Economic Research Forum (ERF)

The way forward for Egypt

1718
As Egypt prepares to host the 27th Climate Change Conference in Sharm El-Sheikh in November, there may be an opportunity to restart the post-pandemic economic recovery. This column, first published by The NileView, is firmly optimistic about the country’s potential and prospects, with the author opening: ‘I am not an economist, but here is some food for thought on the way forward for Egypt.’

In a nutshell

While we can be optimistic about Egypt’s potential and prospects, it is essential to understand that economic recovery takes time, relentless efforts, ample resources, resilience and several transformative policies and actions.

It is vital to approach this economic crisis with the mindset that it could very well represent a window of opportunity for the country to autocorrect and pave the way to a healthier and prosperous economy.

COP27 is a unique chance for the government of Egypt to commit to a well-thought and accelerated structural reform programme, and to embark on a journey that is driven by inclusive and sustainable development and a greener economy.

As we start the last quarter of 2022, the global economy continues to be challenged by multiple disruptions. In the aftermath of the Covid-19 pandemic and its associated implications, which seemed to have been somehow subsiding in the latter part of 2021, came Russia’s invasion of Ukraine early in 2022 and its related repercussions, including further derailing of different global value and supply chains.

Such development had strategically caused a worldwide loss of economic momentum. In addition, it led food and energy prices to increase dramatically, resulting in inflation skyrocketing and becoming broad-based in many economies – especially for large food importers like Egypt, with annual wheat imports amounting to around 13 million tons, mainly from Russia and Ukraine, and generally causing more social challenges at a time when the cost of living was already steadily on the rise in both the developed world and developing economies.

Global economic growth has stalled since the second quarter of 2022. Accordingly, projections show that, most likely, many countries will experience slow growth extending well into the fiscal year 2023/24. The implications of these global developments are affecting many countries around the world.

For Egypt, early this year, the country was on the verge of what looked like a gradual post-pandemic economic recovery – building on the economic growth of 3.3% in the fiscal year 2020/21, which was higher than many other countries. But with the developments in Eastern Europe, it turned out that the implications are more severe for the Egyptian economy.

They require a comprehensive approach that encompasses simultaneous actions to be taken by both the government and the central bank, such as embarking on an expedited and comprehensive structural reform program, revisiting fiscal and monetary policies, including moving away from fixing the exchange rate and surely from relying on the carry trade (in other words, hot money), coupled with reaching out to international financial institutions and different global and regional investment channels for significant support.

The negotiations of the government of Egypt with the International Monetary Fund (IMF) are progressing, with the final agreement expected soon pending – I suspect – concrete actions, including an accelerated structural reform strategy and an implementation plan that can see the government taking the corrective measures to exit gradually from the economy and adopting a more inclusive approach vis-à-vis the private sector.

Some of these actions are already underway but the sooner that the agreement with the IMF is reached, the better so that the process of moving away from the current economic crisis starts, which will signal the beginning of the recovery journey.

It is worth noting that the decisions that were taken by the government a few years ago regarding phasing out subsidies on food, fuel and utilities for households and business users while expanding the social protection programmes demonstrate that the government does not shy away from taking tough decisions and mitigating the consequences through various projects and activities.

Today, it is widely acknowledged by different stakeholders, including the government, that it is time for another round of policies and actions that primarily address the role of the government in the economy and improving the business climate with an eye on creating jobs and boosting exports, among other strategic objectives.

For Egypt, I firmly believe that regardless of the severity of the challenges that the economy faces, timely decisions are always of the essence, and no challenge cannot be approached and rectified. I believe that the much-anticipated structural reform programme that the government plans should also be driven by maximising efficiency and effectiveness, taking clear and bold actions to reduce bureaucracy and red tape, and combating corruption where digitalisation can play a significant role – something that the government is working on, and the rollout of several digital services is already underway.

Furthermore, transforming the economy’s fortunes often boils down to how to manage its resources. On this note, several questions come to mind: How do we promote smoother collaboration between government offices? It is important to emphasise that in all environments, silos exist, but what needs to be done is to think creatively to contain them and minimise their negative impact? How to encourage better and more effective coordination between government organisations and offices where the mindset is overwhelmingly driven by thinking vertically and turf protection and overrules a more horizontal approach to decision-making where teamwork and alignment prevail?

