EGYPT: An economy haunted by inflation, tax shortfalls, unemployment, poverty and corruption

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Beyond the political uncertainty that increased with recent parliamentary elections, Egypt faces many economic, social and institutional challenges undermining its future.

Addressing these challenges is imperative; otherwise, the spread of poverty to large segments of the Egyptian population, cloudy economic prospects and feelings of marginalization after the election could lead to greater social upheaval.

Five challenges pose the most immediate threats to Egypt.

First, the International Monetary Fund projects a 2011 inflation rate of 9.5% in Egypt, bringing its 2006-2011 inflation average to 12%.

Beyond undermining the purchasing power of most of the population, inflation impedes investment and hurts confidence in the stability of the Egyptian economy. Despite efforts to trim public spending, public domestic debt represents more than 70% of GDP, compared to an average of 50% in the Middle East and North Africa region.

Second, Egypt has a tax revenue-to-GDP ratio of about 15%, well below that of Morocco, Tunisia, and Jordan, with 24%, 21%, and 20%, respectively. Egypt’s fiscal regime is hampered by high tax evasion, corruption and inefficient management.

Third, Egypt’s young and growing population is putting considerable pressure on the labor market to meet demand. At least 50% of males and 90% of females remain jobless two years after leaving school. In addition, the number of jobs created decreased by more than 10% in 2009, with most of the available jobs involving poorly paid informal work, which is highly vulnerable to economic pressures.

Fourth, while the poverty rate — which increased from 2000 to 2005 — declined from 2005 to 2008, it is once again on the rise, according to the results of the National Income and Expenditure Survey, which was conducted in 2008/2009. More than 21% of Egyptians now live below the national poverty line, and more than 40% of Egyptians earn less than $2 a day, compared to a regional average of 20%.

Fifth, corruption is widespread in Egypt. Transparency International’s 2010 Corruption Perception Index ranks it 98 of 178 countries; most corruption occurs through bribes. A survey by the International Finance Corp. revealed that six of 10 Egyptian entrepreneurs consider corruption a major constraint on their businesses.

To overcome these obstacles, Egypt must create incentives for investments in productive and labor-intensive sectors. At 0.2% of GDP during the last decade, Egypt’s research and development public expenditures are far below those of another Medium Human Development country, China, which reaches 1.5% of GDP. Policy-makers must design an ambitious development strategy to build a robust and competitive economy, based on domestic economic and human resources.

Egypt also needs to reform its public finance system by cracking down on tax evasion, phasing out universal fuel subsidies and improving delivery of public services.

Finally, all of these reforms will reallocate public resources with some social costs for the poor and end privileges for the business elite and corrupt officials. To be effectively implemented, however, they must rely on a fairly elected parliament and a government that people can trust. Otherwise, Egypt’s status quo is likely to lead to more troubled times ahead.

-- Lahcen Achy in Beirut