Many fled after the fall of Mubarak, but they are now showing renewed interest as reforms linked to a major IMF loan take effect.
President Abdel Fattah el-Sisi took a risk last year when he approached the IMF for a massive loan to help extricate the Arab world’s most populous country from an economic crisis. His predecessors’ dealings with the lender have come at a high social cost. In the seventies riots over the withdrawal of subsidies stipulated by the IMF rattled the Sadat regime. But Sisi’s decision, for now, seems to be paying off.
The President secured the first tranche of a three-year, $12 billion loan from the IMF in November – the lender’s largest ever loan to a Middle East country. It was sealed after he implemented a number of reforms – including a reduction of fuel subsides, the introduction of a value added tax and the floatation of the Egyptian pound – and secured $6 billion of bilateral finance.
The devaluation caused the currency to halve in value, with inflation quickly climbing to about 30 per cent, its highest level since December 1989. That has distressed many Egyptians – over a quarter live below the poverty line – possibly sowing the seeds of renewed unrest. Sisi will hope that he can limit the pain by re-energising the economy, amid signs that the fall in the Egyptian pound has already spurred exports and inspired investor confidence. But to stand any chance of turning the economy around, the President will need to push ahead with further liberalisation, such as a reduction of the country’s public sector wage bill and other labour reforms.
The reform programme is critical because the economy has been worsening ever since the overthrow of President Hosni Mubarak in 2011. His ousting led to a period of political turbulence and Islamic terror that scared off investors and tourists, a vital source of revenue that generated nearly $12 billion the year before the Arab Spring uprising. The downturn since the revolution and the subsequent toppling of President Mohamed Morsi has swelled the budget deficit that last year stood at just over 12 per cent of GDP, with unemployment hovering at about the same level, although much higher among young people.
Sisi’s economic policies have failed to arrest the slide. He has been ridiculed for exhorting Egyptians to make collective sacrifices, such as donating spare change to help revive the economy. There has been criticism of his pursuit of mega-projects of questionable value, including the widening of the Suez Canal, and expansion of the role of the army in certain sectors. Foreign exchange controls have drained the country of hard currency, critical for a country heavily dependent on imports. In the end, the President had to turn to the IMF for help.
For the moment, the move looks to have set Egypt on the right course. Since the devaluation, the country has accrued $17 billion of foreign currency – with total reserves rising to $28.5 billion at the end of March, the highest level for six years – and overseas investors have purchased $3.5 billion in treasury bills and bonds. Remittances from Egyptian citizens working abroad increased by 11.1 per cent to $4.6 billion in the fourth quarter of 2016, with exports rising by 18 per cent to $5.2 billion over the same period.
The inflow of dollars is such that banks plan to start repatriating profits of international firms. These have not been returned for some time because foreign currency has been needed for essential imports. The authorities are additionally planning to pay off about half of the £3.5 billion arrears owed to oil and gas companies operating in the country.
Since the devaluation, there has also been a notable uptick in foreign direct investment activity. An important piece of news was the recent decision by the European Bank for Reconstruction and Development, which has been investing in Egypt since 2012, to boost funding for projects in 2017 to the equivalent of $1.1 billion. Overall, FDI was up over 25 per cent to $4.3 billion from July to December 2016, compared to the same period the previous year.
There are signs that domestic business confidence is returning, too. The Emirates NBD Purchasing Managers’ Index, a measure of economic activity in the non-oil private sector, increased for three consecutive months, but dropped in March underlining the fragility of the recovery. The index indicates that the economy is still contracting.
Business growth will be constrained by pricier imports and lower consumer spending caused by inflation. This is particularly bad news for car manufacturing, an important sector of the Egyptian economy, which has been under severe strain. In January it was reported that the industry, one of the largest in Africa, had seen a 50 per cent decline in sales over the previous three months.
Of more concern is that there is a risk of social unrest should the withdrawal of subsidies further squeeze citizens’ purchasing power. That would put pressure on the government to slow the pace of reform. The ratings agency Moody’s has warned that progress could be put at risk by “mounting public discontent”. Egyptian nerves are already beginning to fray with falling living standards. In early March there were small protests around the country over changes to a bread subsidy scheme – on which millions depend – that unintentionally left many without rations.
In light of the pain reforms have caused in the past, the IMF loan requires that some of the savings from austerity measures are used to strengthen social protection programmes. The government is already reportedly considering raising food subsides by nearly 30 per cent to alleviate hardships. This is important, as the President must lessen the potential for unrest. His inclination would be to use his security forces to clamp down on any demonstrations – he has already warned that they could be deployed in a matter of hours if trouble breaks out. But if he is serious about wooing investors, it is something he must avoid.