The effect of the economic crisis on egypt

The Effect of the
Economic Crisis on
Egypt’s Economy
A review of the economic crisis impact on the Egyptian
economy between 2007 - 2011

By: Mohamed Khalifa Ibrahim

ESLSCA - MBA 38

November 2011

The Effect Of The Economic Crisis On Egypt

The Effect of the
The global financial and economic
crisis has negatively been transmitted
to the Egyptian economy particularly
Economic Crisis since mid-2008. The impact has been
more pronounced on the real
on Egypt’s economy rather than the banking
sector. This was due to a number of

Economy factors most prominent of which is the
limited integration of the Egyptian
banking sector in the global financial
A review of the economic crisis impact
market. Moreover, the Central B ank of
on the Egyptian economy between
Egypt had succeeded in reforming the
2007 - 2011
sector since 2004 by consolidating the
banks into larger conglomerates;
Executive Summary
restructuring bank management; and
The economic crisis that hit the world getting rid of toxic debts. The Central
economy has been unfolding since Bank also introduced stringent rules of
the end of 2007, and its consequences governance to guarantee the
are yet to be understood. The genesis disciplined functioning of the system.
of the crisis and its dimensions are Finally, the banking system has not
fairly well-known, and therefore fall been short of liquidity with the
beyond the theme of this paper. The lending-to-deposit ratio not exceeding
objective is rather to gauge the 53%, which is well within the safe
impact of the crisis on the Egyptian boundaries compared to the rest of
economy with particular focus on the the world. 1
labor scene. 1
The impact on the real economy has
The crisis can be viewed against the been reflected in the following
backdrop of the strong economic indicators: 1
performance that resulted from the
reform drive which began in 2004 and  Decline of GDP growth from 7.2% in
resulted in an upsurge in almost all 2007/08 to around 4% in 2008/09.
macroeconomic indicators, notably  Reduced flow of FDI and a decline
high rate of GDP growth of 7.2%in in domestic investment.
2007/08. Moreover there has been an  Increase in return migration and
impressive progress in improving the expected drop in remittances.
investment climate which was  Increased strain on the balance of
reflected in the positive rating of the payments.
economy. However, three structural  Capital market collapse.
problems continued to vex the  Decelerating sectoral growth
economy: high budget deficit; rapid especially for tourism,
inflation and a constraining quality of manufacturing and Suez Canal.
the labor force. 1

 Page 1

 The Effect Of The Economic Crisis On Egypt’s Economy

The prolonged labor market recession For Egypt, as for almost all emerging
and the consequent social markets, the crisis may offer an
deterioration are the most serious opportunity to deal with the structural
aspects of the global financial and problems that have beleaguered the
economic crisis as it reflects on Egypt. economy and reduced its capacity to
The most immediate impact of the cope with external shocks, and to lay
crisis has been the inability of the the foundations for the post-crisis
labor market to adjust, thus economy and society based on a
exacerbating the problem of coherent vision of the future of the
unemployment, and accentuating the global economy and the place of
position of different groups pa rticularly Egypt in it. This would imply that
women and youth. Unemployment, immediate, short-term actions,
which has been a chronic problem necessary as they are, must be
even with the rapid growth of the pre - consistent with, and reinforce the
crisis period, is on the rise. Open long-term vision. 1
unemployment increased from 8.4% to
8.8% over the last year, and expected The government has launched a
to 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 into
on the rise. Another aspect of the opportunity 3 tasks are necessary: 1
employment problem is the
prevalence of “vulnerable  Restructuring the economy, mainly
through an aggressive industrial
employment” which affects 28% of the
policy;
employed labor force, and has, in  Improving labor market policies and
fact, been on the rise in recent years. 1 institutions; and,
 Creating a platform for social
The impact has been more dialogue based on the issue of
pronounced for women than for men decent work, or the elaboration of
where vulnerable employment among a "jobs pact".
females amounted to 53% compared
to 21% for men. 1 Introduction

Another challenge is poverty which is Occupying the northeast corner of the
affecting some 20% of the population. Africa, Egypt is divided by the great
Equally important is the vulnerability of fertile Nile valley, where the economic
the "near poor" to external shocks activities take place. In the 50’s and
such as inflation or decline in 60’s of the 20 th century Egypt's
employment. Between 2005 and 2008, economy was highly centralized
9% of the population or 6.7 million, fell during the rule of former President
into the poverty trap. 1 Gamal Abdel NASSER but opened up
considerably under former Presidents

