The Effect of theEconomic Crisis onEgypt’s EconomyA review of the economic crisis impact on the Egyptianeconomy between 20...
The Effect Of The Economic Crisis On EgyptThe Effect of the                                             The global financi...
 The Effect Of The Economic Crisis On Egypt’s EconomyThe prolonged labor market recession             For Egypt, as for a...
The Effect Of The Economic Crisis On EgyptAnwar EL-SADAT and the former                The modern Egyptian economypresiden...
 The Effect Of The Economic Crisis On Egypt’s Economy         "poverty tunnel" and to strike a          The global financ...
The Effect Of The Economic Crisis On Egyptit fell to 3780.38 points. Market capital    their financial obligations to Egyp...
 The Effect Of The Economic Crisis On Egypt’s Economyamounted to $467.5 million, $419.8               Available data indi...
The Effect Of The Economic Crisis On Egyptreach the real economy-proved                disciplined functioning of the syst...
 The Effect Of The Economic Crisis On Egypt’s Economyof LE 15 billion to face the present            fiscal policies. 1 H...
The Effect Of The Economic Crisis On EgyptGDP growth declined to 5.8% and 4.1%                       (25.8%), trade and fi...
 The Effect Of The Economic Crisis On Egypt’s Economythe dominant share of the informal or                   were only ab...
The Effect Of The Economic Crisis On EgyptThe irony is that almost half o f those      productivity. Achieving anemployed ...
 The Effect Of The Economic Crisis On Egypt’s EconomyE.   Reduced flow of Domestic and              the second quarter of...
The Effect Of The Economic Crisis On Egyptbetween 10 to 20% as a result of the                    been negatively reflecte...
 The Effect Of The Economic Crisis On Egypt’s EconomyFurthermore, the strain on Egypt’s                             wheat...
The Effect Of The Economic Crisis On EgyptI.   Fiscal Policy                           costly. Fuel subsidies in 2009/10 c...
 The Effect Of The Economic Crisis On Egypt’s EconomyThe remainder of fiscal 2010/11 will                        fell to ...
The Effect Of The Economic Crisis On EgyptThe capital and financial account            and uncertainties the country and t...
 The Effect Of The Economic Crisis On Egypt’s Economylargely outpaced by credit to the              government corruption...
The Effect Of The Economic Crisis On EgyptManufacturing production alone               to 22.2% of GDP from 27.1%.accounts...
 The Effect Of The Economic Crisis On Egypt’s EconomyReferences   1- Samir Radwan ; ILO, SRO Cairo ;      April 2009   2-...
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The effect of the economic crisis on egypt

  1. 1. The Effect of theEconomic Crisis onEgypt’s EconomyA review of the economic crisis impact on the Egyptianeconomy between 2007 - 2011By: Mohamed Khalifa IbrahimESLSCA - MBA 38November 2011
  2. 2. The Effect Of The Economic Crisis On EgyptThe Effect of the The global financial and economic crisis has negatively been transmitted to the Egyptian economy particularlyEconomic Crisis since mid-2008. The impact has been more pronounced on the realon Egypt’s economy rather than the banking sector. This was due to a number ofEconomy factors most prominent of which is the limited integration of the Egyptian banking sector in the global financialA review of the economic crisis impact market. Moreover, the Central B ank ofon the Egyptian economy between Egypt had succeeded in reforming the2007 - 2011 sector since 2004 by consolidating the banks into larger conglomerates;Executive Summary restructuring bank management; andThe economic crisis that hit the world getting rid of toxic debts. The Centraleconomy has been unfolding since Bank also introduced stringent rules ofthe end of 2007, and its consequences governance to guarantee theare yet to be understood. The genesis disciplined functioning of the system.of the crisis and its dimensions are Finally, the banking system has notfairly well-known, and therefore fall been short of liquidity with thebeyond the theme of this paper. The lending-to-deposit ratio not exceedingobjective is rather to gauge the 53%, which is well within the safeimpact of the crisis on the Egyptian boundaries compared to the rest ofeconomy with particular focus on the the world. 1labor scene. 1 The impact on the real economy hasThe crisis can be viewed against the been reflected in the followingbackdrop of the strong economic indicators: 1performance that resulted from thereform drive which began in 2004 and  Decline of GDP growth from 7.2% inresulted in an upsurge in almost all 2007/08 to around 4% in 2008/09.macroeconomic indicators, notably  Reduced flow of FDI and a declinehigh rate of GDP growth of 7.2%in in domestic investment.2007/08. Moreover there has been an  Increase in return migration andimpressive progress in improving the expected drop in remittances.investment climate which was  Increased strain on the balance ofreflected in the positive rating of the payments.economy. However, three structural  Capital market collapse.problems continued to vex the  Decelerating sectoral growtheconomy: high budget deficit; rapid especially for tourism,inflation and a constraining quality of manufacturing and Suez Canal.the labor force. 1  Page 1
  3. 3.  The Effect Of The Economic Crisis On Egypt’s EconomyThe prolonged labor market recession For Egypt, as for almost all emergingand the consequent social markets, the crisis may offer andeterioration are the most serious opportunity to deal with the structuralaspects of the global financial and problems that have beleaguered theeconomic crisis as it reflects on Egypt. economy and reduced its capacity toThe most immediate impact of the cope with external shocks, and to laycrisis has been the inability of the the foundations for the post-crisislabor market to adjust, thus economy and society based on aexacerbating the problem of coherent vision of the future of theunemployment, and accentuating the global economy and the place ofposition of different groups pa rticularly Egypt in it. This would imply thatwomen and youth. Unemployment, immediate, short-term actions,which has been a chronic problem necessary as they are, must beeven with the rapid growth of the pre - consistent with, and reinforce thecrisis period, is on the rise. Open long-term vision. 