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

Page 1

The Effect of the

Economic Crisis

on Egypt’s

Economy A review of the economic crisis impact

on the Egyptian economy between

2007 - 2011

Executive Summary

The economic crisis that hit the world

economy has been unfolding since

the end of 2007, and its consequences

are yet to be understood. The genesis

of the crisis and its dimensions are

fairly well-known, and therefore fall

beyond the theme of this paper. The

objective is rather to gauge the

impact of the crisis on the Egyptian

economy with particular focus on the

labor scene.1

The crisis can be viewed against the

backdrop of the strong economic

performance that resulted from the

reform drive which began in 2004 and

resulted in an upsurge in almost all

macroeconomic indicators, notably

high rate of GDP growth of 7.2%in

2007/08. Moreover there has been an

impressive progress in improving the

investment climate which was

reflected in the positive rating of the

economy. However, three structural

problems continued to vex the

economy: high budget deficit; rapid

inflation and a constraining quality of

the labor force.1

The global financial and economic

crisis has negatively been transmitted

to the Egyptian economy particularly

since mid-2008. The impact has been

more pronounced on the real

economy rather than the banking

sector. This was due to a number of

factors most prominent of which is the

l imited integration of the Egyptian

banking sector in the global financial

market. Moreover, the Central Bank of

Egypt had succeeded in reforming the

sector since 2004 by consolidating the

banks into larger conglomerates;

restructuring bank management; and

getting rid of toxic debts. The Central

Bank also introduced stringent rules of

governance to guarantee the

disciplined functioning of the system.

Finally, the banking system has not

been short of l iquidity with the

lending-to-deposit ratio not exceeding

53%, which is well within the safe

boundaries compared to the rest of

the world.1

The impact on the real economy has

been reflected in the following

indicators: 1

Decline of GDP growth from 7.2% in

2007/08 to around 4% in 2008/09.

Reduced flow of FDI and a decline

in domestic investment.

Increase in return migration and

expected drop in remittances.

Increased strain on the balance of

payments.

Capital market collapse.

Decelerating sectoral growth

especially for tourism,

manufacturing and Suez Canal.

The Effect Of The Economic Crisis On Egypt’s Economy

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The prolonged labor market recession

and the consequent social

deterioration are the most serious

aspects of the global financial and

economic crisis as it reflects on Egypt.

The most immediate impact of the

crisis has been the inability of the

labor market to adjust, thus

exacerbating the problem of

unemployment, and accentuating the

position of different groups particularly

women and youth. Unemployment,

which has been a chronic problem

even with the rapid growth of the pre-

crisis period, is on the rise. Open

unemployment increased from 8.4% to

8.8% over the last year, and expected

to reach 10% by the end of this year.1

Moreover, vulnerable unemployment is

on the rise. Another aspect of the

employment problem is the

prevalence of “vulnerable

employment” which affects 28% of the

employed labor force, and has, in

fact, been on the rise in recent years.1

The impact has been more

pronounced for women than for men

where vulnerable employment among

females amounted to 53% compared

to 21% for men.1

Another challenge is poverty which is

affecting some 20% of the population.

Equally important is the vulnerabil ity of

the "near poor" to external shocks

such as inflation or decline in

employment. Between 2005 and 2008,

9% of the population or 6.7 mill ion, fell

into the poverty trap.1

For Egypt, as for almost all emerging

markets, the crisis may offer an

opportunity to deal with the structural

problems that have beleaguered the

economy and reduced its capacity to

cope with external shocks, and to lay

the foundations for the post-crisis

economy and society based on a

coherent vision of the future of the

global economy and the place of

Egypt in it. This would imply that

immediate, short-term actions,

necessary as they are, must be

consistent with, and reinforce the

long-term vision.1

The government has launched a

stimulus package of LE15 bill ion aimed

at boosting domestic demand.

However, to turn the crisis into

opportunity 3 tasks are necessary: 1

Restructuring the economy, mainly

through an aggressive industrial

policy;

Improving labor market policies and

institutions; and,

Creating a platform for social

dialogue based on the issue of

decent work, or the elaboration of

a "jobs pact".

Introduction

Occupying the northeast corner of the

Africa, Egypt is divided by the great

fertile Nile valley, where the economic

activities take place. In the 50’s and

60’s of the 20 th century Egypt's

economy was highly centralized

during the rule of former President

Gamal Abdel NASSER but opened up

considerably under former Presidents


Page 3

Anwar EL-SADAT and the former

president Mohamed Hosni Mubarak.2

From 2004 to 2008 Egypt aggressively

pursued economic reforms to attract

foreign investment and facil itate GDP

growth.2

Economic growth had been sustained

at a rate above 7% in the last 2 years

from a base of 3.1% in FY 02/03.2

Real GDP growth in Egypt reached

7.2% in FY 07/08 up from 7.1% in the

previous year, however due to the

financial crisis Egypt has witnessed a

drop in real GDP growth.2

The impact of the U.S. financial crisis

yet remains mild compared to the rest

of the world, as the GOE is sti l l able to

maintain a growth rate of 4.7% FY

2008/20092. The budget deficit

climbed to over 8% of GDP,

predominately due to reduced growth

in export-oriented sectors, including

manufacturing and tourism, and Suez

Canal revenues.2

Net International Reserves reached US

$ 31208.4 mill ion at the end of May

2009.3

In 2010, the government spent more

on infrastructure and public projects,

and exports drove GDP growth to

more than 5%, but GDP growth in 2011

is unlikely to bounce back to pre-

global financial recession levels, when

it stood at 7%. Despite the relatively

high levels of economic growth over

the past few years, l iving conditions

for the average Egyptian remain

poor.2

The modern Egyptian economy

embarked on various stages of

development during which the public

and private sectors played roles

varying in relative importance and

can be summarized in seven eras as

follows:

1. Import substitution and

nationalization , 1952–1966, during

which the first program of

industrial ization in 1957 was

established and led by the public

sector in heavy industries such as

iron and steel and chemical

industries. Nationalization reduced

the relative importance of the

private sector.

2. Inter-War, 1967–1973, adversely

affected the performance of the

economy and public sector role in

import substitution.

3. Openness Euphoria , 1974–1982

during which policies were

introduced to encourage Arab

and foreign investment through a

series of incentives and l iberalizing

trade and payment; the economy

expanded but this proved

unsustainable and growth

consequently scaled back.

4. External Debt Crisis , 1982–1990, the

external debt crisis and Paris Club

re-scheduling and debt reduction.

5. Economic Reform , 1991–2007,

reform policies were introduced to

meet the terms of international

institutions, lenders and donors,

including wider incentives to the

role of the private sector in all

economic activities.

6. The World Food Crisis , 2008,

soaring food prices, especially for

grains, led to calls for the

government to provide more

immediate assistance to the

population of more than 40% in the

http://en.wikipedia.org/wiki/Paris_Club


Page 4

"poverty tunnel" and to strike a

"new deal" on agriculture policy

and reform.

7. The World Global Financial Crisis ,

2008–present, Egypt to face the

repercussions of the global financial

crisis on the national economy.

The Crisis

The global economic crisis that blew

up in the US and went beyond to

affect the rest of the world had done

a major impact on the Egyptian

economy. This crisis that began by the

end of 2007 in the developed

economies and spread into the rest of

the global economy is the most severe

crisis since the Great Depression of

1929-1932.4

The crisis began with the

sub-prime mortgage

problem in the United States

and culminated in the

financial crunch, caused

mainly by the accumulation

of toxic debts, and which

threatened the banking

system in the whole world.4

The leaders of the Group of 20 (G20)

who met in London on the 2nd of April

2009 declared that “We face the

greatest challenge to the world

economy in modern times; a crisis

which has deepened since we last

met (15 November 2008), which

affects the l ives of women, men, and

children in every country and which all

countries must join together to

resolve.4

The global financial and economic

crisis has negatively been transmitted

to the Egyptian economy particularly

since mid-2008. The impact has been

more pronounced on the real

economy rather than the banking

sector. This was due to a number of

factors most prominent of which is the

l imited integration of the Egyptian

banking sector in the global financial

market.4

The Egyptian stock exchange was the

first to suffer due to the collapse in

foreign stock markets. Foreign

investors hastened to sell the shares

they own in Egypt's stock market to

cover their vulnerable financial

position, especially following their

losses elsewhere. Moreover,

most Egyptian big

corporations are l isted in

foreign markets particularly

those of London and New

York - thus their shares

declined with the collapse

that hit these markets. The

fact that seventy per cent

of investors in the Egyptian

stock exchange are small

shareholders, compounds the crisis,

because they hurried to sell their

shares even when prices fell to the

level of 20 per cent.4

Hence the index of Cairo and

Alexandria Stock Exchanges (CASE)

made harsh losses as it fell from 2727.7

points in August 2008 to 1556.7 points

in November 2008. The average of

Case30 fell from 8449.6 points in

August 2008 to 4205.9 points in

November 2008. On January 21s t 2009,


Page 5

it fel l to 3780.38 points. Market capital

of Egyptian-l isted companies fell from

EGP 695 bill ion in August 2008 EGP 461

bill ion in November 2008, i.e. losses

amounted to EGP 234 bill ion. Such

developments resulted in losses below

50 per cent of equil ibrium value-

therefore numerous investors suffered

harsh losses. 4

Worth mentioning that the drop in

terms of shares' prices took place in

May 2008 due to a number of

economic decisions taken by the

Egyptian government. Yet a greater

decline occurred after mid-September

2008 following the eruption of the

global financial crisis.4

Sector of tourism

Because the crisis began shortly

before the tourism season in Egypt,

the sector of tourism was strongly

affected. Although it was estimated

primarily that losses would not be felt

before March 2009, the real picture

was bleaker as tourism began to suffer

in December 2008. The Tourism

Minister said that signs of the crisis

began to express themselves in August

2008 thought real losses stared to be

felt in December 2008 - by 4.5 per

cent. Secretary General of Chamber

of Hotels said that reservations are in

real decline and great numbers of

workers in the sector of tourism are

expected to be laid off. The media

transmitted reports on the dismissal of

temporary workers in some hotels in

Luxor, Aswan, Hurghada, and Sharm

el-Sheikh. When some European tourist

organizers were belated in meeting

their financial obligations to Egyptian

hotels, an atmosphere of worry

dominated the field.4

This situation predicts a decline in

terms of tourism revenues, which

would have a negative impact on 62

professions closely l inked to tourism.