 Page 2


Anwar EL-SADAT and the former The modern Egyptian economy
president Mohamed Hosni Mubarak. 2 embarked on various stages of
development during which the public
From 2004 to 2008 Egypt aggressively
and private sectors played roles
pursued economic reforms to attract
varying in relative importance and
foreign investment and facilitate GDP
can be summarized in seven eras as
growth. 2
follows:
Economic growth had been sustained
at a rate above 7% in the last 2 years 1. Import substitution and
from a base of 3.1% in FY 02/03. 2 nationalization, 1952–1966, during
which the first program of
Real GDP growth in Egypt reached
industrialization in 1957 was
7.2% in FY 07/08 up from 7.1% in the established and led by the public
previous year, however due to the sector in heavy industries such as
financial crisis Egypt has witnessed a iron and steel and chemical
drop in real GDP growth. 2 industries. Nationalization reduced
The impact of the U.S. financial crisis the relative importance of the
yet remains mild compared to the rest private sector.
2. Inter-War, 1967–1973, adversely
of the world, as the GOE is still able to
affected the performance of the
maintain a growth rate of 4.7% FY economy and public sector role in
2008/2009 2 . The budget deficit import substitution.
climbed to over 8% of GDP, 3. Openness Euphoria, 1974–1982
predominately due to reduced growth during which policies were
in export-oriented sectors, including introduced to encourage Arab
manufacturing and tourism, and Suez and foreign investment through a
series of incentives and liberalizing
Canal revenues. 2
trade and payment; the economy
expanded but this proved
Net 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 Club
In 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 to
more than 5%, but GDP growth in 2011 meet the terms of international
is unlikely to bounce back to pre - institutions, lenders and donors,
including wider incentives to the
global financial recession levels, when
role of the private sector in all
it 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 for
for the average Egyptian remain grains, led to calls for the
poor. 2 government to provide more
immediate assistance to the
population of more than 40% in the

 Page 3


"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 particularly
7. 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 Egypt's 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


it fell to 3780.38 points. Market capital their financial obligations to Egyptian
of Egyptian-listed companies fell from hotels, an atmosphere of worry
EGP 695 billion in August 2008 EGP 461 dominated the field. 4
billion in November 2008, i.e. losses
This situation predicts a decline in
amounted to EGP 234 billion. Such
terms of tourism revenues, which
developments resulted in losses below
would have a negative impact on 62
50 per cent of equilibrium value-
professions closely linked to tourism.
therefore numerous investors suffered
Available data showed that the
harsh losses. 4
growth in tourism revenues decreased
Worth mentioning that the drop in from 17 per cent in August 2008 to 10.8
terms of shares' prices took place in per cent in the following month. In the
May 2008 due to a number of first quarter of 2008/2009, the rate was
economic decisions taken by the 15.2 per cent against 32 per cent in
Egyptian government. Yet a greater the same period last year. The year
decline occurred after mid-September 2009 witnessed a 20 per cent drop in
2008 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-sighted
Sector of tourism
policy usually pursued by tourist
Because the crisis began shortly agencies and companies - i.e.
before the tourism season in Egypt, reducing prices dramatically- will be
the sector of tourism was strongly to no avail. 4
affected. Although it was estimated Navigation in Suez Canal
primarily that losses would not be felt
before March 2009, the real picture Since world trade will certainly decline
was bleaker as tourism began to suffer due to the recession, the movement of
in December 2008. The Tourism navigation and oil shipping slow down.
Minister said that signs of the crisis Hence shipping through the Suez
began to express themselves in August Canal negatively affected,
2008 thought real losses stared to be particularly when taking into account
felt in December 2008 - by 4.5 per that some companies have already
cent. Secretary General of Chamber started to use the alternative route of
of Hotels said that reservati ons are in the Cape of Good Hope due to the
real decline and great numbers of phenomenon of piracy off Somali
workers in the sector of tourism are shores. Hence shipping through the
expected to be laid off. The media Suez Canal has witnessed a slowdown
transmitted reports on the dismissal of over the past three months and
temporary workers in some hotels in revenues fell from $504.5 m illion in
Luxor, Aswan, Hurghada, and Sharm August 2008 to $469.6 million in
el-Sheikh. When some European tourist September 2008. In October,
organizers were belated in meeting November and December, revenues

 Page 5


amounted to $467.5 million, $419.8 Available data indicate that net
million and $391.8 million respectively. foreign investments decreased by 44
It is worthy of noting that revenues per cent compared with 2007. External
were $426.3 million in December 2007. 4 portfolio investment flows rose to $3.5

