the effect of the economic crisis on egypt
TRANSCRIPT
The Effect of the
Economic Crisis on
Egypt’s Economy A review of the economic crisis impact on the Egyptian
economy between 2007 - 2011
By: Mohamed Khalifa Ibrahim
ESLSCA - MBA 38
November 2011
The Effect Of The Economic Crisis On Egypt
Page 1
The Effect of the
Economic Crisis
on Egypt’s
Economy A review of the economic crisis impact
on the Egyptian economy between
2007 - 2011
Executive Summary
The economic crisis that hit the world
economy has been unfolding since
the end of 2007, and its consequences
are yet to be understood. The genesis
of the crisis and its dimensions are
fairly well-known, and therefore fall
beyond the theme of this paper. The
objective is rather to gauge the
impact of the crisis on the Egyptian
economy with particular focus on the
labor scene.1
The crisis can be viewed against the
backdrop of the strong economic
performance that resulted from the
reform drive which began in 2004 and
resulted in an upsurge in almost all
macroeconomic indicators, notably
high rate of GDP growth of 7.2%in
2007/08. Moreover there has been an
impressive progress in improving the
investment climate which was
reflected in the positive rating of the
economy. However, three structural
problems continued to vex the
economy: high budget deficit; rapid
inflation and a constraining quality of
the labor force.1
The global financial and economic
crisis has negatively been transmitted
to the Egyptian economy particularly
since mid-2008. The impact has been
more pronounced on the real
economy rather than the banking
sector. This was due to a number of
factors most prominent of which is the
l imited integration of the Egyptian
banking sector in the global financial
market. Moreover, the Central Bank of
Egypt had succeeded in reforming the
sector since 2004 by consolidating the
banks into larger conglomerates;
restructuring bank management; and
getting rid of toxic debts. The Central
Bank also introduced stringent rules of
governance to guarantee the
disciplined functioning of the system.
Finally, the banking system has not
been short of l iquidity with the
lending-to-deposit ratio not exceeding
53%, which is well within the safe
boundaries compared to the rest of
the world.1
The impact on the real economy has
been reflected in the following
indicators: 1
Decline of GDP growth from 7.2% in
2007/08 to around 4% in 2008/09.
Reduced flow of FDI and a decline
in domestic investment.
Increase in return migration and
expected drop in remittances.
Increased strain on the balance of
payments.
Capital market collapse.
Decelerating sectoral growth
especially for tourism,
manufacturing and Suez Canal.
The Effect Of The Economic Crisis On Egypt’s Economy
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The prolonged labor market recession
and the consequent social
deterioration are the most serious
aspects of the global financial and
economic crisis as it reflects on Egypt.
The most immediate impact of the
crisis has been the inability of the
labor market to adjust, thus
exacerbating the problem of
unemployment, and accentuating the
position of different groups particularly
women and youth. Unemployment,
which has been a chronic problem
even with the rapid growth of the pre-
crisis period, is on the rise. Open
unemployment increased from 8.4% to
8.8% over the last year, and expected
to reach 10% by the end of this year.1
Moreover, vulnerable unemployment is
on the rise. Another aspect of the
employment problem is the
prevalence of “vulnerable
employment” which affects 28% of the
employed labor force, and has, in
fact, been on the rise in recent years.1
The impact has been more
pronounced for women than for men
where vulnerable employment among
females amounted to 53% compared
to 21% for men.1
Another challenge is poverty which is
affecting some 20% of the population.
Equally important is the vulnerabil ity of
the "near poor" to external shocks
such as inflation or decline in
employment. Between 2005 and 2008,
9% of the population or 6.7 mill ion, fell
into the poverty trap.1
For Egypt, as for almost all emerging
markets, the crisis may offer an
opportunity to deal with the structural
problems that have beleaguered the
economy and reduced its capacity to
cope with external shocks, and to lay
the foundations for the post-crisis
economy and society based on a
coherent vision of the future of the
global economy and the place of
Egypt in it. This would imply that
immediate, short-term actions,
necessary as they are, must be
consistent with, and reinforce the
long-term vision.1
The government has launched a
stimulus package of LE15 bill ion aimed
at boosting domestic demand.
However, to turn the crisis into
opportunity 3 tasks are necessary: 1
Restructuring the economy, mainly
through an aggressive industrial
policy;
Improving labor market policies and
institutions; and,
Creating a platform for social
dialogue based on the issue of
decent work, or the elaboration of
a "jobs pact".
Introduction
Occupying the northeast corner of the
Africa, Egypt is divided by the great
fertile Nile valley, where the economic
activities take place. In the 50’s and
60’s of the 20 th century Egypt's
economy was highly centralized
during the rule of former President
Gamal Abdel NASSER but opened up
considerably under former Presidents
The Effect Of The Economic Crisis On Egypt
Page 3
Anwar EL-SADAT and the former
president Mohamed Hosni Mubarak.2
From 2004 to 2008 Egypt aggressively
pursued economic reforms to attract
foreign investment and facil itate GDP
growth.2
Economic growth had been sustained
at a rate above 7% in the last 2 years
from a base of 3.1% in FY 02/03.2
Real GDP growth in Egypt reached
7.2% in FY 07/08 up from 7.1% in the
previous year, however due to the
financial crisis Egypt has witnessed a
drop in real GDP growth.2
The impact of the U.S. financial crisis
yet remains mild compared to the rest
of the world, as the GOE is sti l l able to
maintain a growth rate of 4.7% FY
2008/20092. The budget deficit
climbed to over 8% of GDP,
predominately due to reduced growth
in export-oriented sectors, including
manufacturing and tourism, and Suez
Canal revenues.2
Net International Reserves reached US
$ 31208.4 mill ion at the end of May
2009.3
In 2010, the government spent more
on infrastructure and public projects,
and exports drove GDP growth to
more than 5%, but GDP growth in 2011
is unlikely to bounce back to pre-
global financial recession levels, when
it stood at 7%. Despite the relatively
high levels of economic growth over
the past few years, l iving conditions
for the average Egyptian remain
poor.2
The modern Egyptian economy
embarked on various stages of
development during which the public
and private sectors played roles
varying in relative importance and
can be summarized in seven eras as
follows:
1. Import substitution and
nationalization , 1952–1966, during
which the first program of
industrial ization in 1957 was
established and led by the public
sector in heavy industries such as
iron and steel and chemical
industries. Nationalization reduced
the relative importance of the
private sector.