Available data showed that the

growth in tourism revenues decreased

from 17 per cent in August 2008 to 10.8

per cent in the following month. In the

first quarter of 2008/2009, the rate was

15.2 per cent against 32 per cent in

the same period last year. The year

2009 witnessed a 20 per cent drop in

tourism revenues. Should the crisis last,

the revenues generated by tourism will

further decline. The short-sighted

policy usually pursued by tourist

agencies and companies - i.e.

reducing prices dramatically- will be

to no avail.4

Navigation in Suez Canal

Since world trade will certainly decline

due to the recession, the movement of

navigation and oil shipping slow down.

Hence shipping through the Suez

Canal negatively affected,

particularly when taking into account

that some companies have already

started to use the alternative route of

the Cape of Good Hope due to the

phenomenon of piracy off Somali

shores. Hence shipping through the

Suez Canal has witnessed a slowdown

over the past three months and

revenues fell from $504.5 mill ion in

August 2008 to $469.6 mill ion in

September 2008. In October,

November and December, revenues


Page 6

amounted to $467.5 mill ion, $419.8

mill ion and $391.8 mill ion respectively.

It is worthy of noting that revenues

were $426.3 mill ion in December 2007.4

Suez Canal revenues registered the

highest monthly figures since 2008,

totaling $406.2 mill ion in July2010, a

6.1% increase year-on-year. This is a

5.9% rise over the previous month

when revenues totaled $383.7 mill ion.

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 bill ion compared to

$2.38 bill ion.5

Oil sector

Fall ing oil prices had negative

ramifications on Egypt's oil revenues.

The decline started to unfold, as the

oil balance made a surplus of $ 1.6

bill ion in July-September 2008 against

$3.5 bill ion in April -June 2008. It has to

be noted here that although fall ing oil

prices will reduce foreign currency, it

will also cut the cost of oil subsidy,

which will reduce the budget deficit.4

The global financial crisis cut revenues

from commodity exports due to the

troubles experienced by Egypt's

trading partners in Europe and the US.

Remittances by Egyptian expatriates

will fall as Gulf States ended the

contracts of large numbers of migrant

workers including the Egyptians. Many

of those came back to Egypt and join

the column of the unemployed.4

Foreign direct investments

I t is beyond a shadow of a doubt that

foreign direct investments will fall .

Available data indicate that net

foreign investments decreased by 44

per cent compared with 2007. External

portfol io investment flows rose to $3.5

bill ion against $1.4 bill ion in 2007.4

All the above factors expressed

themselves in the balance of

payments whose surplus fell in the first

quarter of 2008/2009 by 4.5 per cent

to become $0.5 bill ion against $ 1.1

bill ion in the same period previous

year.3 The recession in the US and

Europe reached Egypt, wherein the

GDP growth fell throughout 2008/2009

and 2009/2010. The recession will be

followed by a declining internal

demand, then a reduction in terms of

production capacities. The outcome

will definitely be a rise in the

unemployment.4

Growth rate slowdown

The first half of 2008/2009 revealed a

slowdown in the growth rate to reach

5.8 per cent compared with 6.5 per

cent in the same period last year. Thus

the rosy picture Egyptian officials tried

to paint proved unrealistic and their

claims that the crisis will not go

beyond the monetary economy - to


Page 7

reach the real economy-proved

untrue.4

Source: Ministry of Economic Development

Per capita NDP fell and create a

climate of turbulence in view of the

'revolution of expectations' resulted

from globalization and advancement

in communications technology. When

a poor and unemployed individual is

able to know how extravagant l ives of

the rich are, social turmoil becomes

very l ikely.4

The Egyptian government allocated

EGP15 bill ion to counterbalance the

ramifications of the economic crisis.

The government was keen to convey a

message stressing its aptitude to

resolve the crisis. Yet some observers

believe that the government allotment

remains too small to be able to offset

the repercussions of the crisis.4

Moreover, the Central Bank of Egypt

had succeeded in reforming the

sector since 2004 by consolidating the

banks into larger conglomerates;

restructuring bank management; and

getting rid of toxic debts. The Central

Bank also introduced stringent rules of

governance to guarantee the

disciplined functioning of the system.