Suez Canal revenues registered the
highest monthly figures since 2008 ,
totaling $406.2 million in July2010, a
6.1% increase year-on-year. This is a
5.9% rise over the previous month
when revenues totaled $383.7 million.
The Suez Canal Authority also noted
that vessel traffic also climbed 2.2%. 5
Revenues shot up 11.5% in the first
seven months of 2010, year-on-year
reaching $2.66 billion compared to
$2.38 billion. 5

Oil sector billion against $1.4 billion in 2007. 4

Falling oil prices had negative All the above factors expressed
ramifications on Egypt's oil revenues. themselves in the balance of
The decline started to unfold, as the payments whose surplus fell in the first
oil balance made a surplus of $ 1.6 quarter of 2008/2009 by 4.5 per cent
billion 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 previous
be noted here that although falling oil year. 3 The recession in the US and
prices will reduce foreign currency, it Europe reached Egypt, wherein the
will also cut the cost of oil subsidy, GDP growth fell throughout 2008/2009
which will reduce the budget deficit. 4 and 2009/2010. The recession will be
followed by a declining internal
The global financial crisis cut revenues demand, then a reduction in terms of
from commodity exports due to the production capacities. The outcome
troubles experienced by Egypt's will definitely be a rise in the
trading partners in Europe and the US. unemployment. 4
Remittances by Egyptian expatriates
Growth rate slowdown
will fall as Gulf States ended the
contracts of large numbers of migrant The first half of 2008/2009 revealed a
workers including the Egyptians. Many slowdown in the growth rate to reach
of those came back to Egypt and join 5.8 per cent compared with 6.5 per
the column of the unemployed. 4 cent in the same period last year. Thus
the rosy picture Egyptian officials tried
Foreign direct investments to paint proved unrealistic and their
It is beyond a shadow of a doubt that claims that the crisis will not go
foreign direct investments will fall. beyond the monetary economy - to

 Page 6


reach 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 and
Source: Ministry of Economic Development the impact on the real economy,
relegating the impact on employment
Per capita NDP fell and create a and social aspects to a separate
climate of turbulence in view of the section as it is a core issue of this
'revolution of expectations' resulted paper. It should be emphasized at the
from globalization and advancement outset that the depth of the impact of
in communications technology. When the crisis can best be understood by
a poor and unemployed individual is taking into consideration the existing
able to know how extravagant lives of structural problems that confronted
the rich are, social turmoil becomes the Egyptian Economy. The crisis and
very likely. 4 the response to it have been
conditioned by these problems. 4
The Egyptian government allocated
A. Macro-economic instability
EGP15 billion to counterbalance the
ramifications of the economic crisis. The robust economic growth since
The government was keen to convey a 2004 contrasts sharply with the
message stressing its aptitude to declining ranking of Egypt on the
resolve the crisis. Yet some observers macroeconomic stability
believe that the government allotment competitiveness component of the
remains too small to be able to offset Global Competitiveness Index. 1
the repercussions of the crisis. 4 Despite minor improvements, total
gross debt remains a major problem
Moreover, the Central Bank of Egypt
amounting to 85.1 % of GDP. Similarly,
had succeeded in reforming the
budget deficit continued to be a
sector since 2004 by consolidating the
challenge despite concerted
banks into larger conglomerates;
government efforts to reduce it, where
restructuring bank management; and
it stood at 6.8% of GDP in 2008. This is
getting rid of toxic debts. The Central
likely to increase as a result of the
Bank also introduced stringent rules of
stimulus package of public spending
governance to guarantee the