1unemployment increased from 8.4% to8.8% over the last year, and expected The government has launched ato reach 10% by the end of this year. 1 stimulus package of LE15 billion aimed at boosting domestic demand.Moreover, vulnerable unemployment is However, to turn the crisis intoon the rise. Another aspect of the opportunity 3 tasks are necessary: 1employment problem is theprevalence of “vulnerable  Restructuring the economy, mainly through an aggressive industrialemployment” which affects 28% of the policy;employed labor force, and has, in  Improving labor market policies andfact, been on the rise in recent years. 1 institutions; and,  Creating a platform for socialThe impact has been more dialogue based on the issue ofpronounced for women than for men decent work, or the elaboration ofwhere vulnerable employment among a "jobs pact".females amounted to 53% comparedto 21% for men. 1 IntroductionAnother challenge is poverty which is Occupying the northeast corner of theaffecting some 20% of the population. Africa, Egypt is divided by the greatEqually important is the vulnerability of fertile Nile valley, where the economicthe "near poor" to external shocks activities take place. In the 50’s andsuch as inflation or decline in 60’s of the 20 th century Egyptsemployment. Between 2005 and 2008, economy was highly centralized9% of the population or 6.7 million, fell during the rule of former Presidentinto the poverty trap. 1 Gamal Abdel NASSER but opened up considerably under former Presidents Page 2
  4. 4. The Effect Of The Economic Crisis On EgyptAnwar EL-SADAT and the former The modern Egyptian economypresident Mohamed Hosni Mubarak. 2 embarked on various stages of development during which the publicFrom 2004 to 2008 Egypt aggressively and private sectors played rolespursued economic reforms to attract varying in relative importance andforeign investment and facilitate GDP can be summarized in seven eras asgrowth. 2 follows:Economic growth had been sustainedat a rate above 7% in the last 2 years 1. Import substitution andfrom a base of 3.1% in FY 02/03. 2 nationalization, 1952–1966, during which the first program ofReal GDP growth in Egypt reached industrialization in 1957 was7.2% in FY 07/08 up from 7.1% in the established and led by the publicprevious year, however due to the sector in heavy industries such asfinancial crisis Egypt has witnessed a iron and steel and chemicaldrop in real GDP growth. 2 industries. Nationalization reducedThe impact of the U.S. financial crisis the relative importance of theyet remains mild compared to the rest private sector. 2. Inter-War, 1967–1973, adverselyof the world, as the GOE is still able to affected the performance of themaintain a growth rate of 4.7% FY economy and public sector role in2008/2009 2 . The budget deficit import substitution.climbed to over 8% of GDP, 3. Openness Euphoria, 1974–1982predominately due to reduced growth during which policies werein export-oriented sectors, including introduced to encourage Arabmanufacturing and tourism, and Suez and foreign investment through a series of incentives and liberalizingCanal revenues. 2 trade and payment; the economy expanded but this provedNet International Reserves reached US unsustainable and growth$ 31208.4 million at the end of May consequently scaled back.2009. 3 4. External Debt Crisis , 1982–1990, the external debt crisis and Paris ClubIn 2010, the government spent more re-scheduling and debt reduction.on infrastructure and public projects, 5. Economic Reform, 1991–2007,and exports drove GDP growth to reform policies were introduced tomore than 5%, but GDP growth in 2011 meet the terms of internationalis unlikely to bounce back to pre - institutions, lenders and donors, including wider incentives to theglobal financial recession levels, when role of the private sector in allit stood at 7%. Despite the relatively economic activities.high levels of economic growth over 6. The World Food Crisis, 2008,the past few years, living conditions soaring food prices, especially forfor the average Egyptian remain grains, led to calls for thepoor. 2 government to provide more immediate assistance to the population of more than 40% in the  Page 3
  5. 5.  The Effect Of The Economic Crisis On Egypt’s Economy "poverty tunnel" and to strike a The global financial and economic "new deal" on agriculture policy crisis has negatively been transmitted and reform. to the Egyptian economy particularly7. The World Global Financial Crisis , since mid-2008. The impact has been 2008–present, Egypt to face the repercussions of the global financi al more pronounced on the real crisis on the national economy. economy rather than the banking sector. This was due to a number of The Crisis factors most prominent of which is the limited integration of the Egyptian The global economic crisis that blew banking sector in the global financial up in the US and went beyond to market. 4 affect the rest of the world had done The Egyptian stock exchange was the a major impact on the Egyptian first to suffer due to the collapse in economy. This crisis that began by the foreign stock markets. Foreign end of 2007 in the developed investors hastened to sell the shares economies and spread into the rest of they own in Egypts stock market to the global economy is the most severe cover their vulnerable financial crisis since the Great Depression of position, especially following their 1929-1932. 4 losses elsewhere. Moreover, The crisis began with the most Egyptian big sub-prime mortgage corporations are listed in problem in the United States foreign markets particularly and culminated in the those of London and New financial crunch, caused York - thus their shares mainly by the accumulation declined with the collapse of toxic debts, and which that hit these markets. The threatened the banking fact that seventy per cent system in the whole world. 4 of investors in the Egyptian stock exchange are small The leaders of the Group of 20 (G20) shareholders, compounds the crisis, who met in London on the 2nd of April because they hurried to sell their 2009 declared that “We face the shares even when prices fell to the greatest challenge to the world level of 20 per cent. 4 economy in modern times; a crisis Hence the index of Cairo and which has deepened since we last Alexandria Stock Exchanges (CASE) met (15 November 2008), which made harsh losses as it fell from 2727.7 affects the lives of women, men, and points in August 2008 to 1556.7 points children in every country and which all in November 2008. The average of countries must join together to Case30 fell from 8449.6 points in resolve. 4 August 2008 to 4205.9 points in November 2008. On January 21 s t 2009,  Page 4