Finally, the banking system has not

been short of l iquidity 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

the impact on the real economy,

relegating the impact on employment

and social aspects to a separate

section as it is a core issue of this

paper. It should be emphasized at the

outset that the depth of the impact of

the crisis can best be understood by

taking into consideration the existing

structural problems that confronted

the Egyptian Economy. The crisis and

the response to it have been

conditioned by these problems.4

A. Macro-economic instability

The robust economic growth since

2004 contrasts sharply with the

declining ranking of Egypt on the

macroeconomic stabil ity

competitiveness component of the

Global Competitiveness Index.1

Despite minor improvements, total

gross debt remains a major problem

amounting to 85.1 % of GDP. Similarly,

budget deficit continued to be a

challenge despite concerted

government efforts to reduce it, where

it stood at 6.8% of GDP in 2008. This is

l ikely to increase as a result of the

stimulus package of public spending


Page 8

of LE 15 bill ion to face the present

economic crisis. In fact, the deficit-to-

GDP ratio has increased to 8.4% in

2009 as a result of a rise in expenditure

to 28% of GDP, and a decline of

revenues to 19.3%.1

This chronic macroeconomic situation

of the Egyptian economy ref lects the

tension in policy choices between

requirements of economic efficiency

and those of social welfare. One of

the main reasons for budget deficit is

the increasing bil l of public servants,

wages and of subsidies. This has

increased from 64 bill ion LE in 2007 to

128 bill ion in 2008. The government has

managed to reduce subsidies for

energy, especially for energy-intensive

industries, but this has been more than

outweighed by the increase in

subsidies for food, health and

education as well as the 2008 r ise of

30% in the salaries of 5.9 mill ion

government employees to make up

for the sudden upsurge in prices

especially food.1

Inflation targeting has been a

daunting task for the Central Bank of

Egypt, particularly in view of the

openness of the economy and its

vulnerabil ity to “imported inflation”

resulting from the increase in

international prices. Inflation rates

averaged 9.5 % in 2007, and

continued to escalate in the first

quarter of 2008 reaching 14.4%. By the

end of July, inflation rates were as

high as 22%, and by August jumped to

25.6%. Inflation had been brought

under control due mainly to the results

of the reform by the monetary and

fiscal policies.1 However, there were

periods when inflation erupted

beginning with the impact of the

Avian Flu in 2006, followed by the

effect of domestic price increases for

commodities such as fuel, and finally

the inflation resulting from global

increase in food and energy prices

during last year.1

Source: Based on data from CAPMAS for the

period Jan-05 to August 08 and Ministry of

Economic Development thereafter.

The impact of the crisis has been mainly

reflected in the decline in almost all the

macroeconomic indicators representing

almost a reversal of the impressive

performance of the previous four years .

In the following, a picture of this impact

will be outl ined.1

Decline in real GDP growth rates

In contrast to the previous four years

when, almost all national and

international reports point out to a

reversal of the trend particularly during

the first two quarters of the financial

year 2008/09. The real GDP growth

which amounted to 7.2% in 2007/08,

declined sl ightly by the end of that

year when it was 6.7% in the last

quarter. But with the onset of the crisis

-5

0

5

10

15

20

25

30

35

40 General Prices Food and Beverage


Page 9

GDP growth declined to 5.8% and 4.1%

during the first and second quarters of

2008/09 respectively. This has been due

to the decline in the major drivers of

growth especially tourism,

manufacturing, Suez Canal, and

remittances of Egyptians working

abroad. It is expected that the

economy will begin its recovery by 2010

propelled by the renewed growth of

the global economy and through the

effect of the stimulus package by the

Egyptian government designed to

boost domestic demand.1

Real GDP Growth (2003-2013)

Source: IMF, International Financial Stati stics,

quoted by the Economist Intel l igence Uni t (EIU),

London, March 2009.

Note: Official f igures for Egypt’s GDP growth in Q1

2008/09 i s 5.8 %, and for Q2 i s 4.1% according to

the Ministry of Economic Development

B. Unbalanced Sectoral Sources of

Growth

An analysis of the sectoral sources of

GDP growth in 2008 shows that the

major contributors were manufacturing

(25.8%), trade and finance (21.3%), and

transport (16.9%). With the exception of

manufacturing, these sectors are not

typically employment-intensive. The

position of agriculture is puzzl ing. While

its share of employment is around 28%,

it contributed only 8% of GDP growth

last year. Its share of investment is also

low (7.2%). An il lustration of an example

of these discrepancies is provided in

the figure below where agriculture and

industry are compared in terms of their

contribution to GDP growth, share of

investment, and share of the labor

force. The implication is that the sector

with the largest labor force share is

starved of investment resources and its

productivity is low which curtails its

contribution to growth.1

Source: Calculated from data provided by the

Ministry of Economic Development, December

2008.

C. Inadequate Human Resources

A cross-cutting cause of the low and

declining competitiveness in Egypt is

due in a large measure to the quality

of the labor force, and the efficiency

of labor market institutions. A striking

feature of the Egyptian labor force is

2006a 2007a 2008b 2009c 2010c

Egypt 6.8 7.1 7.2 3.8 3.9

World 4 3.8 2 -2.6 1

-4

-2

0

2

4

6

8

% Employment

% Investment

% GDP growth

28%

13%

5%

25%

8%

26%


Page 10

the dominant share of the informal or

unorganized sector in overall

employment.1

As shown in the below figure, out of

the 20 mill ion employed in 2006, the

informal sector accounted for 35%;

government for 28.5% and agriculture

36.5%. These add up to 90% of the

employed labor force, and they are to

a large extent of low productivity and

of low income. Only 10% of

employment remains in what could be

termed as the “modern sectors”. It is

here that the major explanation for

the country’s competitiveness position

resides.1

Structure of the Employed Labor Force

Source: Samir Radwan, Impact of Investment on

the Economic and Social Aspects in Egypt,

memeo. Cai ro, 2007

To gauge the order of magnitude,

labor supply grows at 3% every year,

while the demand for labor grows only

at 2.8%, with the difference

continually swell ing the ranks of the

unemployed. Furthermore, of those

unemployed, 92.1% are first time job

seekers. The problem is partly created

by the length of queuing period of the

school-to-work transition. In 2006,

around 75% of first time job seekers

were only able to find jobs within 5

years of leaving school. As for

females, the situation is much worse.