 Page 7


of LE 15 billion to face the present fiscal policies. 1 However, there were
economic crisis. In fact, the deficit-to- periods when inflation erupted
GDP ratio has increased to 8.4% in beginning with the impact of the
2009 as a result of a rise in expenditure Avian Flu in 2006, followed by the
to 28% of GDP, and a decline of effect of domestic price increases for
revenues to 19.3%. 1 commodities such as fuel, and finally
the inflation resulting from global
This chronic macroeconomic situation
increase in food and energy prices
of the Egyptian economy reflects the
during last year. 1
tension in policy choices between
requirements of economic efficiency 40 General Prices Food and Beverage
and those of social welfare. One of 35
the main reasons for budget deficit is 30
the increasing bill of public servants, 25
wages and of subsidies. This has 20
increased from 64 billion LE in 2007 to 15
128 billion in 2008. The government has 10
managed to reduce subsidies for 5
energy, especially for energy-intensive 0
industries, but this has been more than -5
outweighed by the increase in
subsidies for food, health and
Source: Based on data from CAPM AS for the
education as well as the 2008 rise of peri od Jan-05 to Augus t 0 8 and Mini stry of
30% in the salaries of 5.9 million Economi c Development th ereafter.
government employees to make up
The impact of the crisis has been mainly
for the sudden upsurge in prices
reflected in the decline in almost all the
especially food. 1
macroeconomic indicators representing
Inflation targeting has been a almost a reversal of the impressive
daunting 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 impact
openness of the economy and its will be outlined. 1
vulnerability to “imported inflation”
resulting from the increase in Decline in real GDP growth rates
international prices. Inflation rates In contrast to the previous four years
averaged 9.5 % in 2007, and when, almost all national and
continued to escalate in the first international reports point out to a
quarter of 2008 reaching 14.4%. By the reversal of the trend particularly during
end of July, inflation rates were as the first two quarters of the financial
high as 22%, and by August jumped to year 2008/09. The real GDP growth
25.6%. 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 that
of 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


GDP growth declined to 5.8% and 4.1% (25.8%), trade and finance (21.3%), and
during the first and second quarters of transport (16.9%). With the exception of
2008/09 respectively. This has been due manufacturing, these sectors are not
to the decline in the major drivers of typically employment-intensive. The
growth especially tourism, position of agriculture is puzzling. While
manufacturing, Suez Canal, and its share of employment is around 28%,
remittances of Egyptians working it contributed only 8% of GDP growth
abroad. It is expected that the last year. Its share of investment is also
economy will begin its recovery by 2010 low (7.2%). An illustration of an example
propelled by the renewed growth of of these discrepancies is provided in
the global economy and through the the figure below where agriculture and
effect of the stimulus package by the industry are compared in terms of their
Egyptian government designed to contribution to GDP growth, share of
boost 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 1

Source: I M F, I nternati onal Fi nanci al Stati sti cs, Source: Cal cul ated from data provi ded by the
quoted by the Economi st Intelligence Uni t (EI U), Mini stry of Economi c Devel opment, December
London, March 2009. 2008 .

Note: Offi ci al fi gures for Egypt’s GDP grow th i n Q1 C. Inadequate Human Resources
2008/09 i s 5.8 %, and for Q2 i s 4.1% accordi ng to
the 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 quality
An analysis of the sectoral sources of of the labor force, and the efficiency
GDP growth in 2008 shows that the of labor market institutions. A striking
major contributors were manufacturing feature of the Egyptian labor force is

 Page 9


the dominant share of the informal or were only able to find jobs within 5
unorganized sector in overall years of leaving school. As for
employment. 1 females, the situation is much worse.
The school-to-work transition rates for
As shown in the below figure , out of
females from 1998 to 2006 never
the 20 million employed in 2006, the
exceeded 25% even after 15 years of
informal sector accounted for 35%;
leaving school. 1
government for 28.5% and agriculture
36.5%. These add up to 90% of the This phenomenon is mainly attributed
employed labor force, and they are to to another mismatch which exists
a 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 to
termed as the “modern sectors”. It is economic development in Egypt, skill
here that the major explanation for shortage has been underlined as a
the country’s competitiveness position deficit that has to be compensated
resides. 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
Education
Source: Sami r Radw an, I mpact of I nvestment on Illiterate/
the Economi c and Soci al Aspec ts i n Egypt,
14%
read
memeo. Cai ro, 2007 Less than
&write
Higher
To gauge the order of magnitude, Education
42%
labor supply grows at 3% every year, 4% Middle
while the demand for labor grows only Level
at 2.8%, with the difference Education Less than
continually swelling the ranks of the 31% Middle
unemployed. Furthermore, of those Level
Education
unemployed, 92.1% are first time job
9%
seekers. The problem is partly created
by the length of queuing period of the Source: Based on data from CAPM AS, Labor
school-to-work transition. In 2006, Force Sa mple Survey, Quarterl y Bulleti n;
November 2008. Tabl e 5A, p50
around 75% of first time job seekers

