Egypt in Transition
Very good analysis of Egypt's economic reforms by Al Ahram:
The Egyptian economy has delivered one of its most impressive performances ever this year, with a spurt in growth rates generated by reforms and solid macro-economic management. Better still, international organisations like the World Bank, IMF and rating agencies have issued laudatory reports on the state of the local economy and the outlook for 2007/08. Foreign investors poured billions of dollars into diverse sectors throughout the year, with some, such as real estate and information technology, witnessing double-digit growth rates.
For average Egyptians, however, there has been precious little of the trickledown that the government promised would be the fruit of economic reform, and patience appears to be wearing thin.
The country's economic recovery has so far been a jobless one, with stagnant wages falling well behind mounting inflation rates. The long sought-after high growth rates have come hand in hand with unbearable inflationary spikes and have failed to create job opportunities for millions of Egyptian youth. Persistent unemployment has exacerbated the obvious deterioration in standards of living, leading to increased poverty.
Uncharacteristically, Egypt's economic reform has recently met rare waves of labour unrest and public trust has dipped to an all-time low. In the past year, Egypt has seen an unprecedented number of strikes, sit-ins and demonstrations at its factories, the most famous of which was the eight-day demonstrations by property tax employees in early December in demand of higher salaries. This phenomenon is worrying the government, as it was virtually non-existent in the local economy for almost three decades.
Egypt's social unrest can be tied to the liberal economic policies followed by the government, which has led to booming stock and property markets, a bigger role played by the private sector and unprecedented levels of growth reaching an average of seven per cent during calendar year 2007. Economic growth was boosted by a dramatic increase in foreign direct investment (FDI), which climbed by 82 per cent in fiscal year 2006/07 to reach the current $11.1 billion figure. FDIs directed to the oil and gas sector accounted for only 28 per cent of the overall figure, with 25 per cent channelled to privatisation and sales of assets and 47 per cent going into new projects and the expansion of existing ones.
According to Ministry of Planning figures, growth in the construction sector throughout the year was the highest, reaching 16.2 per cent in the third quarter, compared to 15.2 per cent in the same quarter of the previous year. Tourism and Suez Canal revenues surged, pushing net foreign reserves to $30.92 billion by the end of October 2007, marking a 26.8 per cent spike from the previous year. The exchange rate is benefiting from a worldwide decline in the dollar value, a factor that, luckily, has so far not affected the appeal of Egypt's dollar-denominated exports.
The government was also able to raise its revenues by 16.3 per cent in fiscal year 2007, thanks to privatisation receipts, third mobile operator licences and land sales.
More significant is the thumbs up given by the World Bank in its annual Doing Business report which ranked Egypt the top reformer in the world during 2007 due to its delivery of the highest number of upgrades to its investment climate out of the 175 countries surveyed by the report. An IMF report published in September praised Egypt's economic growth that has come from a diversified economic structure -- namely agriculture, manufacturing, real estate and construction -- which has boosted consumer demand in the economy. Both Standard and Poor's and Moody's rating agencies, while harbouring reservations on the mounting public debt and government expenditures, maintained a positive outlook for the economy.
How have these figures that look so promising on paper trickled down to impact the daily lives of housewives, public workers and even the luckier private sector employees?
Not so well. Average household expenditures increased by almost 50 per cent since the beginning of the year. The government introduced a 10 per cent hike in electricity prices last month for both residential and commercial units. Talk about a possible elimination or reduction in subsidies makes the average citizen's view of the future even bleaker.
Government figures show a decline in the Consumer Price Index (CPI), the main measurement of inflation, to 6.9 per cent in November, down from 7.5 per cent in October and 9.3 per cent in September. The same figures point to an 8.9 per cent fall in unemployment in the third quarter of 2007, from 11.1 per cent a year earlier. This means that out of a workforce of 23.54 million, there were 2.1 million unemployed.
A recent UN survey issued in November gives a more realistic view of the economic situation. The survey revealed that the level of absolute poverty in Egypt is on the rise. An estimated 13 million Egyptians, or 19.6 per cent of the population, earned less than $2 a day in 2005, up from 16.7 per cent in 2000. This renders meeting basic needs a distant dream.