  6. 6. The Effect Of The Economic Crisis On Egyptit fell to 3780.38 points. Market capital their financial obligations to Egyptianof Egyptian-listed companies fell from hotels, an atmosphere of worryEGP 695 billion in August 2008 EGP 461 dominated the field. 4billion in November 2008, i.e. losses This situation predicts a decline inamounted to EGP 234 billion. Such terms of tourism revenues, whichdevelopments resulted in losses below would have a negative impact on 6250 per cent of equilibrium value- professions closely linked to tourism.therefore numerous investors suffered Available data showed that theharsh losses. 4 growth in tourism revenues decreasedWorth mentioning that the drop in from 17 per cent in August 2008 to 10.8terms of shares prices took place in per cent in the following month. In theMay 2008 due to a number of first quarter of 2008/2009, the rate waseconomic decisions taken by the 15.2 per cent against 32 per cent inEgyptian government. Yet a greater the same period last year. The yeardecline occurred after mid-September 2009 witnessed a 20 per cent drop in2008 following the eruption of the tourism revenues. Should the crisis last,global financial crisis. 4 the revenues generated by tourism will further decline. The short-sightedSector of tourism policy usually pursued by touristBecause the crisis began shortly agencies and companies - i.e.before the tourism season in Egypt, reducing prices dramatically- will bethe sector of tourism was strongly to no avail. 4affected. Although it was estimated Navigation in Suez Canalprimarily that losses would not be feltbefore March 2009, the real picture Since world trade will certainly declinewas bleaker as tourism began to suffer due to the recession, the movement ofin December 2008. The Tourism navigation and oil shipping slow down.Minister said that signs of the crisis Hence shipping through the Suezbegan to express themselves in August Canal negatively affected,2008 thought real losses stared to be particularly when taking into accountfelt in December 2008 - by 4.5 per that some companies have alreadycent. Secretary General of Chamber started to use the alternative route ofof Hotels said that reservati ons are in the Cape of Good Hope due to thereal decline and great numbers of phenomenon of piracy off Somaliworkers in the sector of tourism are shores. Hence shipping through theexpected to be laid off. The media Suez Canal has witnessed a slowdowntransmitted reports on the dismissal of over the past three months andtemporary workers in some hotels in revenues fell from $504.5 m illion inLuxor, Aswan, Hurghada, and Sharm August 2008 to $469.6 million inel-Sheikh. When some European tourist September 2008. In October,organizers were belated in meeting November and December, revenues  Page 5
  7. 7.  The Effect Of The Economic Crisis On Egypt’s Economyamounted to $467.5 million, $419.8 Available data indicate that netmillion and $391.8 million respectively. foreign investments decreased by 44It is worthy of noting that revenues per cent compared with 2007. Externalwere $426.3 million in December 2007. 4 portfolio investment flows rose to $3.5Suez Canal revenues registered thehighest monthly figures since 2008 ,totaling $406.2 million in July2010, a6.1% increase year-on-year. This is a5.9% rise over the previous monthwhen revenues totaled $383.7 million.The Suez Canal Authority also notedthat vessel traffic also climbed 2.2%. 5Revenues shot up 11.5% in the firstseven months of 2010, year-on-yearreaching $2.66 billion compared to$2.38 billion. 5Oil sector billion against $1.4 billion in 2007. 4Falling oil prices had negative All the above factors expressedramifications on Egypts oil revenues. themselves in the balance ofThe decline started to unfold, as the payments whose surplus fell in the firstoil balance made a surplus of $ 1.6 quarter of 2008/2009 by 4.5 per centbillion in July-September 2008 against to become $0.5 billion against $ 1.1$3.5 billion in April-June 2008. It has to billion in the same period previousbe noted here that although falling oil year. 3 The recession in the US andprices will reduce foreign currency, it Europe reached Egypt, wherein thewill also cut the cost of oil subsidy, GDP growth fell throughout 2008/2009which will reduce the budget deficit. 4 and 2009/2010. The recession will be followed by a declining internalThe global financial crisis cut revenues demand, then a reduction in terms offrom commodity exports due to the production capacities. The outcometroubles experienced by Egypts will definitely be a rise in thetrading partners in Europe and the US. unemployment. 4Remittances by Egyptian expatriates Growth rate slowdownwill fall as Gulf States ended thecontracts of large numbers of migrant The first half of 2008/2009 revealed aworkers including the Egyptians. Many slowdown in the growth rate to reachof those came back to Egypt and join 5.8 per cent compared with 6.5 perthe column of the unemployed. 4 cent in the same period last year. Thus the rosy picture Egyptian officials triedForeign direct investments to paint proved unrealistic and theirIt is beyond a shadow of a doubt that claims that the crisis will not goforeign direct investments will fall. beyond the monetary economy - to Page 6
  8. 8. The Effect Of The Economic Crisis On Egyptreach the real economy-proved disciplined functioning of the system.untrue. 4 Finally, the banking system has not been short of liquidity with the lending-to-deposit ratio not exceeding 53%, which is well within the safe boundaries compared to the rest of the world. 4 In what follows, a brief account will be given of the impact of the crisis on the economy starting by macroeconomic indicators, followed by the performance of financial markets andSource: Ministry of Economic Development the impact on the real economy, relegating the impact on employmentPer capita NDP fell and create a and social aspects to a separateclimate of turbulence in view of the section as it is a core issue of thisrevolution of expectations resulted paper. It should be emphasized at thefrom globalization and advancement outset that the depth of the impact ofin communications technology. When the crisis can best be understood bya poor and unemployed individual is taking into consideration the existingable to know how extravagant lives of structural problems that confrontedthe rich are, social turmoil becomes the Egyptian Economy. The crisis andvery likely. 