The school-to-work transition rates for

females from 1998 to 2006 never

exceeded 25% even after 15 years of

leaving school.1

This phenomenon is mainly attributed

to another mismatch which exists

between the products of education,

and the demands of the labor market.

In almost all the reports related to

economic development in Egypt, skil l

shortage has been underl ined as a

deficit that has to be compensated

for through educational and training

policies. As Figure 4 shows, some 41 %

of the employed labor force is either

i l l iterate or semi-il l iterate. This curtails

the abil ity of the labor force to deal

with technology and explains to some

extent the low productivity and

hence, low return to labor among

these groups.1

Employed Labor Force by Educational

Status

Source: Based on data from CAPMAS, Labor

Force Sample Survey, Quarterly Bul letin;

November 2008. Table 5A, p50

Government

Sector 28%

Informal

Sector 35%

Agriculture 27%

MODERN SECTOR

10%

Illiterate/ read

&write 42%

Less than Middle Level

Education 9%

Middle Level

Education 31%

Less than Higher

Education 4%

Higher Education

14%


Page 11

Domestic Credit Growth and the Change

in Gross Fixed Investment

*Gross Fixed Investment calculated at constant

prices

Source: Based on data from the Economist

Intel l igence Uni t, Egypt: Country Forecast, January 2009,

p11&13

Foreign Direct Investment

Source: Based on data from Economist Intelligence Unit, Egypt:

Country Forecast, January 2009,p14 *Gross Fixed Investment calculated at constant prices

The irony is that almost half of those

employed are either i l l iterate or

semil iterate, as they cannot afford to

be idle; while more than half of those

unemployed have received middle

level education and more than one

third have received high level

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-

2004/05 shows clearly that increased

capital intensity has been

predominant in explaining the

observed changes in output per

worker growth, with TFP lagging

behind. It can also be observed that

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 negative, while

capital-intensity increases tended to

exceed growth in output per worker

by around 10%. This analysis reinforces

the point made earl ier about the

quality of education and efficiency of

the labor force. These two combined

explain the reason for low

productivity. Achieving an

improvement in TFP would require

concerted action to improve

education and to skil l the labor force.1


Page 12

E. Reduced flow of Domestic and

Foreign Investment

Total investment in the second quarter

of 2008/09 amounted to LE 52.5 bill ion

compared to LE 50.7 bill ion during the

same period of the previous year.1

Though this represents a sl ight

increase, there has been a notable

decline in investment flow from 32%

during the second quarter of 2007/08

to 3.6% only in the second quarter of

2008/09. This can be explained by a

number of factors: first, despite the

comfortable liquidity of the banking

sector, the rate of growth of domestic

credit has declined sharply during

2009; secondly, the flow of FDI which

had amounted to almost 9% of GDP in

2007/08, declined during the first half

of 2008/09 by 60% compared to the

first half of 2007/08; and thirdly the

reticence of the private sector to

embark on new investments under

conditions of uncertainty about

market recovery.1

F. Sharp Drop in Remittances

expected (increase in returned

migration)

The global crisis has adversely

affected the major sources of demand

for Egyptian workers. Thus the decline

in the activities in the GCC countries,

which is the main destination of

migrant workers, in addition to USA

and EU, is l ikely to result in a sharp

drop in remittances which went down

in the first quarter of 2008/09 to about

US $ 1.950 bill ion compared to

US$ 2.285 bill ion compared to the last

quarter of 2007/08. However,

remittances increased again during

the second quarter of 2008/09. This is

not surprising as remittances may

actually increase in the early stages of

the downturn as returned migrants

usually bring their savings with them.1

There are strong indications that this

trend would be reversed as the crisis

unfolds in the destination countries.

For instance In the US and Kuwait,

where the global downturn and fall ing

oil prices seem to have had a more

pronounced effect early on in the

global downturn, remittances fel l

sharply (by 22% and 17% year on year

respectively), a precursor perhaps of

developments elsewhere. The impact

would be most pronounced for

Egyptians working in the construction

sector of the gulf sector of the GCC

states which account for around 54%

of all remittances from these

countries.1

While the ful l picture is not clear, there

are estimates that the performance of

the past few years where remittances

reached some US$ 8.6 bill ion, or 6.5%

of GDP, is l ikely to be reversed. A

study published by the Centre for

Economic Studies in Egypt estimates

that around 500,000 Egyptian migrant

workers will lose their jobs in the Gulf

by end-2009. Another recent estimate

suggests that around 30% of Egyptian

construction workers have already

returned home, but few of these

workers are expected to find

alternative employment in Egypt

where domestic construction activity

has started to weaken. The net result

would be a decline of remittances of


Page 13

between 10 to 20% as a result of the

crisis.1

Worker Remittances

Source: Based on Data from the Central Bank of Egypt,

Monthly Statistical Bulletin

Source: Based on Data from the Central Bank of Egypt,

Monthly Statistical Bulletin

G. Balance of Payments Strained

The decline in demand for Egyptian

goods (exports) and services (Suez

Canal, tourism, workers abroad) has

been negatively reflected on the

external balance of the country, thus

ending the short-l ived 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

2008/9 where it jumped from US$131

mill ion to US$ 966 mill ion.