2. Inter-War, 1967–1973, adversely
affected the performance of the
economy and public sector role in
import substitution.
3. Openness Euphoria , 1974–1982
during which policies were
introduced to encourage Arab
and foreign investment through a
series of incentives and l iberalizing
trade and payment; the economy
expanded but this proved
unsustainable and growth
consequently scaled back.
4. External Debt Crisis , 1982–1990, the
external debt crisis and Paris Club
re-scheduling and debt reduction.
5. Economic Reform , 1991–2007,
reform policies were introduced to
meet the terms of international
institutions, lenders and donors,
including wider incentives to the
role of the private sector in all
economic activities.
6. The World Food Crisis , 2008,
soaring food prices, especially for
grains, led to calls for the
government to provide more
immediate assistance to the
population of more than 40% in the
The Effect Of The Economic Crisis On Egypt’s Economy
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"poverty tunnel" and to strike a
"new deal" on agriculture policy
and reform.
7. The World Global Financial Crisis ,
2008–present, Egypt to face the
repercussions of the global financial
crisis on the national economy.
The Crisis
The global economic crisis that blew
up in the US and went beyond to
affect the rest of the world had done
a major impact on the Egyptian
economy. This crisis that began by the
end of 2007 in the developed
economies and spread into the rest of
the global economy is the most severe
crisis since the Great Depression of
1929-1932.4
The crisis began with the
sub-prime mortgage
problem in the United States
and culminated in the
financial crunch, caused
mainly by the accumulation
of toxic debts, and which
threatened the banking
system in the whole world.4
The leaders of the Group of 20 (G20)
who met in London on the 2nd of April
2009 declared that “We face the
greatest challenge to the world
economy in modern times; a crisis
which has deepened since we last
met (15 November 2008), which
affects the l ives of women, men, and
children in every country and which all
countries must join together to
resolve.4
The global financial and economic
crisis has negatively been transmitted
to the Egyptian economy particularly
since mid-2008. The impact has been
more pronounced on the real
economy rather than the banking
sector. This was due to a number of
factors most prominent of which is the
l imited integration of the Egyptian
banking sector in the global financial
market.4
The Egyptian stock exchange was the
first to suffer due to the collapse in
foreign stock markets. Foreign
investors hastened to sell the shares
they own in Egypt's stock market to
cover their vulnerable financial
position, especially following their
losses elsewhere. Moreover,
most Egyptian big
corporations are l isted in
foreign markets particularly
those of London and New
York - thus their shares
declined with the collapse
that hit these markets. The
fact that seventy per cent
of investors in the Egyptian
stock exchange are small
shareholders, compounds the crisis,
because they hurried to sell their
shares even when prices fell to the
level of 20 per cent.4
Hence the index of Cairo and
Alexandria Stock Exchanges (CASE)
made harsh losses as it fell from 2727.7
points in August 2008 to 1556.7 points
in November 2008. The average of
Case30 fell from 8449.6 points in
August 2008 to 4205.9 points in
November 2008. On January 21s t 2009,
The Effect Of The Economic Crisis On Egypt
Page 5
it fel l to 3780.38 points. Market capital
of Egyptian-l isted companies fell from
EGP 695 bill ion in August 2008 EGP 461
bill ion in November 2008, i.e. losses
amounted to EGP 234 bill ion. Such
developments resulted in losses below
50 per cent of equil ibrium value-
therefore numerous investors suffered
harsh losses. 4
Worth mentioning that the drop in
terms of shares' prices took place in
May 2008 due to a number of
economic decisions taken by the
Egyptian government. Yet a greater
decline occurred after mid-September
2008 following the eruption of the
global financial crisis.4
Sector of tourism
Because the crisis began shortly
before the tourism season in Egypt,
the sector of tourism was strongly
affected. Although it was estimated
primarily that losses would not be felt
before March 2009, the real picture
was bleaker as tourism began to suffer
in December 2008. The Tourism
Minister said that signs of the crisis
began to express themselves in August
2008 thought real losses stared to be
felt in December 2008 - by 4.5 per
cent. Secretary General of Chamber
of Hotels said that reservations are in
real decline and great numbers of
workers in the sector of tourism are
expected to be laid off. The media
transmitted reports on the dismissal of
temporary workers in some hotels in
Luxor, Aswan, Hurghada, and Sharm
el-Sheikh. When some European tourist
organizers were belated in meeting
their financial obligations to Egyptian
hotels, an atmosphere of worry
dominated the field.4
This situation predicts a decline in
terms of tourism revenues, which
would have a negative impact on 62
professions closely l inked to tourism.
Available data showed that the
growth in tourism revenues decreased
from 17 per cent in August 2008 to 10.8
per cent in the following month. In the
first quarter of 2008/2009, the rate was
15.2 per cent against 32 per cent in
the same period last year. The year
2009 witnessed a 20 per cent drop in
tourism revenues. Should the crisis last,
the revenues generated by tourism will
further decline. The short-sighted
policy usually pursued by tourist
agencies and companies - i.e.
reducing prices dramatically- will be
to no avail.4
Navigation in Suez Canal
Since world trade will certainly decline
due to the recession, the movement of
navigation and oil shipping slow down.