4 the response to it have been conditioned by these problems. 4The Egyptian government allocated A. Macro-economic instabilityEGP15 billion to counterbalance theramifications of the economic crisis. The robust economic growth sinceThe government was keen to convey a 2004 contrasts sharply with themessage stressing its aptitude to declining ranking of Egypt on theresolve the crisis. Yet some observers macroeconomic stabilitybelieve that the government allotment competitiveness component of theremains too small to be able to offset Global Competitiveness Index. 1the repercussions of the crisis. 4 Despite minor improvements, total gross debt remains a major problemMoreover, the Central Bank of Egypt amounting to 85.1 % of GDP. Similarly,had succeeded in reforming the budget deficit continued to be asector since 2004 by consolidating the challenge despite concertedbanks into larger conglomerates; government efforts to reduce it, whererestructuring bank management; and it stood at 6.8% of GDP in 2008. This isgetting rid of toxic debts. The Central likely to increase as a result of theBank also introduced stringent rules of stimulus package of public spendinggovernance to guarantee the  Page 7
  9. 9.  The Effect Of The Economic Crisis On Egypt’s Economyof LE 15 billion to face the present fiscal policies. 1 However, there wereeconomic crisis. In fact, the deficit-to- periods when inflation eruptedGDP ratio has increased to 8.4% in beginning with the impact of the2009 as a result of a rise in expenditure Avian Flu in 2006, followed by theto 28% of GDP, and a decline of effect of domestic price increases forrevenues to 19.3%. 1 commodities such as fuel, and finally the inflation resulting from globalThis chronic macroeconomic situation increase in food and energy pricesof the Egyptian economy reflects the during last year. 1tension in policy choices betweenrequirements of economic efficiency 40 General Prices Food and Beverageand those of social welfare. One of 35the main reasons for budget deficit is 30the increasing bill of public servants, 25wages and of subsidies. This has 20increased from 64 billion LE in 2007 to 15128 billion in 2008. The government has 10managed to reduce subsidies for 5energy, especially for energy-intensive 0industries, but this has been more than -5outweighed by the increase insubsidies for food, health and Source: Based on data from CAPM AS for theeducation as well as the 2008 rise of peri od Jan-05 to Augus t 0 8 and Mini stry of30% in the salaries of 5.9 million Economi c Development th ereafter.government employees to make up The impact of the crisis has been mainlyfor the sudden upsurge in prices reflected in the decline in almost all theespecially food. 1 macroeconomic indicators representingInflation targeting has been a almost a reversal of the impressivedaunting task for the Central Bank of performance of the previous four years .Egypt, particularly in view of the In the following, a picture of this impactopenness of the economy and its will be outlined. 1vulnerability to “imported inflation”resulting from the increase in Decline in real GDP growth ratesinternational prices. Inflation rates In contrast to the previous four yearsaveraged 9.5 % in 2007, and when, almost all national andcontinued to escalate in the first international reports point out to aquarter of 2008 reaching 14.4%. By the reversal of the trend particularly duringend of July, inflation rates were as the first two quarters of the financialhigh as 22%, and by August jumped to year 2008/09. The real GDP growth25.6%. Inflation had been brought which amounted to 7.2% in 2007/08,under control due mainly to the results declined slightly by the end of thatof the reform by the monetary and year when it was 6.7% in the last quarter. But with the onset of the crisis Page 8
  10. 10. The Effect Of The Economic Crisis On EgyptGDP growth declined to 5.8% and 4.1% (25.8%), trade and finance (21.3%), andduring the first and second quarters of transport (16.9%). With the exception of2008/09 respectively. This has been due manufacturing, these sectors are notto the decline in the major drivers of typically employment-intensive. Thegrowth especially tourism, position of agriculture is puzzling. Whilemanufacturing, Suez Canal, and its share of employment is around 28%,remittances of Egyptians working it contributed only 8% of GDP growthabroad. It is expected that the last year. Its share of investment is alsoeconomy will begin its recovery by 2010 low (7.2%). An illustration of an examplepropelled by the renewed growth of of these discrepancies is provided inthe global economy and through the the figure below where agriculture andeffect of the stimulus package by the industry are compared in terms of theirEgyptian government designed to contribution to GDP growth, share ofboost domestic demand. 1 investment, and share of the labor force. The implication is that the sector Real GDP Growth (2003-2013) with the largest labor force share is starved of investment resources and its 8 productivity is low which curtails its contribution to growth. 1 6 26% 4 25% 2 28% 8% 0 5% % GDP growth -2 13% % Investment % Employment -4 2006a 2007a 2008b 2009c 2010c Egypt 6.8 7.1 7.2 3.8 3.9 World 4 3.8 2 -2.6 1Source: I M F, I nternati onal Fi nanci al Stati sti cs, Source: Cal cul ated from data provi ded by thequoted by the Economi st Intelligence Uni t (EI U), Mini stry of Economi c Devel opment, DecemberLondon, March 2009. 2008 .Note: Offi ci al fi gures for Egypt’s GDP grow th i n Q1 C. Inadequate Human Resources2008/09 i s 5.8 %, and for Q2 i s 4.1% accordi ng tothe M i ni stry of Economi c Devel opment A cross-cutting cause of the low and B. Unbalanced Sectoral Sources of declining competitiveness in Egypt is Growth due in a large measure to the qualityAn analysis of the sectoral sources of of the labor force, and the efficiencyGDP growth in 2008 shows that the of labor market institutions. A strikingmajor contributors were manufacturing feature of the Egyptian labor force is  Page 9