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

Source: Ministry of Economic Development, Follow-Report

Q2/H1 2009

1.9

3.1

-1

-0.6

-1.5

-1

-0.5

0

0.5

1

1.5

2

2.5

3

3.5

Second Quarter First Half

US$

bill

ion

2008 2009


Page 14

Food prices 2000 – 20096

Source: The Financial and Economic Crisis : A Decent Work Response : International Labor Organization

(International Institute for Labor Studies) 2009

Furthermore, the strain on Egypt’s

international reserves has been

amplified. International reserves

currently cover only half of the year’s

imports, while it used to cover at least

9 months June 2009.1

H. Effect of the food crisis

Egypt is in the pain of an impending

food crisis due to Russia’s temporary

ban on wheat exports in 2010. Egypt is

the world’s biggest wheat importer

and more than 50% of its wheat comes

from Russia, whose vast tracts of

wheat fields were destroyed by

wildfires leading to the ban. In a

country where more than 80 mill ion

Egyptians depend on subsidized bread

to survive, Egypt already had political

and social uproar because bread

supplies are hit. The former trade

Minister Rachid Mohamed Rachid said

that the country imported six tons of

wheat from Argentina. He also said

that it would cost the government

$700 mil l ion in additional subsidies to

keep the price of bread stable. To

avert such a challenge in the future,

the Egyptian government has said that

the country is aiming for 70% self -

sufficiency in wheat by 2020.5

Urban inflation stood at an annualized

10.7% in July2010, as increasing food

costs drove up prices.5

Food prices jumped 3.2% in July2010.

Core inflation, which excludes the

costs of fruits and vegetables, rose to

7.08% in the year to July 2010 from

6.70% in June 2010.5

Non-oil exports saw a huge spike of

20% in the second quarter of 2010 to

the tune of $5.1 bill ion compared to

24 bill ion in the period last year.

Egypt’s exports are showing a healthy

increase as the economy recovers

from the global economic crisis .5


Page 15

I. Fiscal Policy

Fiscal policy was expansionary in

2009/10 in order to offset the impact

of the global financial crisis, with the

budget deficit rising to 8.1% of GDP, 1

percentage point higher than the

average in the previous three years

but sl ightly lower than the government

had expected. The wider deficit was

due to a combination of lower

revenues and higher expenditure.