Hence shipping through the Suez
Canal negatively affected,
particularly when taking into account
that some companies have already
started to use the alternative route of
the Cape of Good Hope due to the
phenomenon of piracy off Somali
shores. Hence shipping through the
Suez Canal has witnessed a slowdown
over the past three months and
revenues fell from $504.5 mill ion in
August 2008 to $469.6 mill ion in
September 2008. In October,
November and December, revenues
The Effect Of The Economic Crisis On Egypt’s Economy
Page 6
amounted to $467.5 mill ion, $419.8
mill ion and $391.8 mill ion respectively.
It is worthy of noting that revenues
were $426.3 mill ion in December 2007.4
Suez Canal revenues registered the
highest monthly figures since 2008,
totaling $406.2 mill ion in July2010, a
6.1% increase year-on-year. This is a
5.9% rise over the previous month
when revenues totaled $383.7 mill ion.
The Suez Canal Authority also noted
that vessel traffic also climbed 2.2%.5
Revenues shot up 11.5% in the first
seven months of 2010, year-on-year
reaching $2.66 bill ion compared to
$2.38 bill ion.5
Oil sector
Fall ing oil prices had negative
ramifications on Egypt's oil revenues.
The decline started to unfold, as the
oil balance made a surplus of $ 1.6
bill ion in July-September 2008 against
$3.5 bill ion in April -June 2008. It has to
be noted here that although fall ing oil
prices will reduce foreign currency, it
will also cut the cost of oil subsidy,
which will reduce the budget deficit.4
The global financial crisis cut revenues
from commodity exports due to the
troubles experienced by Egypt's
trading partners in Europe and the US.
Remittances by Egyptian expatriates
will fall as Gulf States ended the
contracts of large numbers of migrant
workers including the Egyptians. Many
of those came back to Egypt and join
the column of the unemployed.4
Foreign direct investments
I t is beyond a shadow of a doubt that
foreign direct investments will fall .
Available data indicate that net
foreign investments decreased by 44
per cent compared with 2007. External
portfol io investment flows rose to $3.5
bill ion against $1.4 bill ion in 2007.4
All the above factors expressed
themselves in the balance of
payments whose surplus fell in the first
quarter of 2008/2009 by 4.5 per cent
to become $0.5 bill ion against $ 1.1
bill ion in the same period previous
year.3 The recession in the US and
Europe reached Egypt, wherein the
GDP growth fell throughout 2008/2009
and 2009/2010. The recession will be
followed by a declining internal
demand, then a reduction in terms of
production capacities. The outcome
will definitely be a rise in the
unemployment.4
Growth rate slowdown
The first half of 2008/2009 revealed a
slowdown in the growth rate to reach
5.8 per cent compared with 6.5 per
cent in the same period last year. Thus
the rosy picture Egyptian officials tried
to paint proved unrealistic and their
claims that the crisis will not go
beyond the monetary economy - to
The Effect Of The Economic Crisis On Egypt
Page 7
reach the real economy-proved
untrue.4
Source: Ministry of Economic Development
Per capita NDP fell and create a
climate of turbulence in view of the
'revolution of expectations' resulted
from globalization and advancement
in communications technology. When
a poor and unemployed individual is
able to know how extravagant l ives of
the rich are, social turmoil becomes
very l ikely.4
The Egyptian government allocated
EGP15 bill ion to counterbalance the
ramifications of the economic crisis.
The government was keen to convey a
message stressing its aptitude to
resolve the crisis. Yet some observers
believe that the government allotment
remains too small to be able to offset
the repercussions of the crisis.4
Moreover, the Central Bank of Egypt
had succeeded in reforming the
sector since 2004 by consolidating the
banks into larger conglomerates;
restructuring bank management; and
getting rid of toxic debts. The Central
Bank also introduced stringent rules of
governance to guarantee the
disciplined functioning of the system.
Finally, the banking system has not
been short of l iquidity with the
lending-to-deposit ratio not exceeding
53%, which is well within the safe
boundaries compared to the rest of
the world.4
In what follows, a brief account will be
given of the impact of the crisis on the
economy starting by macroeconomic
indicators, followed by the
performance of financial markets and
the impact on the real economy,
relegating the impact on employment
and social aspects to a separate
section as it is a core issue of this
paper. It should be emphasized at the
outset that the depth of the impact of
the crisis can best be understood by
taking into consideration the existing
structural problems that confronted
the Egyptian Economy. The crisis and
the response to it have been
conditioned by these problems.4
A. Macro-economic instability
The robust economic growth since
2004 contrasts sharply with the
declining ranking of Egypt on the
macroeconomic stabil ity
competitiveness component of the
Global Competitiveness Index.1
Despite minor improvements, total
gross debt remains a major problem
amounting to 85.1 % of GDP. Similarly,
budget deficit continued to be a
challenge despite concerted
government efforts to reduce it, where
it stood at 6.8% of GDP in 2008. This is
l ikely to increase as a result of the
stimulus package of public spending
The Effect Of The Economic Crisis On Egypt’s Economy
Page 8
of LE 15 bill ion to face the present
economic crisis. In fact, the deficit-to-
GDP ratio has increased to 8.4% in
2009 as a result of a rise in expenditure
to 28% of GDP, and a decline of
revenues to 19.3%.1
This chronic macroeconomic situation
of the Egyptian economy ref lects the
tension in policy choices between
requirements of economic efficiency
and those of social welfare. One of
the main reasons for budget deficit is
the increasing bil l of public servants,
wages and of subsidies. This has
increased from 64 bill ion LE in 2007 to
128 bill ion in 2008. The government has
managed to reduce subsidies for
energy, especially for energy-intensive
industries, but this has been more than
outweighed by the increase in
subsidies for food, health and
education as well as the 2008 r ise of
30% in the salaries of 5.9 mill ion
government employees to make up
for the sudden upsurge in prices
especially food.1
Inflation targeting has been a
daunting task for the Central Bank of
Egypt, particularly in view of the
openness of the economy and its
vulnerabil ity to “imported inflation”
resulting from the increase in
international prices. Inflation rates
averaged 9.5 % in 2007, and
continued to escalate in the first
quarter of 2008 reaching 14.4%. By the
end of July, inflation rates were as
high as 22%, and by August jumped to
25.6%. Inflation had been brought
under control due mainly to the results
of the reform by the monetary and
fiscal policies.1 However, there were
periods when inflation erupted
beginning with the impact of the
Avian Flu in 2006, followed by the
effect of domestic price increases for
commodities such as fuel, and finally
the inflation resulting from global
increase in food and energy prices
during last year.1
Source: Based on data from CAPMAS for the
period Jan-05 to August 08 and Ministry of
Economic Development thereafter.
