July 7, 2013


Uncertain future - economic problems in Egypt (Deutsche Welle, 7/07/13)

Hosni Mubarak's ousting had opened up a period of political uncertainty - foreign companies no longer wanted to invest money in Egypt. Economic growth began to stall and unemployment began to rise. At the same time poverty levels increased from just under 22 percent to over 25 percent. To alleviate the pressure, the state introduced subsidies on food and utilities. Almost $20 billion (194.8 billion euros) - about a third of the entire state budget - was set aside for aid. Assistance wasn't just limited to the poor across the country, beneficiaries were also among the middle class and wealthy people.

This policy though turned into a financial burden for the state. The deficit this year will rise to an estimated 13 percent of the gross domestic product. The value of the Egyptian pound has also been on the decline. In an attempt to halt the loss, Egypt turned to its reserves of US dollars. This strategy only works for a short time, explains north African analyst at the Deutsche Bank, Oliver Masetti. Foreign exchange reserves, he says, declined dramatically. "Last year that meant the central back was no longer able to keep the country's exchange rate at a constant level. This lead to some very sharp depreciation. Overall, the Egyptian pound has lost about 15 percent of the value it had in 2012."

This trend was also reflected in the domestic market: Egyptians soon realized they got less for their money. Despite government subsidies, prices rose markedly for goods such as bread, gas and petrol. "These are exactly the products that are being consumed on a large scale by the poorer parts of the population," says Masetti in an interview with DW. That is exactly what Morsi's government wanted to avoid. The issue of subsidies is one reason why negotiations with the International Monetary Fund on receiving a stand-by credit of $4.8 billion (3.7 billion euros) have stalled. The IMF has called for subsidy reforms in order to relieve the state budget, but this, too, has the potential to further increase food and energy prices.

This downwards trend is something that even stand-by credits from neighbouring friends of Egypt - especially Qatar - couldn't stop. And since those credits didn't come with any conditions for Egypt to implement reforms, the risk remains for their effect to evaporate.

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Posted by at July 7, 2013 5:58 AM

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