Total revenues and grants fell to 22.2%

of GDP in 2009/10 from 27.1% in

2008/09. The budget deficit for fiscal

2010/11 is expected to rise further to

almost 10% of GDP.7

Total domestic debt jumped by 21% to

reach EGP 779.5 bill ion or 64.6% of

GDP, up by 2.8 percentage points,

by June 2010.1 External debt

meanwhile rose 6.9% to USD 33.7

bill ion or 15.9% of GDP by June 2010,

one percentage point lower than the

previous year. Thus, Egypt’s external

debt position does not constitute an

immediate threat to external stabil ity.7

The Finance Ministry’s medium-term

framework was to bring down the ratio

of total public debt (domestic plus

external) to 60% of GDP and the

overall deficit to around 3.5% of GDP

by 2015. Given the country’s political

transformation with the departure of

President Hosni Mubarak, it is unclear

whether this target will be met. For

2010/11 and possibly 2011/12,

additional spending will be needed to

meet higher international food and

energy prices, in addition to a larger

than expected wage bill due to ad

hoc measures taken in the face of the

political unrest. A 15% salary increase

was stipulated for government

employees in response to the protests

while temporary government workers

in their post for at least three years

were made permanent staff. The

pressure of subsidies may also prove

costly. Fuel subsidies in 2009/10 cost

an estimated EGP 66.5 bill ion – 5.5% of

GDP and more than 18% of total

expenditures.7

The 2010/11 and 2011/12 budgeted

figures for fuel subsidies were originally

set at EGP 67.7 bill ion and EGP 87.8

bill ion but plans to phase out this

costly exercise will l ikely be put on

hold until a new government takes

power after presidential elections

scheduled for later in 2011. Rising oil

prices may even increase the cost of

the subsidies while revenue generation

will be challenging. Tax revenues,

which constitute more than 60% of

government revenues, may be

undermined by the slowdown in

economic activity during the second

half of 2010/11 because of the

political upheaval and associated

uncertainty.7

J. Monetary Policy

The Central Bank of Egypt (CBE) cut its

key interest rates – overnight deposit

and overnight lending – in July and

September 2009 to 8.25% and 9.75%

while the discount rate was left

unchanged at 8.5%. Rates were then

kept on hold through to March 2011

on the view that underlying inflation

pressures were contained.7

Consumer Price Inflation averaged

11.7% in fiscal 2009/10, off a monthly

high of 13.6% in January 2010 as

higher costs for fruits and vegetables

showed up in the figures. The stil l

relatively high rate of inflation

represented, however, a significant

improvement on the 16.2% recorded in

fiscal 2008/09. Core inflation, which

excludes volatile food items such as

fruits and vegetables, as well as items

with regulated prices, came in at

6.7% for 2009/10, within the CBE’s

comfort zone.7


Page 16

The remainder of fiscal 2010/11 will

l ikely see increased inflationary

pressures owing to the political unrest

that disrupted production and

transportation, coupled with sharp

increases in global commodity prices,

especially for food and fuel. On the

other hand, slower growth could help

ease inflation pressures to some

degree.7

K. External Position

Egypt’s external position improved in

2009/10, reflecting the overall upturn

seen after the global slump of the

previous year but the current account

remained in deficit, at 2.0% of GDP

compared with 2.3% in 2008/09. The

current account deficit, however, is

projected to widen again to 3.2% in

the current f iscal year and narrow only

sl ightly to 2.9% in 2011/12.7

Exports and imports fell for a second

year running. Exports of goods fell to

10.9% of GDP in 2009/10 from 13.3% in

2008/09, with imports of goods down

to 22.4% from 26.6%. Petroleum exports

fell to USD 10.3 bill ion from USD 11

bill ion, with non-oil exports lower at

USD 13.6 bil l ion from USD 14.2 bil l ion.

Total export proceeds were down 5.0%

and 18.7% lower than pre-global crisis

levels. Total imports fell 2.7% to USD

48.9 bill ion in 2009/10.7

Receipts from services exports also

continued to decrease for the second

year in a row, to USD 23.6 bill ion in

2009/10 after a 13% slump in 2008/09.

While tourism receipts bounced back

to pre-crisis levels, income from the

Suez Canal continued to decrease as

traffic flows weakened. Imports of

services cost USD 13.2 bill ion in

2009/10, up 17%. The services account

surplus fell to USD 10.3 bill ion in

2009/10 from USD 12.5 bill ion the

previous year. Private and official

transfers increased by 26.9% to reach

USD 10.5 bil l ion in 2009/10.7

The trade deficit was l ittle changed at

USD 25 bill ion over the past two years

while the current account deficit

narrowed from USD 4.4 bill ion in

2008/09 to USD 4.3 bill ion in 2009/10.

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)


Page 17

The capital and financial account

improved significantly in 2009/10 on

net inflows of USD 8.3 bill ion, 3.6 times

the amount recorded in 2008/09 even

as FDI fell to USD 6.8 bill ion. Net

portfol io inflows amounted to

USD 7.9 bill ion, nearly reversing the

previous year’s net outflow of USD 9.2

bill ion as international investment

confidence returned. As a result,

foreign exchange reserves rose to USD

35.2 bill ion in 2009/10, higher than

before the global crisis and sufficient

to cover 8.6 months of imports,

compared with 7.5 months in 2008/09.

Gross external debt increased to USD

33.7 bill ion at end-June 2010, up 6.9%

and equal to 15.9% of GDP, a level not

seen as a threat to Egypt’s external

stabil ity.7

Egypt operates a managed exchange

rate regime. After depreciating in

2008/09, the Egyptian pound rose

sl ightly against the US dollar over the

first two quarters of 2009/10, reflecting

net portfol io inflows. However, the

currency then began to fall as

political unrest and associated capital

outflows roiled the markets. The CBE

intervened to support the currency

with the result that at end-January

2011, the Egyptian pound stood at

EGP 5.87 per US dollar compared to

EGP 5.47 at end-January 2010.

The political uncertainty following the

ouster of President Hosni Mubarak may

last for some time and is l ikely to

pressure Egypt’s external position. On

the capital account, the effect of the

political upheaval is expected to be

severe the rebound in portfol io inflows

during 2009/10 could be completely

reversed in 2010/11. Trading on the

stock market was suspended in late

January and only resumed in late

March 2011. FDI will also l ikely

continue to fall given the difficulties

and uncertainties the country and the

wider region face.7

L. Private Sector Development

Over the past five years, the private

sector has accounted for some 62% of

GDP, 55% of gross capital formation

and close to 70% of total

employment.7

Despite its important role, more stil l

needs to be done to enhance its

performance. A lack of skil led labor

due to a mismatch between what the

market wants and what the education

system produces remains a challenge

for the private sector’s development.7

Egypt’s business environment has

improved, helped by the

modernization of the export/import

system and lower costs for starting a

company. The World Bank’s 2011

Doing Business report ranked Egypt 94

out of 183 countries, up five places

compared to its 2010 report.7

Construction permits remain a

problem, with the country ranked 154

on this measure despite recent

legislation intended to ease the cost

of obtaining permits.7

Other problem areas identified by the

World Bank included registering

property, getting credit and

protecting investors.7

The banking sector in Egypt generally

appears to enjoy ample l iquidity, low

dollarization and improving asset

quality. The loan-to-deposit ratio was

51% in June 2010. In January 2011, as

political protests gathered pace, the

CBE guaranteed all deposits in the

banking system and then l imited

withdrawals in February when the

banks reopened.7

Domestic credit rose by 7.0% in

2009/10, 1 percentage point lower

than in the previous year. Credit to the

private sector increased by 7.7%,


Page 18

largely outpaced by credit to the

government, which was up by 15%.

One concern about the Egyptian

banking system is that i t holds a large

portion of the outstanding stock of

Treasury bills and bonds. In 2008/09,

private and public banks held 67% of

the total outstanding stock of

Treasury bills, fall ing to 60% in

2009/10.7 In Egypt, where the banking

system is characterized by ample

l iquidity, banks seem to prefer less

risky sovereign lending rather than

making loans to the private sector.