  11. 11.  The Effect Of The Economic Crisis On Egypt’s Economythe dominant share of the informal or were only able to find jobs within 5unorganized sector in overall years of leaving school. As foremployment. 1 females, the situation is much worse. The school-to-work transition rates forAs shown in the below figure , out of females from 1998 to 2006 neverthe 20 million employed in 2006, the exceeded 25% even after 15 years ofinformal sector accounted for 35%; leaving school. 1government for 28.5% and agriculture36.5%. These add up to 90% of the This phenomenon is mainly attributedemployed labor force, and they are to to another mismatch which existsa large extent of low productivity and between the products of education,of low income. Only 10% of and the demands of the labor market.employment remains in what could be In almost all the reports related totermed as the “modern sectors”. It is economic development in Egypt, skillhere that the major explanation for shortage has been underlined as athe country’s competitiveness position deficit that has to be compensatedresides. 1 for through educational and training Structure of the Employed Labor Force policies. As Figure 4 shows, some 41 % of the employed labor force is either MODERN Government illiterate or semi-illiterate. This curtails SECTOR Sector the ability of the labor force to deal 10% 28% with technology and explains to some extent the low productivity and hence, low return to labor among Agriculture 27% these groups. 1 Employed Labor Force by Educational Informal Sector Status 35% Higher EducationSource: Sami r Radw an, I mpact of I nvestment on Illiterate/the Economi c and Soci al Aspec ts i n Egypt, 14% readmemeo. Cai ro, 2007 Less than &write HigherTo gauge the order of magnitude, Education 42%labor supply grows at 3% every year, 4% Middlewhile the demand for labor grows only Levelat 2.8%, with the difference Education Less thancontinually swelling the ranks of the 31% Middleunemployed. Furthermore, of those Level Educationunemployed, 92.1% are first time job 9%seekers. The problem is partly createdby the length of queuing period of the Source: Based on data from CAPM AS, Laborschool-to-work transition. In 2006, Force Sa mple Survey, Quarterl y Bulleti n; November 2008. Tabl e 5A, p50around 75% of first time job seekers Page 10
  12. 12. The Effect Of The Economic Crisis On EgyptThe irony is that almost half o f those productivity. Achieving anemployed are either illiterate or improvement in TFP would requiresemiliterate, as they cannot afford to concerted action to improvebe idle; while more than half of those education and to skill the labor force. 1unemployed have received middlelevel education and more than one Domestic Credit Growth and the Changethird have received high level in Gross Fixed Investmenteducation. 1D. Growth is driven more by investment than productivityA strong correlation has beenobserved between investment andGDP growth over the last threedecades. Periods of strong growthperformance were usually associatedwith higher rates of capitalaccumulation, rather than increases inTotal Factor Productivity (TFP). 1An analysis of the period 1990/91- * Gross Fi xed I nvestment cal culated at constant2004/05 shows clearly that increased pri cescapital intensity has been Source: Based on data from the Economi st I ntelli gence Uni t, Egypt: Country Forecast, January 2009,predominant in explaining the p11&13observed changes in output perworker growth, with TFP laggingbehind. It can also be observed that Foreign Direct Investmentchanges were, to a great extent,associated with growth in output perworker. The average GDP growth ratefor the period as a whole was 4.2%,while employment grew at aremarkably stable rate of 2.6%, withoutput per worker growing at 1.5%. 1The contribution of TFP growth tooutput per worker was nega tive, whilecapital-intensity increases tended toexceed growth in output per workerby around 10%. This analysis reinforces Source: Based on data from Economist Intelligence Unit, Egypt:the point made earlier about the Country Forecast, January 2009,p14 *Gross Fixed Investment calculated at constant pricesquality of education and efficiency ofthe labor force. These two combinedexplain the reason for low  Page 11
  13. 13.  The Effect Of The Economic Crisis On Egypt’s EconomyE. Reduced flow of Domestic and the second quarter of 2008/09. This is Foreign Investment not surprising as remittances may actually increase in the early stages ofTotal investment in the second quarter the downturn as returned migrantsof 2008/09 amounted to LE 52.5 billion usually bring their savings with them. 1compared to LE 50.7 billion during thesame period of the previous year. 1 There are strong indications that thisThough this represents a slight trend would be reversed as the crisisincrease, there has been a notable unfolds in the destination countries.decline in investment flow from 32 % For instance In the US and Kuwait,during the second quarter of 2007/08 where the global downturn and fallingto 3.6% only in the second quarter of oil prices seem to have had a more2008/09. This can be explained by a pronounced effect early on in thenumber of factors: first, despite the global downturn, remittances fellcomfortable liquidity of the banking sharply (by 22% and 17% year on yearsector, the rate of growth of domestic respectively), a precursor perhaps ofcredit has declined sharply during developments elsewhere. The impact2009; secondly, the flow of FDI which would be most pronounced forhad amounted to almost 9% of GDP in Egyptians working in the construction2007/08, declined during the first half sector of the gulf sector of the GCCof 2008/09 by 60% compared to the states which account for around 54%first half of 2007/08; and thirdly the of all remittances from thesereticence of the private sector to countries. 1embark on new investments under While the full picture is not clear, thereconditions of uncertainty about are estimates that the performance ofmarket recovery. 1 the past few years where remittances reached some US$ 8.6 billion, or 6.5%F. Sharp Drop in Remittances of GDP, is likely to be reversed. A expected (increase in returned study published by the Centre for migration) Economic Studies in Egypt estimatesThe global crisis has adversely that around 500,000 Egyptian migrantaffected the major sources of demand workers will lose their jobs in the Gulffor Egyptian workers. Thus the decline by end-2009. Another recent estimatein the activities in the GCC countries, suggests that around 30% of Egyptianwhich is the main destination of construction workers have alreadymigrant workers, in addition to USA returned home, but few of theseand EU, is likely to result in a sharp workers are expected to finddrop in remittances which went down alternative employment in Egyptin the first quarter of 2008/09 to about where domestic construction activityUS $ 1.950 billion compared to has started to weaken. The net resultUS$ 2.285 billion compared to the last would be a decline of remittances ofquarter of 2007/08. However,remittances increased again during Page 12