The impact of the crisis has been mainly
reflected in the decline in almost all the
macroeconomic indicators representing
almost a reversal of the impressive
performance of the previous four years .
In the following, a picture of this impact
will be outl ined.1
Decline in real GDP growth rates
In contrast to the previous four years
when, almost all national and
international reports point out to a
reversal of the trend particularly during
the first two quarters of the financial
year 2008/09. The real GDP growth
which amounted to 7.2% in 2007/08,
declined sl ightly by the end of that
year when it was 6.7% in the last
quarter. But with the onset of the crisis
-5
0
5
10
15
20
25
30
35
40 General Prices Food and Beverage
The Effect Of The Economic Crisis On Egypt
Page 9
GDP growth declined to 5.8% and 4.1%
during the first and second quarters of
2008/09 respectively. This has been due
to the decline in the major drivers of
growth especially tourism,
manufacturing, Suez Canal, and
remittances of Egyptians working
abroad. It is expected that the
economy will begin its recovery by 2010
propelled by the renewed growth of
the global economy and through the
effect of the stimulus package by the
Egyptian government designed to
boost domestic demand.1
Real GDP Growth (2003-2013)
Source: IMF, International Financial Stati stics,
quoted by the Economist Intel l igence Uni t (EIU),
London, March 2009.
Note: Official f igures for Egypt’s GDP growth in Q1
2008/09 i s 5.8 %, and for Q2 i s 4.1% according to
the Ministry of Economic Development
B. Unbalanced Sectoral Sources of
Growth
An analysis of the sectoral sources of
GDP growth in 2008 shows that the
major contributors were manufacturing
(25.8%), trade and finance (21.3%), and
transport (16.9%). With the exception of
manufacturing, these sectors are not
typically employment-intensive. The
position of agriculture is puzzl ing. While
its share of employment is around 28%,
it contributed only 8% of GDP growth
last year. Its share of investment is also
low (7.2%). An il lustration of an example
of these discrepancies is provided in
the figure below where agriculture and
industry are compared in terms of their
contribution to GDP growth, share of
investment, and share of the labor
force. The implication is that the sector
with the largest labor force share is
starved of investment resources and its
productivity is low which curtails its
contribution to growth.1
Source: Calculated from data provided by the
Ministry of Economic Development, December
2008.
C. Inadequate Human Resources
A cross-cutting cause of the low and
declining competitiveness in Egypt is
due in a large measure to the quality
of the labor force, and the efficiency
of labor market institutions. A striking
feature of the Egyptian labor force is
2006a 2007a 2008b 2009c 2010c
Egypt 6.8 7.1 7.2 3.8 3.9
World 4 3.8 2 -2.6 1
-4
-2
0
2
4
6
8
% Employment
% Investment
% GDP growth
28%
13%
5%
25%
8%
26%
The Effect Of The Economic Crisis On Egypt’s Economy
Page 10
the dominant share of the informal or
unorganized sector in overall
employment.1
As shown in the below figure, out of
the 20 mill ion employed in 2006, the
informal sector accounted for 35%;
government for 28.5% and agriculture
36.5%. These add up to 90% of the
employed labor force, and they are to
a large extent of low productivity and
of low income. Only 10% of
employment remains in what could be
termed as the “modern sectors”. It is
here that the major explanation for
the country’s competitiveness position
resides.1
Structure of the Employed Labor Force
Source: Samir Radwan, Impact of Investment on
the Economic and Social Aspects in Egypt,
memeo. Cai ro, 2007
To gauge the order of magnitude,
labor supply grows at 3% every year,
while the demand for labor grows only
at 2.8%, with the difference
continually swell ing the ranks of the
unemployed. Furthermore, of those
unemployed, 92.1% are first time job
seekers. The problem is partly created
by the length of queuing period of the
school-to-work transition. In 2006,
around 75% of first time job seekers
were only able to find jobs within 5
years of leaving school. As for
females, the situation is much worse.
The school-to-work transition rates for
females from 1998 to 2006 never
exceeded 25% even after 15 years of
leaving school.1
This phenomenon is mainly attributed
to another mismatch which exists
between the products of education,
and the demands of the labor market.