In my mind, one of the most critical questions whose answer could help realise a transformational change is – does Egypt really need 32 ministries? In my humble opinion, such an organisational structure is too complex and should be revisited. It often leads to conflicts and, as a result, helps to create a problem for every solution, not the other way around.

Egypt’s financial crisis – probably one of its worst ever – remains a significant deterrent impeding the economy. Everyone acknowledges that, and different key stakeholders – including the government – are seriously deliberating on how to approach such a position with transformative, well-informed, data-driven decisions and proceed with a healthy recovery process.

Therefore, the government’s plan to revisit the public sector is both encouraging and ambitious. The acceleration in the divestiture of state-owned enterprises could be a game-changer and could go a long way in bringing the economy back on track by helping to bridge the financial gap, reducing government investment in the economy, and consequently reducing its debt and, rightly so, offering more investment opportunities to the private sector both locally and internationally while striking the right balance that best serves the interest of the economy – all can help in reducing the country’s external debt.

On a different note, the outlook for business activity remains blurry. The S&P Global Egypt Purchasing Managers’ Index – reflecting the non-oil private sector economy – contracted to 47.6 in September 2022.

Furthermore, some indications show a further drop in business activities due to declining demand across the board in services, manufacturing, construction and retailing because of rising inflation – which is expected to increase further with the much-anticipated and imminent devaluation of the Egyptian pound – coupled with the lack of raw material supply, spare parts as well as other intermediate goods, due to the private sector’s inability to import their needs given the unavailability of foreign currency.

This position was exacerbated by the imposed import regulations early in 2022 – among other reasons­­ – that affected both manufacturers and retailers. It is worth noting that some of these restrictions were recently eased in September.

For the record, Egypt’s balance of trade problems lies not only in the volume of imports but rather in the below-par volume coupled with the complexity of exports, where more than half of exports are primary commodities as for the finished goods, they rely on inputs from other countries. The ripple effect of the recent developments led in the last few months to a significant decrease in exports – a major setback in achieving the country’s ambitious and strategic target of reaching $100 billion in exports.

The role of the government in managing the economy is invaluable. But it needs to be clearly defined with its framework and parameters so that the ecosystem is transparent – leaving no room for speculation – and, more importantly, sustainable from the perspective of local and international investors. Economies need collective efforts by governments, the private sector and other stakeholders to move forward so that everyone is aligned and complements each other.

The private sector should and must be the engine that is empowered to transform the economy, which will not be easy to realise without a conducive business environment that is inviting and act as a magnet for foreign direct investment – the first order of business should be to remove the chronic obstacles facing investors.

For now, the private sector is not playing the sizable role it should be playing in creating enough jobs due to existing market conditions and limitations and the heavy participation of the government in the economy somehow crowding out the private sector – as opposed to playing an invaluable role being the regulator. Therefore, it is promising to know that the government plans to grow the share of the private sector in economic activities from 30% to 65% over the next three years.

Meanwhile, it is worth noting that regional and international investors’ interest in the economy remains solid and high, given Egypt’s size and prospects, pending the availability of market dynamics that are based on and reflect a level playing field.

Every challenge requires unconventional and innovative measures to turn it into an opportunity. In the case of Egypt’s economy, I believe that the path to recovery is relatively classical.

The directions to be taken include revisiting the role of the government in the economy, prioritising spending on mega projects, encouraging private sector investments through an enabling and inviting business environment, adopting a more inclusive economic approach and capitalising on Egypt’s most important asset – its human capital – by creating enough cutting-edge employment opportunities away from low value-added economic sectors, which can help to deliver a more advanced level of productivity growth and consequently positively affect exports.

I am not an economist: these are just some reflections and food for thought. But I remain firmly optimistic about Egypt’s potential and prospects. Given the current state of global affairs and continuing developments, understanding that economic recovery takes time, relentless efforts, ample resources, resilience, and several transformative policies and actions are essential.