 Page 10


The irony is that almost half o f those productivity. Achieving an
employed are either illiterate or improvement in TFP would require
semiliterate, as they cannot afford to concerted action to improve
be idle; while more than half of those education and to skill the labor force. 1
unemployed have received middle
level education and more than one Domestic Credit Growth and the Change
third have received high level in Gross Fixed Investment
education. 1
D. Growth is driven more by
investment than productivity
A strong correlation has been
observed between investment and
GDP growth over the last three
decades. Periods of strong growth
performance were usually associated
with higher rates of capital
accumulation, rather than increases in
Total Factor Productivity (TFP). 1
An analysis of the period 1990/91-
* Gross Fi xed I nvestment cal culated at constant
2004/05 shows clearly that increased pri ces
capital 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&13
observed changes in output per
worker growth, with TFP lagging
behind. It can also be observed that Foreign Direct Investment
changes were, to a great extent,
associated with growth in output per
worker. The average GDP growth rate
for the period as a whole was 4.2%,
while employment grew at a
remarkably stable rate of 2.6%, with
output per worker growing at 1.5%. 1
The contribution of TFP growth to
output per worker was nega tive, while
capital-intensity increases tended to
exceed growth in output per worker
by 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 prices
quality of education and efficiency of
the labor force. These two combined
explain the reason for low

 Page 11


E. 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 of
Total investment in the second quarter
the downturn as returned migrants
of 2008/09 amounted to LE 52.5 billion
usually bring their savings with them. 1
compared to LE 50.7 billion during the
same period of the previous year. 1 There are strong indications that this
Though this represents a slight trend would be reversed as the crisis
increase, 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 falling
to 3.6% only in the second quarter of oil prices seem to have had a more
2008/09. This can be explained by a pronounced effect early on in the
number of factors: first, despite the global downturn, remittances fell
comfortable liquidity of the banking sharply (by 22% and 17% year on year
sector, the rate of growth of domestic respectively), a precursor perhaps of
credit has declined sharply during developments elsewhere. The impact
2009; secondly, the flow of FDI which would be most pronounced for
had amounted to almost 9% of GDP in Egyptians working in the construction
2007/08, declined during the first half sector of the gulf sector of the GCC
of 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 these
reticence of the private sector to countries. 1
embark on new investments under While the full picture is not clear, there
conditions of uncertainty about are estimates that the performance of
market 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 estimates
The global crisis has adversely that around 500,000 Egyptian migrant
affected the major sources of demand workers will lose their jobs in the Gulf
for Egyptian workers. Thus the decline by end-2009. Another recent estimate
in the activities in the GCC countries, suggests that around 30% of Egyptian
which is the main destination of construction workers have already
migrant workers, in addition to USA returned home, but few of these
and EU, is likely to result in a sharp workers are expected to find
drop in remittances which went down alternative employment in Egypt
in the first quarter of 2008/09 to about where domestic construction activity
US $ 1.950 billion compared to has started to weaken. The net result
US$ 2.285 billion compared to the last would be a decline of remittances of
quarter of 2007/08. However,
remittances increased again during

 Page 12


between 10 to 20% as a result of the been negatively reflected on the
crisis. 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 Q1
Source: Based on Data from the Central Bank of Egypt, 2008/9 where it jumped from US$1 31
Monthly Statistical Bulletin million to US$ 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 Half
Source: Based on Data from the Central Bank of Egypt,
-1 -0.6
Monthly Statistical Bulletin
-1.5 -1

G. Balance of Payments Strained
The decline in demand for Egyptian Source: Ministry of Economic Development, Follow-Report
goods (exports) and services (Suez Q2/H1 2009
Canal, tourism, workers abroad) has

 Page 13


Furthermore, the strain on Egypt’s wheat from Argentina. He also said
international reserves has been that it would cost the government
amplified. International reserves $700 million in additional subsidies to
keep the price of bread stable. To
currently 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 that
9 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 annualized
Egypt is in the pain of an impending 10.7% in July2010, as increasing food
food crisis due to Russia’s temporary costs drove up prices. 5
ban 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) 2009

and more than 50% of its wheat comes costs of fruits and vegetables, rose to
from Russia, whose vast tracts of 7.08% in the year to July 2010 from
wheat fields were destroyed by 6.70% in June 2010. 5
wildfires leading to the ban. In a Non-oil exports saw a huge spike of
country where more than 80 million 20% in the second quarter of 2 010 to
Egyptians depend on subsidized bread the tune of $5.1 billion compared to
to survive, Egypt already had political 24 billion in the period last year.
and social uproar because bread Egypt’s exports are showing a healthy
supplies are hit. The former trade increase as the economy recovers
Minister Rachid Mohamed Rachid said from the global economic crisis. 5
that the country imported six tons of