  14. 14. The Effect Of The Economic Crisis On Egyptbetween 10 to 20% as a result of the been negatively reflected on thecrisis. 1 external balance of the country, thus Worker Remittances ending the short-lived surplus of the pre-crisis period. Exports have been severely hit. The growth rate of exports is expected to slow down by more than a third of its current pace from 25.5% in 2008 to 5.9% in 2009. Although imports are also slowing down from 27.9% growth to 14%, they will not be hit as hard as exports. Furthermore as services and transfers drop as a result of the crisis, the current account is being significantly impacted. 1 According to the Egyptian Central Bank, the current account deficit for Q1 2007/08 has increased 7 folds in Q1Source: Based on Data from the Central Bank of Egypt, 2008/9 where it jumped from US$1 31Monthly Statistical Bulletin million to US$ 966 million. The impact of all these factors on Egypt’s balance of payments is quiet severe, where the 2008 surplus has been converted into a deficit in the first half of 2009. 1 Balance of Payments 3.5 2008 2009 3.1 3 2.5 1.9 2 US$ billion 1.5 1 0.5 0 -0.5 Second Quarter First HalfSource: Based on Data from the Central Bank of Egypt, -1 -0.6Monthly Statistical Bulletin -1.5 -1G. Balance of Payments StrainedThe decline in demand for Egyptian Source: Ministry of Economic Development, Follow-Reportgoods (exports) and services (Suez Q2/H1 2009Canal, tourism, workers abroad) has  Page 13
  15. 15.  The Effect Of The Economic Crisis On Egypt’s EconomyFurthermore, the strain on Egypt’s wheat from Argentina. He also saidinternational reserves has been that it would cost the governmentamplified. International reserves $700 million in additional subsidies to keep the price of bread stable. Tocurrently cover only half of the year’s avert such a challenge in the future,imports, while it used to cover at least the Egyptian government has said that9 months June 2009. 1 the country is aiming for 70% self -H. Effect of the food crisis sufficiency in wheat by 2020. 5 Urban inflation stood at an annualizedEgypt is in the pain of an impending 10.7% in July2010, as increasing foodfood crisis due to Russia’s temporary costs drove up prices. 5ban on wheat exports in 2010. Egypt is Food prices jumped 3.2% in July2010.the world’s biggest wheat importer Core inflation, which excludes the Food prices 2000 – 20096 Source: The Financial and Economic Crisis : A Decent Work Response : International Labor Organization (International Institute for Labor Studies) 2009and more than 50% of its wheat comes costs of fruits and vegetables, rose tofrom Russia, whose vast tracts of 7.08% in the year to July 2010 fromwheat fields were destroyed by 6.70% in June 2010. 5wildfires leading to the ban. In a Non-oil exports saw a huge spike ofcountry where more than 80 million 20% in the second quarter of 2 010 toEgyptians depend on subsidized bread the tune of $5.1 billion compared toto survive, Egypt already had political 24 billion in the period last year.and social uproar because bread Egypt’s exports are showing a healthysupplies are hit. The former trade increase as the economy recoversMinister Rachid Mohamed Rachid said from the global economic crisis. 5that the country imported six tons of Page 14
  16. 16. The Effect Of The Economic Crisis On EgyptI. Fiscal Policy costly. Fuel subsidies in 2009/10 cost an estimated EGP 66.5 billion – 5.5% ofFiscal policy was expansionary in GDP and more than 18% of total2009/10 in order to offset the impact expenditures. 7of the global financial crisis, with the The 2010/11 and 2011/12 budgetedbudget deficit rising to 8.1% of GDP, 1 figures for fuel subsidies were origina llypercentage point higher than the set at EGP 67.7 billion and EGP 87.8average in the previous three years billion but plans to phase o ut thisbut slightly lower than the government costly exercise will likely be put onhad expected. The wider deficit wa s hold until a new government takesdue to a combination of lower power after presidential electionsrevenues and higher expenditure. scheduled for later in 2011. Rising oilTotal revenues and grants fell to 22.2% prices may even increase the cost ofof GDP in 2009/10 from 27.1% in the subsidies while revenue generation2008/09. The budget deficit for fiscal will be challenging. Tax revenues,2010/11 is expected to rise further to which constitute more than 60% ofalmost 10% of GDP. 7 government revenues, may beTotal domestic debt jumped by 21% to undermined by the slowdown inreach EGP 779.5 billion or 64.6% of economic activity during the secondGDP, up by 2.8 percentage points, half of 2010/11 because of theby June 2010.1 External debt political upheaval and associatedmeanwhile rose 6.9% to USD 33.7 uncertainty. 7billion or 15.9% of GDP by June 2010,one percentage point lower than the J. Monetary Policyprevious year. Thus, Egypt’s external The Central Bank of Egypt (CBE) cut itsdebt position does not constitute an key interest rates – overnight depositimmediate threat to external stability. 7 and overnight lending – in July andThe Finance Ministry’s medium-term September 2009 to 8.25% and 9.75%framework was to bring down the ratio while the discount rate was leftof total public debt (domestic plus unchanged at 8.5%. Rates were thenexternal) to 60% of GDP and the kept on hold through to March 2011overall deficit to around 3.5% of GDP on the view that underlying inflationby 2015. Given the country’s political pressures were contained. 7transformation with the departure of Consumer Price Inflation averagedPresident Hosni Mubarak, it is unclear 11.7% in fiscal 2009/10, off a monthlywhether this target will be met. For high of 13.6% in January 2010 as2010/11 and possibly 2011/12, higher costs for fruits and vegetablesadditional spending will be needed to showed up in the figures. The stillmeet higher international food and relatively high rate of inflationenergy prices, in addition to a larger represented, however, a significantthan expected wage bill due to ad improvement on the 16.2% recorded inhoc measures taken in the face of the fiscal 2008/09. Core inflation, whichpolitical unrest. A 15% salary increase excludes volatile food items such aswas stipulated for government fruits and vegetables, as well as itemsemployees in response to the protests with regulated prices, came in atwhile temporary government workers 6.7% for 2009/10, within the CBE ’sin their post for at least three years comfort zone. 7were made permanent staff. Thepressure of subsidies may also prove  Page 15