Nevertheless, at the same time, it is vital to approach this economic crisis with the mindset that it could very well represent a window of opportunity for the country to autocorrect and pave the way to a healthier and prosperous economy.

On this note, during these challenging times, economies need an opening. One such comes as Egypt prepares to host the 27th edition of the United Nations Conference of the Parties (COP27) – also known as the Climate Change Conference, in Sharm El-Sheikh during the period 6-18 November 2022. The meeting will bring together representatives from around the world and from all walks of life, including but not limited to heads of states, policy-makers, business leaders, professionals, entrepreneurs, academics, civil society representatives and more.

There is no doubt in my mind that this is a unique chance for the government of Egypt to commit to a well-thought and accelerated structural reform programme that can – not just unleash many of the untapped potentials of the private sector and seamlessly and expeditiously open the business environment for investment opportunities – but also embark, as per the government plan, on a journey that is driven by inclusive and sustainable development and a greener economy.

 

This column is a lightly edited version of a 6 October post at The NileView, the Substack newsletter of Sherif Kamel.

Most read

Sustaining entrepreneurship: lessons from Iran

Does entrepreneurial activity naturally return to long-term average levels after big economic disturbances? This column presents new evidence from Iran on trends in entrepreneurship among various categories of firm size, sector and location – and suggests policies that could be effective in promoting entrepreneurial activities.

Happiness in the Arab world: should we be concerned?

Several Arab countries have low rankings in the latest comparative assessment of average happiness across the world. But as this column explains, the average is not a reliable summary statistic when applied to ordinal data. The evidence from more robust analysis of socio-economic inequality in happiness suggests that policy-makers should be less concerned about happiness indicators than the core development objective of more equitable social conditions for citizens.

Financial constraints on small firms’ growth: pandemic lessons from Iran

How does access to finance affect the growth of small businesses? This column presents new evidence from Iran before and during the Covid-19 pandemic – and lessons learned by micro, small and medium-sized enterprises.

The economics of Israeli war aims and strategies

Israel’s response to last October’s Hamas attack has led to widespread death and destruction. This column outlines the impact thus far, including the effects on food scarcity, migration and the Palestinian economy in both Gaza and the West Bank.

It’s too early to tell what happened to the Arab Spring

Did the Arab Spring fail? This column presents a view the consensus view from ERF’s recent annual conference in Morocco: careful analysis of the fundamental drivers of democratic transitions suggests that it’s too early to tell.

Arab regional cooperation in a fragmenting world

As globalisation stalls, regionalisation has emerged as an alternative. This column argues that Arab countries need to face the new realities and move decisively towards greater mutual cooperation. A regional integration agenda that also supports domestic reforms could be an important source of growth, jobs and stability.

Self-employment in MENA: the role of religiosity and personal values

How important are individual’s values and beliefs in influencing the likelihood that they will embrace the responsibilities, risks and entrepreneurial challenge of self-employment? This column presents evidence from 12 countries in the Middle East and North African region on the roles of people’s religiosity and sense of personal agency in their labour market choices.

Gender differences in business record-keeping and planning in Iraq

Only one in every ten informal businesses in Iraq is led by a woman. Yet as research summarised in this column reveals, those businesses are more likely to set budgets and sales targets, and to keep business records. This may be evidence of the role of social exclusion in motivating greater reliance on the formal bureaucratic system.

Reformed foreign ownership rules in UAE: the impact on business entry

In an effort to stimulate economic growth and diversify the economy, the government of the United Arab Emirates has recently implemented regulatory reform that allows 100% foreign ownership of companies operating in the country. This column examines the implications of the reform for entry of new firms in Dubai, using unique data on new business licences in the emirate.

Conflict and debt in the Middle East and North Africa

With the global economy is in its third year of deceleration amid declining inflation and oil prices, the Middle East and North Africa grew by just 1.9% in 2023, with a forecast for growth in 2024 at 2.7%. In addition to heightened uncertainty brought on by the conflict centred in Gaza, many countries in the region are also grappling with pre-existing vulnerabilities, including rising debt levels. This column summarises a new report that unpacks the nature of debt in MENA – and explains the critical importance of keeping rising debt stocks in check.