 Page 14


I. Fiscal Policy costly. Fuel subsidies in 2009/10 cost
an estimated EGP 66.5 billion – 5.5% of
Fiscal policy was expansionary in GDP and more than 18% of total
2009/10 in order to offset the impact expenditures. 7
of the global financial crisis, with the The 2010/11 and 2011/12 budgeted
budget deficit rising to 8.1% of GDP, 1 figures for fuel subsidies were origina lly
percentage point higher than the set at EGP 67.7 billion and EGP 87.8
average in the previous three years billion but plans to phase o ut this
but slightly lower than the government costly exercise will likely be put on
had expected. The wider deficit wa s hold until a new government takes
due to a combination of lower power after presidential elections
revenues and higher expenditure. scheduled for later in 2011. Rising oil
Total revenues and grants fell to 22.2% prices may even increase the cost of
of GDP in 2009/10 from 27.1% in the subsidies while revenue generation
2008/09. The budget deficit for fiscal will be challenging. Tax revenues,
2010/11 is expected to rise further to which constitute more than 60% of
almost 10% of GDP. 7 government revenues, may be
Total domestic debt jumped by 21% to undermined by the slowdown in
reach EGP 779.5 billion or 64.6% of economic activity during the second
GDP, up by 2.8 percentage points, half of 2010/11 because of the
by June 2010.1 External debt political upheaval and associated
meanwhile rose 6.9% to USD 33.7 uncertainty. 7
billion or 15.9% of GDP by June 2010,
one percentage point lower than the J. Monetary Policy
previous year. Thus, Egypt’s external
The Central Bank of Egypt (CBE) cut its
debt position does not constitute an
key interest rates – overnight deposit
immediate threat to external stability. 7
and overnight lending – in July and
The 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 left
of total public debt (domestic plus
unchanged at 8.5%. Rates were then
external) to 60% of GDP and the
kept on hold through to March 2011
overall deficit to around 3.5% of GDP
on the view that underlying inflation
by 2015. Given the country’s political
pressures were contained. 7
transformation with the departure of
Consumer Price Inflation averaged
President Hosni Mubarak, it is unclear
11.7% in fiscal 2009/10, off a monthly
whether this target will be met. For
high of 13.6% in January 2010 as
2010/11 and possibly 2011/12,
higher costs for fruits and vegetables
additional spending will be needed to
showed up in the figures. The still
meet higher international food and
relatively high rate of inflation
energy prices, in addition to a larger
represented, however, a significant
than expected wage bill due to ad
improvement on the 16.2% recorded in
hoc measures taken in the face of the
fiscal 2008/09. Core inflation, which
political unrest. A 15% salary increase
excludes volatile food items such as
was stipulated for government
fruits and vegetables, as well as items
employees in response to the protests
with regulated prices, came in at
while temporary government workers
6.7% for 2009/10, within the CBE ’s
in their post for at least three years
comfort zone. 7
were made permanent staff. The
pressure of subsidies may also prove

 Page 15


The remainder of fiscal 2010/11 will fell to USD 10.3 billion from USD 11
likely see increased i nflationary billion, with non-oil exports lower at
pressures 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 crisis
increases in global commodity prices, levels. Total imports fell 2.7% to USD
especially for food and fuel. On the 48.9 billion in 2009/10. 7
other hand, slower growth could help Receipts from services exports also
ease inflation pressures to some continued to decrease for the second
degree. 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 back
Egypt’s external position improved in to pre-crisis levels, income from the
2009/10, reflecting the overall upturn Suez Canal continued to decrease as
seen after the global slump of the traffic flows weakened. Imports of
previous year but the current account services cost USD 13.2 billion in
remained 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; (www.africaneconomicoutlook.org)

compared with 2.3% in 2008/09. The surplus fell to USD 10.3 billion in
current account deficit, however, is 2009/10 from USD 12.5 billion the
projected to widen again to 3.2% in previous year. Private and official
the current fiscal year and narrow only transfers increased by 26.9% to rea ch
slightly to 2.9% in 2011/12. 7 USD 10.5 billion in 2009/10. 7
Exports and imports fell for a second The trade deficit was little changed at
year running. Exports of goods fell to USD 25 billion over the past two years
10.9% of GDP in 2009/10 from 13.3% in while the current account deficit
2008/09, with imports of goods down narrowed from USD 4.4 billion in
to 22.4% from 26.6%. Petroleum expo rts 2008/09 to USD 4.3 billion in 2009/10.