The asset quality of the Egyptian

banking system improved with Non-

performing loans (NPLs) fall ing to

13.4% of total loans outstanding in

2009/10 from 26.5% in 2005/06. Bad

loan provisions provided 100%

coverage in 2009/10, up from 51% in

2005/06. The overhaul of the banks’

risk management practices is ongoing.

The Egyptian Stock Exchange put in a

solid performance in fiscal 2009/10,

with capitalization rising 34.2% from

the previous year to EGP 500 bill ion,

but the political unrest of early 2011

sparked very sharp losses and has

clouded the short-term outlook.7

M. The revolution impact

The Jasmine Revolution started in

Tunisia December 2010 spread to

Egypt on 25 January 2011 and led to

the ousting of the long-time President

Hosni Mubarak on 11 February. The

uprising featured marches,

demonstrations, strikes and acts of

civil disobedience and climaxed to

violent clashes between protesters

defying the curfew imposed by the

government and security services and

supporters of Hosni Mubarak.8

High unemployment, food price

inflation and low minimum wages

along with police brutality,

government corruption and lack of

free elections and freedom of speech

forged the social disarray during the

30-year rule of Hosni Mubarak.8

According to the World Bank, 40% of

total population (population in the FY

2009/10: 79mn) l ives below the poverty

l ine and earns less than USD 2 per

day.8

Egypt once the granary of the

Mediterranean Basin is currently the

largest wheat importer in the world,

while prices of beef increased more

than 60% over the last three months.

Apparently, the authoritarian and long

rule of Hosni Mubarak bred

government corruption and instigated

large income inequalities where an

elite few close to governing party

officials enjoyed the gains from the

impressive real GDP growth recorded

in the previous years. On 11 February,

Vice President Omar Suleiman

announced that President Mubarak

handed over the power to the

Supreme Council of the Armed Forces

and stepped down. The Supreme

Council under General Mohamed

Hussein Tantawi suspended the

Constitution, dissolved both houses of

the parl iament and announced that it

will rule for the next six months until

the presidential elections in

September 2011. The caretaker Prime

Minister Ahmed Shafik resigned on 3

March and replaced by Essam Sharaf.8

The social upheaval in the first couple

of months of 2011 will take a heavy toll

on economic activity in the current FY

as the turmoil resulted in the loss of

numerous working days and hours. For

instance, the Stock Exchange in

Cairo, which suspended trading on 29

January when protests erupted,

remain closed for 55 days, the

commodity sector, which accounts for

the 51.4% of GDP, will bear the brunt

of the disruptions in production.


Page 19

Manufacturing production alone

accounts for 16.9% of GDP, while

extractive industry and agriculture

production account for the 28.4% of

GDP. We estimated that tourism alone,

which accounts for a mere 3.5% of

GDP, will shave off real GDP growth

1.5 to 1.8pps in 2010/11 should tourist

arrivals decline to the levels observed

right after the 1997 massacre in Luxor

when gunmen kil led 60 tourists. As the

share of the remaining economic

sectors to real GDP is a lot bigger than

that of tourism, real GDP growth will

be a lot weaker than 1.5-1.8pps in

2010/11 and will average a fragile

0.5% in 2010/11, should we factor in

production disruptions in the

remaining sectors of the economy.8

Inflation inched down to 10.71% in

February from 10.79% in the previous

month as the annual growth in prices

of fruits and vegetables eased at

25.5% YoY from 27.4%. On the month,

CPI rose by 0.13% in February from

1.02% in the previous month. Also,

core inflation dropped to 9.5% in

February from 9.7% a month earl ier

and prevailed over the unfavorable

base effect. Yet, regulated prices rose

by 9.98% YoY in February after

accelerating by 8.83% in the previous

month. We believe that regulated

prices will subside in the forthcoming

months as the caretaking government

will attempt to ameliorate the public

opinion by lowering util ity prices. Yet,

food prices will head north following

global commodity trends and inflation

will average 13.7% in 2010/11.8

Eventually, the Central Bank of 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

to 22.2% of GDP from 27.1%.

Expenditures dropped to 30.3% of GDP

from 33.7% in the corresponding

periods fail ing though to match the

revenues decline. The primary deficit

widened to 3% of GDP in 2009/10 from

2.7% in the previous FY. The fiscal

policy will come across considerable

headwinds in the current fiscal year

and that the fiscal deficit target

penciled in the 2010/11 budget of

7.9% of GDP is overoptimistic, as

weaker economic activity will take a

heavy toll on fiscal revenues. Tax

administration and revenue collection

have paralyzed after the regime

transition and will underperform until a

democratically elected government

assumes office. Moreover, fiscal policy

will have to become more frugal by

raising subsidies, redistribution

payments and public wages in a bid

to calm the public opinion and

correct income inequalities. We

calculated that the 15% rise in public

wages announced by the former

president before leaving office will

raise the fiscal deficit to 12.2% of GDP

in 2010/11, should public revenues

material ize as projected in the 2010/11

budget. We estimate that the fiscal

deficit will cl imb to 12.4% of GDP by

end 2010/11.8


Page 20

References

1- Samir Radwan ; ILO, SRO Cairo ;

April 2009

2- CIA world Factbook,

https://www.cia.gov/l ibrary/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.

the effect of the economic crisis on egypt

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