In almost all the reports related to
economic development in Egypt, skil l
shortage has been underl ined as a
deficit that has to be compensated
for through educational and training
policies. As Figure 4 shows, some 41 %
of the employed labor force is either
i l l iterate or semi-il l iterate. This curtails
the abil ity of the labor force to deal
with technology and explains to some
extent the low productivity and
hence, low return to labor among
these groups.1
Employed Labor Force by Educational
Status
Source: Based on data from CAPMAS, Labor
Force Sample Survey, Quarterly Bul letin;
November 2008. Table 5A, p50
Government
Sector 28%
Informal
Sector 35%
Agriculture 27%
MODERN SECTOR
10%
Illiterate/ read
&write 42%
Less than Middle Level
Education 9%
Middle Level
Education 31%
Less than Higher
Education 4%
Higher Education
14%
The Effect Of The Economic Crisis On Egypt
Page 11
Domestic Credit Growth and the Change
in Gross Fixed Investment
*Gross Fixed Investment calculated at constant
prices
Source: Based on data from the Economist
Intel l igence Uni t, Egypt: Country Forecast, January 2009,
p11&13
Foreign Direct Investment
Source: Based on data from Economist Intelligence Unit, Egypt:
Country Forecast, January 2009,p14 *Gross Fixed Investment calculated at constant prices
The irony is that almost half of those
employed are either i l l iterate or
semil iterate, as they cannot afford to
be idle; while more than half of those
unemployed have received middle
level education and more than one
third have received high level
education. 1
D. Growth is driven more by
investment than productivity
A strong correlation has been
observed between investment and
GDP growth over the last three
decades. Periods of strong growth
performance were usually associated
with higher rates of capital
accumulation, rather than increases in
Total Factor Productivity (TFP).1
An analysis of the period 1990/91-
2004/05 shows clearly that increased
capital intensity has been
predominant in explaining the
observed changes in output per
worker growth, with TFP lagging
behind. It can also be observed that
changes were, to a great extent,
associated with growth in output per
worker. The average GDP growth rate
for the period as a whole was 4.2%,
while employment grew at a
remarkably stable rate of 2.6%, with
output per worker growing at 1.5%.1
The contribution of TFP growth to
output per worker was negative, while
capital-intensity increases tended to
exceed growth in output per worker
by around 10%. This analysis reinforces
the point made earl ier about the
quality of education and efficiency of
the labor force. These two combined
explain the reason for low
productivity. Achieving an
improvement in TFP would require
concerted action to improve
education and to skil l the labor force.1
The Effect Of The Economic Crisis On Egypt’s Economy
Page 12
E. Reduced flow of Domestic and
Foreign Investment
Total investment in the second quarter
of 2008/09 amounted to LE 52.5 bill ion
compared to LE 50.7 bill ion during the
same period of the previous year.1
Though this represents a sl ight
increase, there has been a notable
decline in investment flow from 32%
during the second quarter of 2007/08
to 3.6% only in the second quarter of
2008/09. This can be explained by a
number of factors: first, despite the
comfortable liquidity of the banking
sector, the rate of growth of domestic
credit has declined sharply during
2009; secondly, the flow of FDI which
had amounted to almost 9% of GDP in
2007/08, declined during the first half
of 2008/09 by 60% compared to the
first half of 2007/08; and thirdly the
reticence of the private sector to
embark on new investments under
conditions of uncertainty about
market recovery.1
F. Sharp Drop in Remittances
expected (increase in returned
migration)
The global crisis has adversely
affected the major sources of demand
for Egyptian workers. Thus the decline
in the activities in the GCC countries,
which is the main destination of
migrant workers, in addition to USA
and EU, is l ikely to result in a sharp
drop in remittances which went down
in the first quarter of 2008/09 to about
US $ 1.950 bill ion compared to
US$ 2.285 bill ion compared to the last
quarter of 2007/08. However,
remittances increased again during
the second quarter of 2008/09. This is
not surprising as remittances may
actually increase in the early stages of
the downturn as returned migrants
usually bring their savings with them.1
There are strong indications that this
trend would be reversed as the crisis
unfolds in the destination countries.
For instance In the US and Kuwait,
where the global downturn and fall ing
oil prices seem to have had a more
pronounced effect early on in the
global downturn, remittances fel l
sharply (by 22% and 17% year on year
respectively), a precursor perhaps of
developments elsewhere. The impact
would be most pronounced for
Egyptians working in the construction
sector of the gulf sector of the GCC
states which account for around 54%
of all remittances from these
countries.1
While the ful l picture is not clear, there
are estimates that the performance of
the past few years where remittances
reached some US$ 8.6 bill ion, or 6.5%
of GDP, is l ikely to be reversed. A
study published by the Centre for
Economic Studies in Egypt estimates
that around 500,000 Egyptian migrant
workers will lose their jobs in the Gulf
by end-2009. Another recent estimate
suggests that around 30% of Egyptian
construction workers have already
returned home, but few of these
workers are expected to find
alternative employment in Egypt
where domestic construction activity
has started to weaken. The net result
would be a decline of remittances of
The Effect Of The Economic Crisis On Egypt
Page 13
between 10 to 20% as a result of the
crisis.1
Worker Remittances
Source: Based on Data from the Central Bank of Egypt,
Monthly Statistical Bulletin
Source: Based on Data from the Central Bank of Egypt,
Monthly Statistical Bulletin
G. Balance of Payments Strained
The decline in demand for Egyptian
goods (exports) and services (Suez
Canal, tourism, workers abroad) has
been negatively reflected on the
external balance of the country, thus
ending the short-l ived surplus of the
pre-crisis period. Exports have been
severely hit. The growth rate of exports
is expected to slow down by more
than a third of its current pace from
25.5% in 2008 to 5.9% in 2009. Although
imports are also slowing down from
27.9% growth to 14%, they will not be
hit as hard as exports. Furthermore as
services and transfers drop as a result
of the crisis, the current account is
being significantly impacted.1
According to the Egyptian Central
Bank, the current account deficit for
Q1 2007/08 has increased 7 folds in Q1
2008/9 where it jumped from US$131
mill ion to US$ 966 mill ion.