  17. 17.  The Effect Of The Economic Crisis On Egypt’s EconomyThe remainder of fiscal 2010/11 will fell to USD 10.3 billion from USD 11likely see increased i nflationary billion, with non-oil exports lower atpressures owing to the political unrest USD 13.6 billion from USD 14.2 billion.that disrupted production and Total export proceeds were down 5.0%transportation, coupled with sharp and 18.7% lower than pre-global crisisincreases in global commodity prices, levels. Total imports fell 2.7% to USDespecially for food and fuel. On the 48.9 billion in 2009/10. 7other hand, slower growth could help Receipts from services exports alsoease inflation pressures to some continued to decrease for the seconddegree. 7 year in a row, to USD 23.6 billion in 2009/10 after a 13% slump in 2008/09.K. External Position While tourism receipts bounced backEgypt’s external position improved in to pre-crisis levels, income from the2009/10, reflecting the overall upturn Suez Canal continued to decrease asseen after the global slump of the traffic flows weakened. Imports ofprevious year but the current account services cost USD 13.2 billion inremained in deficit, at 2.0% of GDP 2009/10, up 17%. The services account Stock of total external debt (% of GDP) and debt service (% of exports of goods and services) Source: African Economic Outlook 2011 report; ( with 2.3% in 2008/09. The surplus fell to USD 10.3 billion incurrent account deficit, however, is 2009/10 from USD 12.5 billion theprojected to widen again to 3.2% in previous year. Private and officialthe current fiscal year and narrow only transfers increased by 26.9% to rea chslightly to 2.9% in 2011/12. 7 USD 10.5 billion in 2009/10. 7Exports and imports fell for a second The trade deficit was little changed atyear running. Exports of goods fell to USD 25 billion over the past two years10.9% of GDP in 2009/10 from 13.3% in while the current account deficit2008/09, with imports of goods down narrowed from USD 4.4 billion into 22.4% from 26.6%. Petroleum expo rts 2008/09 to USD 4.3 billion in 2009/10. Page 16
  18. 18. The Effect Of The Economic Crisis On EgyptThe capital and financial account and uncertainties the country and theimproved significantly in 2009/10 on wider region face. 7net inflows of USD 8.3 billion, 3.6 timesthe amount recorded in 2008/09 even L. Private Sector Developmentas FDI fell to USD 6.8 billion. Netportfolio inflows amounted to Over the past five years, the privateUSD 7.9 billion, nearly reversing the sector has accounted for some 62% ofprevious year’s net outflow of USD 9.2 GDP, 55% of gross capital formationbillion as international investment and close to 70% of totalconfidence returned. As a result, employment. 7foreign exchange reserves rose to USD Despite its important role, more still35.2 billion in 2009/10, higher than needs to be done to enhance itsbefore the global crisis and sufficient performance. A lack of skilled laborto cover 8.6 months of imports, due to a mismatch between what thecompared with 7.5 months in 2008/09. market wants and what the educationGross external debt increased to USD system produces remains a challenge33.7 billion at end-June 2010, up 6.9% for the private sector’s development. 7and equal to 15.9% of GDP, a level not Egypt’s business environment hasseen as a threat to Egypt’s external improved, helped by thestability. 7 modernization of the export/importEgypt operates a managed exchange system and lower costs for starting arate regime. After depreciating in company. The World Bank’s 20112008/09, the Egyptian pound rose Doing Business report ranked Egypt 94slightly against the US dollar over the out of 183 countries, up five placesfirst two quarters of 2009/10, reflecting compared to its 2010 report. 7net portfolio inflows. However, the Construction permits remain acurrency then began to fall as problem, with the country ranked 154political unrest and associated capital on this measure despite recentoutflows roiled the markets. The CBE legislation intended to ease the costintervened to support the currency of obtaining permits. 7with the result that at end-January Other problem areas identified by the2011, the Egyptian pound stood at World Bank included registeringEGP 5.87 per US dollar compared to property, getting credit andEGP 5.47 at end-January 2010. protecting investors. 7The political uncertainty following the The banking sector in Egypt generallyouster of President Hosni Mubarak may appears to enjoy ample liquidity, lowlast for some time and is likely to dollarization and improving assetpressure Egypt’s external position. On quality. The loan-to-deposit ratio wasthe capital account, the effect of the 51% in June 2010. In January 2011, aspolitical upheaval is expected to be political protests gathered pace, thesevere the rebound in portfolio inflows CBE guaranteed all deposits in theduring 2009/10 could be completely banking system and then limitedreversed in 2010/11. Trading on the withdrawals in February when thestock market was suspended in late banks reopened. 7January and only resumed in late Domestic credit rose by 7.0% inMarch 2011. FDI will also likely 2009/10, 1 percentage point lowercontinue to fall given the difficulties than in the previous year. Credit to the private sector increased by 7.7%,  Page 17