 Page 16


The capital and financial account and uncertainties the country and the
improved significantly in 2009/10 on wider region face. 7
net inflows of USD 8.3 billion, 3.6 times
the amount recorded in 2008/09 even
L. Private Sector Development
as FDI fell to USD 6.8 billion. Net
portfolio inflows amounted to Over the past five years, the private
USD 7.9 billion, nearly reversing the sector has accounted for some 62% of
previous year’s net outflow of USD 9.2 GDP, 55% of gross capital formation
billion as international investment and close to 70% of total
confidence returned. As a result, employment. 7
foreign exchange reserves rose to USD Despite its important role, more still
35.2 billion in 2009/10, higher than needs to be done to enhance its
before the global crisis and sufficient performance. A lack of skilled labor
to cover 8.6 months of imports, due to a mismatch between what the
compared with 7.5 months in 2008/09. market wants and what the education
Gross external debt increased to USD system produces remains a challenge
33.7 billion at end-June 2010, up 6.9% for the private sector’s development. 7
and equal to 15.9% of GDP, a level not Egypt’s business environment has
seen as a threat to Egypt’s external improved, helped by the
stability. 7 modernization of the export/import
Egypt operates a managed exchange system and lower costs for starting a
rate regime. After depreciating in company. The World Bank’s 2011
2008/09, the Egyptian pound rose Doing Business report ranked Egypt 94
slightly against the US dollar over the out of 183 countries, up five places
first two quarters of 2009/10, reflecting compared to its 2010 report. 7
net portfolio inflows. However, the Construction permits remain a
currency then began to fall as problem, with the country ranked 154
political unrest and associated capital on this measure despite recent
outflows roiled the markets. The CBE legislation intended to ease the cost
intervened to support the currency of obtaining permits. 7
with the result that at end-January Other problem areas identified by the
2011, the Egyptian pound stood at World Bank included registering
EGP 5.87 per US dollar compared to property, getting credit and
EGP 5.47 at end-January 2010. protecting investors. 7
The political uncertainty following the The banking sector in Egypt generally
ouster of President Hosni Mubarak may appears to enjoy ample liquidity, low
last for some time and is likely to dollarization and improving asset
pressure Egypt’s external position. On quality. The loan-to-deposit ratio was
the capital account, the effect of the 51% in June 2010. In January 2011, as
political upheaval is expected to be political protests gathered pace, the
severe the rebound in portfolio inflows CBE guaranteed all deposits in the
during 2009/10 could be completely banking system and then limited
reversed in 2010/11. Trading on the withdrawals in February when the
stock market was suspended in late banks reopened. 7
January and only resumed in late Domestic credit rose by 7.0% in
March 2011. FDI will also likely 2009/10, 1 percentage point lower
continue to fall given the difficulties than in the previous year. Credit to the
private sector increased by 7.7%,

 Page 17


largely outpaced by credit to the government corruption and lack of
government, which was up by 15%. free elections and freedom of speech
One concern about the Egyptian forged the social disarray during the
banking system is that i t holds a large 30-year rule of Hosni Mubarak. 8
portion of the outstanding stock of According to the World Bank, 40% of
Treasury bills and bonds. In 2008/09, total population (population in th e FY
private and public banks held 67% of 2009/10: 79mn) lives below the poverty
the total outstanding stock of line and earns less than USD 2 per
Treasury bills, falling to 60% in day. 8
2009/10. 7 In Egypt, where the banking Egypt once the granary of the
system is characterized by ample Mediterranean Basin is currently the
liquidity, banks seem to prefer less largest wheat importer in the world,
risky sovereign lending rather than while prices of beef increased more
making loans to the private sector. than 60% over the last three months .
The asset quality of the Egyptian Apparently, the authoritarian and long
banking system improved with Non - rule of Hosni Mubarak bred
performing loans (NPLs) falling to government corruption and instigated
13.4% of total loans outstanding in large income inequalities where an
2009/10 from 26.5% in 2005/06. Bad elite few close to governing party
loan provisions provided 100% officials enjoyed the gains from the
coverage in 2009/10, up from 51% in impressive real GDP growth recorded
2005/06. The overhaul of the banks ’ in the previous years. On 11 February,
risk management practices is ongoing. Vice President Omar Suleiman
The Egyptian Stock Exchange put in a announced that President Mubarak
solid performance in fiscal 2009/10, handed over the power to the
with capitalization rising 34.2% from Supreme Council of the Armed Forces
the previous year to EGP 500 billion, and stepped down. The Supreme
but the political unrest of early 2011 Council under General Mohamed
sparked very sharp losses and has Hussein Tantawi suspended the
clouded the short-term outlook. 7 Constitution, dissolved both houses of
the parliament and announced that it
will rule for the next six months until
M. The revolution impact
the presidential elections in
The Jasmine Revolution started in September 2011. The caretaker Prime
Tunisia December 2010 spread to Minister Ahmed Shafik resigned on 3
Egypt on 25 January 2011 and led to March and replaced by Essam Sharaf. 8
the ousting of the long-time President The social upheaval in the first coupl e
Hosni Mubarak on 11 February. The of months of 2011 will take a heavy toll
uprising featured marches, on economic activity in the current FY
demonstrations, strikes and acts of as the turmoil resulted in the loss of
civil disobedience and climaxed to numerous working days and hours. For
violent clashes between protesters instance, the Stock Exchange in
defying the curfew imposed by the Cairo, which suspended trading on 29
government and security services and January when protests erupted,
supporters of Hosni Mubarak. 8 remain closed for 55 days, the
High unemployment, food price commodity sector, which accounts for
inflation and low minimum wages the 51.4% of GDP, will bear the brunt
along with police brutality, of the disruptions in production.