The impact of all these factors on
Egypt’s balance of payments is quiet
severe, where the 2008 surplus has
been converted into a deficit in the
first half of 2009.1
Balance of Payments
Source: Ministry of Economic Development, Follow-Report
Q2/H1 2009
1.9
3.1
-1
-0.6
-1.5
-1
-0.5
0
0.5
1
1.5
2
2.5
3
3.5
Second Quarter First Half
US$
bill
ion
2008 2009
The Effect Of The Economic Crisis On Egypt’s Economy
Page 14
Food prices 2000 – 20096
Source: The Financial and Economic Crisis : A Decent Work Response : International Labor Organization
(International Institute for Labor Studies) 2009
Furthermore, the strain on Egypt’s
international reserves has been
amplified. International reserves
currently cover only half of the year’s
imports, while it used to cover at least
9 months June 2009.1
H. Effect of the food crisis
Egypt is in the pain of an impending
food crisis due to Russia’s temporary
ban on wheat exports in 2010. Egypt is
the world’s biggest wheat importer
and more than 50% of its wheat comes
from Russia, whose vast tracts of
wheat fields were destroyed by
wildfires leading to the ban. In a
country where more than 80 mill ion
Egyptians depend on subsidized bread
to survive, Egypt already had political
and social uproar because bread
supplies are hit. The former trade
Minister Rachid Mohamed Rachid said
that the country imported six tons of
wheat from Argentina. He also said
that it would cost the government
$700 mil l ion in additional subsidies to
keep the price of bread stable. To
avert such a challenge in the future,
the Egyptian government has said that
the country is aiming for 70% self -
sufficiency in wheat by 2020.5
Urban inflation stood at an annualized
10.7% in July2010, as increasing food
costs drove up prices.5
Food prices jumped 3.2% in July2010.
Core inflation, which excludes the
costs of fruits and vegetables, rose to
7.08% in the year to July 2010 from
6.70% in June 2010.5
Non-oil exports saw a huge spike of
20% in the second quarter of 2010 to
the tune of $5.1 bill ion compared to
24 bill ion in the period last year.
Egypt’s exports are showing a healthy
increase as the economy recovers
from the global economic crisis .5
The Effect Of The Economic Crisis On Egypt
Page 15
I. Fiscal Policy
Fiscal policy was expansionary in
2009/10 in order to offset the impact
of the global financial crisis, with the
budget deficit rising to 8.1% of GDP, 1
percentage point higher than the
average in the previous three years
but sl ightly lower than the government
had expected. The wider deficit was
due to a combination of lower
revenues and higher expenditure.
Total revenues and grants fell to 22.2%
of GDP in 2009/10 from 27.1% in
2008/09. The budget deficit for fiscal
2010/11 is expected to rise further to
almost 10% of GDP.7
Total domestic debt jumped by 21% to
reach EGP 779.5 bill ion or 64.6% of
GDP, up by 2.8 percentage points,
by June 2010.1 External debt
meanwhile rose 6.9% to USD 33.7
bill ion or 15.9% of GDP by June 2010,
one percentage point lower than the
previous year. Thus, Egypt’s external
debt position does not constitute an
immediate threat to external stabil ity.7
The Finance Ministry’s medium-term
framework was to bring down the ratio
of total public debt (domestic plus
external) to 60% of GDP and the
overall deficit to around 3.5% of GDP
by 2015. Given the country’s political
transformation with the departure of
President Hosni Mubarak, it is unclear
whether this target will be met. For
2010/11 and possibly 2011/12,
additional spending will be needed to
meet higher international food and
energy prices, in addition to a larger
than expected wage bill due to ad
hoc measures taken in the face of the
political unrest. A 15% salary increase
was stipulated for government
employees in response to the protests
while temporary government workers
in their post for at least three years
were made permanent staff. The
pressure of subsidies may also prove
costly. Fuel subsidies in 2009/10 cost
an estimated EGP 66.5 bill ion – 5.5% of
GDP and more than 18% of total
expenditures.7
The 2010/11 and 2011/12 budgeted
figures for fuel subsidies were originally
set at EGP 67.7 bill ion and EGP 87.8
bill ion but plans to phase out this
costly exercise will l ikely be put on
hold until a new government takes
power after presidential elections
scheduled for later in 2011. Rising oil
prices may even increase the cost of
the subsidies while revenue generation
will be challenging. Tax revenues,
which constitute more than 60% of
government revenues, may be
undermined by the slowdown in
economic activity during the second
half of 2010/11 because of the
political upheaval and associated
uncertainty.7
J. Monetary Policy
The Central Bank of Egypt (CBE) cut its
key interest rates – overnight deposit
and overnight lending – in July and
September 2009 to 8.25% and 9.75%
while the discount rate was left
unchanged at 8.5%. Rates were then
kept on hold through to March 2011
on the view that underlying inflation
pressures were contained.7
Consumer Price Inflation averaged
11.7% in fiscal 2009/10, off a monthly
high of 13.6% in January 2010 as
higher costs for fruits and vegetables
showed up in the figures. The stil l
relatively high rate of inflation
represented, however, a significant
improvement on the 16.2% recorded in
fiscal 2008/09. Core inflation, which
excludes volatile food items such as
fruits and vegetables, as well as items
with regulated prices, came in at
6.7% for 2009/10, within the CBE’s
comfort zone.7
The Effect Of The Economic Crisis On Egypt’s Economy
Page 16
The remainder of fiscal 2010/11 will
l ikely see increased inflationary
pressures owing to the political unrest
that disrupted production and
transportation, coupled with sharp
increases in global commodity prices,
especially for food and fuel. On the
other hand, slower growth could help
ease inflation pressures to some
degree.7
K. External Position
Egypt’s external position improved in
2009/10, reflecting the overall upturn
seen after the global slump of the
previous year but the current account
remained in deficit, at 2.0% of GDP
compared with 2.3% in 2008/09. The
current account deficit, however, is
projected to widen again to 3.2% in
the current f iscal year and narrow only
sl ightly to 2.9% in 2011/12.7
Exports and imports fell for a second
year running. Exports of goods fell to
10.9% of GDP in 2009/10 from 13.3% in
2008/09, with imports of goods down
to 22.4% from 26.6%. Petroleum exports
fell to USD 10.3 bill ion from USD 11
bill ion, with non-oil exports lower at
USD 13.6 bil l ion from USD 14.2 bil l ion.