  19. 19.  The Effect Of The Economic Crisis On Egypt’s Economylargely outpaced by credit to the government corruption and lack ofgovernment, which was up by 15%. free elections and freedom of speechOne concern about the Egyptian forged the social disarray during thebanking system is that i t holds a large 30-year rule of Hosni Mubarak. 8portion of the outstanding stock of According to the World Bank, 40% ofTreasury bills and bonds. In 2008/09, total population (population in th e FYprivate and public banks held 67% of 2009/10: 79mn) lives below the povertythe total outstanding stock of line and earns less than USD 2 perTreasury bills, falling to 60% in day. 82009/10. 7 In Egypt, where the banking Egypt once the granary of thesystem is characterized by ample Mediterranean Basin is currently theliquidity, banks seem to prefer less largest wheat importer in the world,risky sovereign lending rather than while prices of beef increased moremaking loans to the private sector. than 60% over the last three months .The asset quality of the Egyptian Apparently, the authoritarian and longbanking system improved with Non - rule of Hosni Mubarak bredperforming loans (NPLs) falling to government corruption and instigated13.4% of total loans outstanding in large income inequalities where an2009/10 from 26.5% in 2005/06. Bad elite few close to governing partyloan provisions provided 100% officials enjoyed the gains from thecoverage in 2009/10, up from 51% in impressive real GDP growth recorded2005/06. The overhaul of the banks ’ in the previous years. On 11 February,risk management practices is ongoing. Vice President Omar SuleimanThe Egyptian Stock Exchange put in a announced that President Mubaraksolid performance in fiscal 2009/10, handed over the power to thewith capitalization rising 34.2% from Supreme Council of the Armed Forcesthe previous year to EGP 500 billion, and stepped down. The Supremebut the political unrest of early 2011 Council under General Mohamedsparked very sharp losses and has Hussein Tantawi suspended theclouded the short-term outlook. 7 Constitution, dissolved both houses of the parliament and announced that it will rule for the next six months untilM. The revolution impact the presidential elections inThe Jasmine Revolution started in September 2011. The caretaker PrimeTunisia December 2010 spread to Minister Ahmed Shafik resigned on 3Egypt on 25 January 2011 and led to March and replaced by Essam Sharaf. 8the ousting of the long-time President The social upheaval in the first coupl eHosni Mubarak on 11 February. The of months of 2011 will take a heavy tolluprising featured marches, on economic activity in the current FYdemonstrations, strikes and acts of as the turmoil resulted in the loss ofcivil disobedience and climaxed to numerous working days and hours. Forviolent clashes between protesters instance, the Stock Exchange indefying the curfew imposed by the Cairo, which suspended trading on 29government and security services and January when protests erupted,supporters of Hosni Mubarak. 8 remain closed for 55 days, theHigh unemployment, food price commodity sector, which accounts forinflation and low minimum wages the 51.4% of GDP, will bear the bruntalong with police brutality, of the disruptions in production. Page 18
  20. 20. The Effect Of The Economic Crisis On EgyptManufacturing production alone to 22.2% of GDP from 27.1%.accounts for 16.9% of GDP, while Expenditures dropped to 30.3% of GDPextractive industry and agriculture from 33.7% in the correspondingproduction account for the 28.4% of periods failing though to match theGDP. We estimated that tourism alone, revenues decline. The primary deficitwhich accounts for a mere 3.5% of widened to 3% of GDP in 2009/10 fromGDP, will shave off real GDP growth 2.7% in the previous FY. The fiscal1.5 to 1.8pps in 2010/11 should tourist policy will come across considerablearrivals decline to the levels observed headwinds in the current fiscal yearright after the 1997 massacre in Luxor and that the fiscal deficit targetwhen gunmen killed 60 tourists. As the penciled in the 2010/11 budget ofshare of the remaining econom ic 7.9% of GDP is overoptimistic, assectors to real GDP is a lot bigger than weaker economic activity will take athat of tourism, real GDP growth will heavy toll on fiscal revenues. Taxbe a lot weaker than 1.5-1.8pps in administration and revenue collection2010/11 and will average a fragile have paralyzed after the regime0.5% in 2010/11, should we factor in transition and will underperform until aproduction disruptions in the democratically elected governmentremaining sectors of the economy. 8 assumes office. Moreover, fiscal policyInflation inched down to 10.71% in will have to become more frugal byFebruary from 10.79% in the previous raising subsidies, redistributionmonth as the annual growth in prices payments and public wages in a bi dof fruits and vegetables eased at to calm the public opinion and25.5% YoY from 27.4%. On the month, correct income inequalities. WeCPI rose by 0.13% in February from calculated that the 15% rise in public1.02% in the previous month. Also, wages announced by the formercore inflation dropped to 9.5% in president before leaving office willFebruary from 9.7% a month earlier raise the fiscal deficit to 12.2% o f GDPand prevailed over the unfavorable in 2010/11, should public revenuesbase effect. Yet, regulated prices rose materialize as projected in the 2010/11by 9.98% YoY in February after budget. We estimate that the fiscalaccelerating by 8.83% in the previous deficit will climb to 12.4% of GDP bymonth. We believe that regulated end 2010/11. 8prices will subside in the forthcomingmonths as the caretaking governmentwill attempt to ameliorate the publicopinion by lowering utility prices. Y et,food prices will head north followingglobal commodity trends and inflationwill average 13.7% in 2010/11. 8Eventually, the Central Bank o f Egyptwill tighten its key overnight borrowingand lending interest rates by 15bps to8.40% and 10%, respectively by end2010/11. 8Government budget posted a deficitof 8.1% of GDP in 2009/10 from 6.9% inthe previous FY as revenues tumbled  Page 19
  21. 21.  The Effect Of The Economic Crisis On Egypt’s EconomyReferences 1- Samir Radwan ; ILO, SRO Cairo ; April 2009 2- CIA world Factbook, lications/the-world-factbook/ 3- The General Authority for Investment GAFI, 2011 © GAFI - Under Auspices of the Egyptian Cabinet, 4- Akram Hanna Khalil ; The global financial crisis: effects on the Egyptian economy ; Al Ahram Center for political and strategic studies bulletin ; Issue 119:25 Jan.2009 5- Middle East and Africa - Economic Review ; Thomas White International, Ltd. ; August 2010 6- The Financial and Economic Crisis : A Decent Work Response : International Labor Organization (International Institute for Labor Studies) 2009 7- African Economic Outlook 2011 report; AfDB, OECD, UNDP, UNECA; 2011. (www.africaneconomicoutlook. org) 8- ILIAS LEKKOS ; Egypt Economic Review ; Economic Outlook 2011-2012: Building on last year’s recovery : Piraeus Bank : March 2011. Page 20