Economists also have reservations about the government's elation with the spurt in FDIs, claiming they were not directed to heavy labour industries and thus are powerless to create more employment opportunities. On the contrary, increased foreign investment in the real estate sector have led to skyrocketing real estate prices.
Even the more financially privileged of the country's citizens had a tough year. The cautious monetary policy followed by the government throughout the year by maintaining its bank lending and deposit rates at their December 2006 levels of 10.75 per cent and 8.75 per cent respectively has made the yield on investor deposits nil in light of the increasing inflation. Those with dollar savings received the hardest hit, with a severe decline in dollar value worldwide and a three-time reduction in interest rates this year.
Meanwhile, the government claims it is fully aware of its people's economic hardships during this time of economic growth. The popular line used by government officials is that this transitional period is a necessary evil that economies go through on their way to development and that people are advised to wait for future gains of the current pains. Minister of Finance Youssef Boutros Ghali told reporters early in the year that public discontent is normal because "fighting inequality becomes harder with economic expansion. The gap between rich and poor will inevitably increase in all economies going through a burst of activity."
All hope is not lost, though, as a strong outlook for 2007/08 and continued favourable external conditions provide a promising setting for future implementation of the reform agenda. The obvious and vital task ahead, however, is not merely to push for maintaining growth, but to sustain high job-creating growth, which has seemed to elude the government so far.
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Regarding the comment Midi has left on another thread which was:
Another blow to the Middle Eastern economies is the global increase in food prices (the reason for this is ethanol). Currently countries like Egypt and Morocco subsidies foodstuff in order to combat social unrest(Egypt even gets help from the US for this).
But as basic foodstuff gets more expensive (world market prices have more than doubled this year alone for wheat)and demand is growing, I don't think that any arab regime not allied with the US will be able to afford continuing subsidies. /midi
Egypt and Morocco, the region's biggest wheat importers, face rising debts unless cuts are made elsewhere
Egypt and Morocco face soaring bills for food subsidies after the price of wheat reached a record high on international markets in mid-December. Egypt is the largest importer of wheat in the world, while Morocco is the second largest in the region.
Both countries will become more indebted unless they reduce government spending in other areas as neither can afford to let consumers bear the cost of rising wheat prices, according to a senior official at the UN's Food & Agriculture Organisation (FAO).
"They will not let [domestic] wheat prices rise, so I expect them to import what they need, and they will try to finance it through their own export earnings," says Abdolreza Abbassian, secretary for the intergovernmental group on grains at the FAO. "Egypt just makes sure it pays for its food subsidies. It will use aid to jack up those subsidies."
Egypt will import 7.5 million tonnes of wheat between July 2007 and June 2008, making it the world's largest importer of the grain, according to the UN organisation's estimates.
The Egyptian government increased subsidies for the retail price of bread to almost 52 per cent in September, following the steady rise of the price of wheat on international markets since May. As a result, bread subsidies are now thought to cost the government $2.47bn a year.
The price of hard red winter wheat, a benchmark price for the crop, increased from $203 a tonne in May to $332 a tonne in Nov-ember. Wheat prices have already increased by 19 per cent since the middle of November, after cold weather damaged the harvest in Argentina, which is a key producer.
On 14 December, wheat for delivery in March 2008 reached a record high of $9.80 a bushel on the Chicago Board of Trade, the world's largest market for agricultural commodities.
Any other disruptions to supply caused by poor weather conditions could result in further price surges, according to the commodities outlook for 2008, issued by investment bank Goldman Sachs.
However, Egypt should be able to get the best prices because of its purchasing power in the market.The General Authority for Supply Commodities, a government agency, buys about 50 per cent of the country's imported wheat, but many in the international commodity markets say the government effectively controls almost all imports.
Morocco's government also risks becoming more indebted after a drought in January and February 2007 caused its production of wheat to collapse from 6.3 million tonnes a year to just 1.5 million tonnes for the 12 months to the end of June 2008.
The FAO forecasts that Morocco's wheat imports will climb from 1.8 million tonnes to 3.5 million tonnes because of the drought. After the drought, the government slashed its import tariff on wheat from 130 per cent to 2.5 per cent.
Only Iran and Syria are net exporters of wheat in the region.
Published: 21 December 2007
Author: Will Hadfield. Staff Writer
Middle East Business Intelligence
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