Sep 22, 2013

Egypt's resilient economy

I never knew Egypt's economy was so resilient. No recent crisis global or local has been able to push this economy into recession. Egypt has had at least 20 years of continuous economic growth (with the exception of one quarter, 1Q2011 that is).


It is truly inspiring that while all these events have taken place in the world, Egypt's economy managed to sail through smoothly. Yes, the economy has slowed down, at times to a pace only comparable to traffic on 6th of October bridge. But again, Egypt has not had a technical recession since the late 80s. Not only that, since 2008 we have major shocks to the economy that didn't pull us back.  You know minor shocks and events things like; global financial meltdown in 2008, a euro-crisis on-going since 2010, toppling 2 sitting presidents, governed by 3 incompetent transitional governments, and 1 very incompetent president. Of course we can’t downplay a war next door in Libya, dwindling foreign reserves, a dollar run, massive gas and oil shortages, months of rolling black-outs, at least 4 months of curfews, no tourism, months of sit-ins, return of emergency law, threats of cutting foreign aid, rising xenophobia and no security whatsoever. Oh and I forgot, political paralysis. 

So it's either that our economy is really resilient, we have terrible statisticians or like the greeks we are just making up the numbers to keep up moral. Regardless all of this will bring us down to our knees, sooner or later. For a few reasons that is. Our economy is structurally flawed. It is just not sustainable.

Our fiscal situation is daunting, we are running a 14% of GDP deficit. Around 81% of our budget expenditure is on non-value creation items (11% wages and compensation, 40% interest and debt, 30% food and energy subsidies). Our awesome liberal transitional government just approved a law to set the minimum wage at 1200 a month, without figuring having a study on how it will impact wages for the 6.2M public sector employees. We don't even know how will this be financed. But since this new minimum wage is almost equal to our GDP/capita, serious inflation is expected to follow to lower the value of the minimum wage. Oh and I forgot, our internal debt is 1.7 trillion pounds and external is $38 billion.

On the revenues side of our budget, the government is predicting a whopping 50% increase in tax revenue, to EGP 332B, but again the tax authority has always been known to significantly overshoot in its forecasts. We will have serious issues with revenue generation in our budget, reduced economic activity almost always results in increased tax evasion, particularly when you try to issue new taxes and complicate the tax code. Which of course this and previous governments have been doing.

Our monetary situation is not that rosy either. Yes the CBE is been talking about increased foreign reserves and stabilization of the dollar. Yes, the dollar run subsided. But the crisis ain't over. The majority of the $19B in reserves in the CBE, are interest free deposits by gulfies. The non-gulfie, non-gold reserves are around $4B. We spend over $1B a month on imports. Yes we are safe, but only as long as the gulfies don't take back their money (just like the Qatari's did last week.)

The jobs market is in a terrible situation. We need to create at least 850K jobs a year to maintain the current (and non sustainable) unemployment rates. I would reckon the last 5 governments have collectively created 6 jobs in the last three years. What can they do with the political paralysis, lack of security, lack of FDI.

The general point of all the above, is to rant. Seriously though, our economy is in a terrible situation. And even though we have a government that is stacked with supposedly renowned economists, you would think we would have serious reform or at least a serious talk about the situation. But all we get, are poorly thought out economic policy and no reform. Good thing we have a resilient economy.