propensity to Consume (those that spend a high proportion of any additional income). They also have a high proclivity to consume domestically produced goods. Giving more to the rich will not generate a big bang in the economy. The rich have low marginal propensity to consume and they typically consume foreign imports (Gouda Abdelkahlek)


In my humble opinion the crux of the problem is the transformation of the Egyptian economy under Sadat and Mubarak into a rentier from a production oriented economy that derives its income more from foreign sources (aid, tourism flows, remittances and FDI) than domestic sources.

In the past, under Nasser Commodity producing sectors (agriculture and manufacturing) contributed the largest share of GDP. This is no longer the case.

This is not an argument to shun foreign sources but an argument perhaps to rebase the economy more on production rather than rent.

The “economic success” under Mubarak was not sustainable. It was based on Crony Capitalism, Rent Seeking, Environmental Theft and Inequities. It produced jobless growth, unequal distribution of income and wealth, severe distortions and external vulnerabilities. It was bound to fail. It actually did. What we are suffering from today is directly related to the rentier structure of the economy and the “Open Door Policy.”

Sustainable development is premised on a productive economy, equitable distribution of income and wealth, intergenerational equity and self reliance. It can be achieved. There is no other alternative.

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