 Page 18


Manufacturing production alone to 22.2% of GDP from 27.1%.
accounts for 16.9% of GDP, while Expenditures dropped to 30.3% of GDP
extractive industry and agriculture from 33.7% in the corresponding
production account for the 28.4% of periods failing though to match the
GDP. We estimated that tourism alone, revenues decline. The primary deficit
which accounts for a mere 3.5% of widened to 3% of GDP in 2009/10 from
GDP, will shave off real GDP growth 2.7% in the previous FY. The fiscal
1.5 to 1.8pps in 2010/11 should tourist policy will come across considerable
arrivals decline to the levels observed headwinds in the current fiscal year
right after the 1997 massacre in Luxor and that the fiscal deficit target
when gunmen killed 60 tourists. As the penciled in the 2010/11 budget of
share of the remaining econom ic 7.9% of GDP is overoptimistic, as
sectors to real GDP is a lot bigger than weaker economic activity will take a
that of tourism, real GDP growth will heavy toll on fiscal revenues. Tax
be a lot weaker than 1.5-1.8pps in administration and revenue collection
2010/11 and will average a fragile have paralyzed after the regime
0.5% in 2010/11, should we factor in transition and will underperform until a
production disruptions in the democratically elected government
remaining sectors of the economy. 8 assumes office. Moreover, fiscal policy
Inflation inched down to 10.71% in will have to become more frugal by
February from 10.79% in the previous raising subsidies, redistribution
month as the annual growth in prices payments and public wages in a bi d
of fruits and vegetables eased at to calm the public opinion and
25.5% YoY from 27.4%. On the month, correct income inequalities. We
CPI rose by 0.13% in February from calculated that the 15% rise in public
1.02% in the previous month. Also, wages announced by the former
core inflation dropped to 9.5% in president before leaving office will
February from 9.7% a month earlier raise the fiscal deficit to 12.2% o f GDP
and prevailed over the unfavorable in 2010/11, should public revenues
base effect. Yet, regulated prices rose materialize as projected in the 2010/11
by 9.98% YoY in February after budget. We estimate that the fiscal
accelerating by 8.83% in the previous deficit will climb to 12.4% of GDP by
month. We believe that regulated end 2010/11. 8
prices will subside in the forthcoming
months as the caretaking government
will attempt to ameliorate the public
opinion by lowering utility prices. Y et,
food prices will head north following
global commodity trends and inflation
will average 13.7% in 2010/11. 8
Eventually, the Central Bank o f Egypt
will tighten its key overnight borrowing
and lending interest rates by 15bps to
8.40% and 10%, respectively by end
2010/11. 8
Government budget posted a deficit
of 8.1% of GDP in 2009/10 from 6.9% in
the previous FY as revenues tumbled

 Page 19


References
1- Samir Radwan ; ILO, SRO Cairo ;
April 2009
2- CIA world Factbook,
https://www.cia.gov/library/pub
lications/the-world-factbook/
3- The General Authority for
Investment GAFI, 2011 © GAFI -
Under Auspices of the Egyptian
Cabinet, www.gafinet.org
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

The effect of the economic crisis on egypt

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