Babylon & Beyond

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EGYPT: Unrest poses short-term economic challenges, long-term opportunities

February 9, 2011 |  8:52 am

[Editor's note: Analysts at the Carnegie Endowment for International Peace are included among contributors to Babylon & Beyond. Carnegie is renowned for its political, economic and social analysis of the Middle East. The views represented are the author's own.]

Carnegie logo Egypt’s nationwide protests have come at a significant cost in the short term.

Economic growth is projected to decline, job losses and poverty to increase, inflation to heighten, and the budget deficit to expand. If mass protests continue, the economic damage may be considerable.

But if a smooth transition takes place quickly and the right reforms are implemented, Egypt’s economy will come back stronger.

The unrest in Cairo, Alexandria, and other major cities has disrupted production and service deliveries, spread fear among tourists and led investors to reallocate their portfolios away from Cairo’s stock market to safer destinations — all hurting Egypt’s economy.

Most shops and markets have been closed. Food prices have soared by more than 15%. Tourism — which provides more than 2 million jobs and around 10% of the country’s economic output — has also suffered, with Egypt losing an estimated $100 million a day since the uprising began.

In addition, Egypt’s stock market has plunged by 21% since early January.  Large outflows of foreign portfolio investments from Egypt to alternative markets are likely. And Egypt’s sovereign credit rating was downgraded by international rating agencies, making it more expensive for the country to borrow money.

Faced with this situation, the government will need to address major economic challenges and deep social imbalances in the coming years. Its short-term priority, however, should be to return Egypt to “normal” economic activity.

Egypt’s government will need to restore economic confidence by signaling to domestic and foreign investors that the country is heading toward a stable, transparent and competitive business environment. With that confidence, tourists will return to the country, outflows of foreign exchange reserves will cease and economic growth will resume.

When the new government is elected, it must focus on social issues by fighting poverty and inequality and stimulate the creation of decent jobs. Today, more than 40% of Egyptians earn less than $2 per day and large inequalities exist between rich and poor.

To do this, Egypt will need to reform its tax system, crack down on tax evasion, and adopt a progressive and redistributive taxation scheme. Egypt must also revisit its universal subsidy system that absorbs more than 8% of GDP and over one-third of public spending. Though politically popular, studies show non-targeted subsidies benefit the rich more than the poor.

To mitigate the impact on the poor, Egypt must increase the minimum wage in both the government and the private sector and implement appropriate safety-net mechanisms. Finally, policymakers should shift fiscal resources from subsidies to public investments in health, education and employment policies. These steps will help prepare Egypt for a brighter economic future long after the crisis has passed. 

 -- Lahcen Achy in Beirut

Photo: Pedestrians walk past closed electronics stores with empty displays in Cairo on Feb. 7. Credit: Shawn Baldwin/Bloomberg