Total export proceeds were down 5.0%
and 18.7% lower than pre-global crisis
levels. Total imports fell 2.7% to USD
48.9 bill ion in 2009/10.7
Receipts from services exports also
continued to decrease for the second
year in a row, to USD 23.6 bill ion in
2009/10 after a 13% slump in 2008/09.
While tourism receipts bounced back
to pre-crisis levels, income from the
Suez Canal continued to decrease as
traffic flows weakened. Imports of
services cost USD 13.2 bill ion in
2009/10, up 17%. The services account
surplus fell to USD 10.3 bill ion in
2009/10 from USD 12.5 bill ion the
previous year. Private and official
transfers increased by 26.9% to reach
USD 10.5 bil l ion in 2009/10.7
The trade deficit was l ittle changed at
USD 25 bill ion over the past two years
while the current account deficit
narrowed from USD 4.4 bill ion in
2008/09 to USD 4.3 bill ion in 2009/10.
Stock of total external debt (% of GDP) and debt service (% of exports of goods and services)
Source: African Economic Outlook 2011 report; (www.africaneconomicoutlook.org)
The Effect Of The Economic Crisis On Egypt
Page 17
The capital and financial account
improved significantly in 2009/10 on
net inflows of USD 8.3 bill ion, 3.6 times
the amount recorded in 2008/09 even
as FDI fell to USD 6.8 bill ion. Net
portfol io inflows amounted to
USD 7.9 bill ion, nearly reversing the
previous year’s net outflow of USD 9.2
bill ion as international investment
confidence returned. As a result,
foreign exchange reserves rose to USD
35.2 bill ion in 2009/10, higher than
before the global crisis and sufficient
to cover 8.6 months of imports,
compared with 7.5 months in 2008/09.
Gross external debt increased to USD
33.7 bill ion at end-June 2010, up 6.9%
and equal to 15.9% of GDP, a level not
seen as a threat to Egypt’s external
stabil ity.7
Egypt operates a managed exchange
rate regime. After depreciating in
2008/09, the Egyptian pound rose
sl ightly against the US dollar over the
first two quarters of 2009/10, reflecting
net portfol io inflows. However, the
currency then began to fall as
political unrest and associated capital
outflows roiled the markets. The CBE
intervened to support the currency
with the result that at end-January
2011, the Egyptian pound stood at
EGP 5.87 per US dollar compared to
EGP 5.47 at end-January 2010.
The political uncertainty following the
ouster of President Hosni Mubarak may
last for some time and is l ikely to
pressure Egypt’s external position. On
the capital account, the effect of the
political upheaval is expected to be
severe the rebound in portfol io inflows
during 2009/10 could be completely
reversed in 2010/11. Trading on the
stock market was suspended in late
January and only resumed in late
March 2011. FDI will also l ikely
continue to fall given the difficulties
and uncertainties the country and the
wider region face.7
L. Private Sector Development
Over the past five years, the private
sector has accounted for some 62% of
GDP, 55% of gross capital formation
and close to 70% of total
employment.7
Despite its important role, more stil l
needs to be done to enhance its
performance. A lack of skil led labor
due to a mismatch between what the
market wants and what the education
system produces remains a challenge
for the private sector’s development.7
Egypt’s business environment has
improved, helped by the
modernization of the export/import
system and lower costs for starting a
company. The World Bank’s 2011
Doing Business report ranked Egypt 94
out of 183 countries, up five places
compared to its 2010 report.7
Construction permits remain a
problem, with the country ranked 154
on this measure despite recent
legislation intended to ease the cost
of obtaining permits.7
Other problem areas identified by the
World Bank included registering
property, getting credit and
protecting investors.7
The banking sector in Egypt generally
appears to enjoy ample l iquidity, low
dollarization and improving asset
quality. The loan-to-deposit ratio was
51% in June 2010. In January 2011, as
political protests gathered pace, the
CBE guaranteed all deposits in the
banking system and then l imited
withdrawals in February when the
banks reopened.7
Domestic credit rose by 7.0% in
2009/10, 1 percentage point lower
than in the previous year. Credit to the
private sector increased by 7.7%,
The Effect Of The Economic Crisis On Egypt’s Economy
Page 18
largely outpaced by credit to the
government, which was up by 15%.
One concern about the Egyptian
banking system is that i t holds a large
portion of the outstanding stock of
Treasury bills and bonds. In 2008/09,
private and public banks held 67% of
the total outstanding stock of
Treasury bills, fall ing to 60% in
2009/10.7 In Egypt, where the banking
system is characterized by ample
l iquidity, banks seem to prefer less
risky sovereign lending rather than
making loans to the private sector.
The asset quality of the Egyptian
banking system improved with Non-
performing loans (NPLs) fall ing to
13.4% of total loans outstanding in
2009/10 from 26.5% in 2005/06. Bad
loan provisions provided 100%
coverage in 2009/10, up from 51% in
2005/06. The overhaul of the banks’
risk management practices is ongoing.
The Egyptian Stock Exchange put in a
solid performance in fiscal 2009/10,
with capitalization rising 34.2% from
the previous year to EGP 500 bill ion,
but the political unrest of early 2011
sparked very sharp losses and has
clouded the short-term outlook.7
M. The revolution impact
The Jasmine Revolution started in
Tunisia December 2010 spread to
Egypt on 25 January 2011 and led to
the ousting of the long-time President
Hosni Mubarak on 11 February. The
uprising featured marches,
demonstrations, strikes and acts of
civil disobedience and climaxed to
violent clashes between protesters
defying the curfew imposed by the
government and security services and
supporters of Hosni Mubarak.8
High unemployment, food price
inflation and low minimum wages
along with police brutality,
government corruption and lack of
free elections and freedom of speech
forged the social disarray during the
30-year rule of Hosni Mubarak.8
According to the World Bank, 40% of
total population (population in the FY
2009/10: 79mn) l ives below the poverty
l ine and earns less than USD 2 per
day.8
Egypt once the granary of the
Mediterranean Basin is currently the
largest wheat importer in the world,
while prices of beef increased more
than 60% over the last three months.
Apparently, the authoritarian and long
rule of Hosni Mubarak bred
government corruption and instigated
large income inequalities where an
elite few close to governing party
officials enjoyed the gains from the
impressive real GDP growth recorded
in the previous years. On 11 February,
Vice President Omar Suleiman
announced that President Mubarak
handed over the power to the
Supreme Council of the Armed Forces
and stepped down. The Supreme
Council under General Mohamed
Hussein Tantawi suspended the
Constitution, dissolved both houses of
the parl iament and announced that it
will rule for the next six months until
the presidential elections in
September 2011. The caretaker Prime
Minister Ahmed Shafik resigned on 3
March and replaced by Essam Sharaf.8
The social upheaval in the first couple
of months of 2011 will take a heavy toll
on economic activity in the current FY
as the turmoil resulted in the loss of
numerous working days and hours. For
instance, the Stock Exchange in
Cairo, which suspended trading on 29
January when protests erupted,
remain closed for 55 days, the
commodity sector, which accounts for
the 51.4% of GDP, will bear the brunt
of the disruptions in production.
The Effect Of The Economic Crisis On Egypt
Page 19
Manufacturing production alone
accounts for 16.9% of GDP, while
extractive industry and agriculture
production account for the 28.4% of
GDP. We estimated that tourism alone,
which accounts for a mere 3.5% of
GDP, will shave off real GDP growth
1.5 to 1.8pps in 2010/11 should tourist
arrivals decline to the levels observed
right after the 1997 massacre in Luxor
when gunmen kil led 60 tourists. As the
share of the remaining economic
sectors to real GDP is a lot bigger than
that of tourism, real GDP growth will
be a lot weaker than 1.5-1.8pps in
2010/11 and will average a fragile
0.5% in 2010/11, should we factor in
production disruptions in the
remaining sectors of the economy.8
Inflation inched down to 10.71% in
February from 10.79% in the previous
month as the annual growth in prices
of fruits and vegetables eased at
25.5% YoY from 27.4%. On the month,
CPI rose by 0.13% in February from
1.02% in the previous month. Also,
core inflation dropped to 9.5% in
February from 9.7% a month earl ier
and prevailed over the unfavorable
base effect. Yet, regulated prices rose
by 9.98% YoY in February after
accelerating by 8.83% in the previous
month. We believe that regulated
prices will subside in the forthcoming
months as the caretaking government
will attempt to ameliorate the public
opinion by lowering util ity prices. Yet,
food prices will head north following
global commodity trends and inflation
will average 13.7% in 2010/11.8
Eventually, the Central Bank of Egypt
will tighten its key overnight borrowing
and lending interest rates by 15bps to
8.40% and 10%, respectively by end
2010/11.8
Government budget posted a deficit
of 8.1% of GDP in 2009/10 from 6.9% in
the previous FY as revenues tumbled
to 22.2% of GDP from 27.1%.
Expenditures dropped to 30.3% of GDP
from 33.7% in the corresponding
periods fail ing though to match the
revenues decline. The primary deficit
widened to 3% of GDP in 2009/10 from
2.7% in the previous FY. The fiscal
policy will come across considerable
headwinds in the current fiscal year
and that the fiscal deficit target
penciled in the 2010/11 budget of
7.9% of GDP is overoptimistic, as
weaker economic activity will take a
heavy toll on fiscal revenues. Tax
administration and revenue collection
have paralyzed after the regime
transition and will underperform until a
democratically elected government
assumes office. Moreover, fiscal policy
will have to become more frugal by
raising subsidies, redistribution
payments and public wages in a bid
to calm the public opinion and
correct income inequalities. We
calculated that the 15% rise in public
wages announced by the former
president before leaving office will
raise the fiscal deficit to 12.2% of GDP
in 2010/11, should public revenues
material ize as projected in the 2010/11
budget. We estimate that the fiscal
deficit will cl imb to 12.4% of GDP by
end 2010/11.8
The Effect Of The Economic Crisis On Egypt’s Economy
Page 20
References
1- Samir Radwan ; ILO, SRO Cairo ;
April 2009
2- CIA world Factbook,
https://www.cia.gov/l ibrary/pub
lications/the-world-factbook/
3- The General Authority for
Investment GAFI, 2011 © GAFI -
Under Auspices of the Egyptian
Cabinet, www.gafinet.org
4- Akram Hanna Khalil ; The global
financial crisis: effects on the
Egyptian economy ; Al Ahram
Center for political and
strategic studies bulletin ; Issue
119:25 Jan.2009
5- Middle East and Africa -
Economic Review ; Thomas
White International, Ltd. ; August
2010
6- The Financial and Economic
Crisis : A Decent Work
Response : International Labor
Organization (International
Institute for Labor Studies) 2009
7- African Economic Outlook 2011
report; AfDB, OECD, UNDP,
UNECA; 2011.
(www.africaneconomicoutlook.
org)
8- ILIAS LEKKOS ; Egypt Economic
Review ; Economic Outlook
2011-2012: Building on last year’s
recovery : Piraeus Bank : March
2011.