Egypt Economy Stabilizes Under Sissi but Prices Remain to Be Tamed

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A pedestrian enters a currency exchange bureau adorned with a U.S. one dollar bill in Cairo, Egypt on March 31, 2018.
A pedestrian enters a currency exchange bureau adorned with a U.S. one dollar bill in Cairo, Egypt on March 31, 2018. Credit: Bloomberg

Egyptian President Abdel-Fattah al-Sissi has revived economic growth and tackled pressing problems in power and gas supply, but he must now juggle austerity under an International Monetary Fund program with the need to tame inflation.

“He’s now at the crossroads that every Egyptian president has found himself in,” said Reham Eldesoki, an independent economist long focused on Egypt. “He needs to push forward on intensive reforms, to move forward in building services and non-oil industry and to make Egypt really investment-friendly.”

Sissi’s performance will be watched well beyond Egypt’s borders.

European nations particularly worry that any faltering of reforms could worsen unemployment and encourage young Egyptians to cross the Mediterranean illegally, aggravating already sizeable flows of migrants from north Africa.

Sissi led the military’s overthrow of Egypt’s first democratically elected president in 2013 and was elected president in 2014, after a prolonged period of popular protests scared away many investors and foreign tourists.

Successive governments’ reluctance to devalue the currency had led to an acute foreign exchange shortage, dampening imports and pricing Egyptian exports out of foreign markets.

Sissi’s signature economic achievement has been concluding a three-year deal with the International Monetary Fund in 2016. Under this, the government has raised the price of subsidized fuel to ease the huge burden on the budget, increased VAT to 14% and devalued the Egyptian pound against the dollar by more than half.

Many say the reforms were needed to stabilize Egypt as it recovers from the chaos and tackles an Islamist insurgency. However, the currency reform hit the middle classes particularly hard, while inflation remains high, poverty has increased and unemployment is not going down as quickly as hoped.

Economists see some grounds for hope. GDP growth increased to 5.3% year-on-year in the three months to December from a low of 2.1% in 2012/13, according to the central bank.

“I think we should see growth continue to escalate,” said Mohamed Abu Basha, an economist with Egyptian investment bank EFG Hermes.

Once a net energy exporter, Egypt struggled to get enough fuel to run its antiquated power stations, resulting in frequent blackouts.

Under Sissi, the government signed construction contracts for new plants and arranged for floating gas terminals to allow more imports. Power shortages were soon brought to a near halt.

A worker pushes a dollie under an election banner in support of Abdel-Fattah El-Sisi, Egypt's president, in Cairo, Egypt on March 31, 2018. Credit: Bloomberg

Sissi has also acted to open up gas exploration and development and to reduce vast arrears in payments to international energy companies.

This has encouraged them to revive their activities in Egypt, leading to several gas discoveries, including the Zohr field, the largest in the Mediterranean region.

Zohr, operated by Italy’s ENI, shipped its first gas at the end of 2017. Other fields brought onstream included BP’s Atoll and West Nile Delta. The government says Egypt will be self-sufficient in gas by the end of this year.

Sissi launched a series of large infrastructure projects designed partly to put Egyptians back to work. Many won praise, such as new roads and expanded electricity capacity. More controversially, Sissi initiated several megaprojects, some of which economists say will produce little immediate return. These include dredging a new branch of the Suez Canal.

Sissi insisted the project be completed within a year, adding to the cost, but because of a worldwide trade slowdown canal revenue was little changed.

He began building several new desert cities, including a $45 billion new administrative capital east of Cairo. Egypt has also been negotiating with Russia for a new $20 billion nuclear power plant.

Many investors and economists fear the army is too involved in these and other ventures, threatening to crowd out private investors.

Austerity measures imposed under the IMF deal pushed annual inflation to 33% in August. By February, that had dropped back to 14.4%. But more planned measures will make it difficult to bring it down further. The government is widely expected to raise fuel prices again at the start of the new fiscal year on July 1.

“The challenge will be to get inflation down to single digits,” Abu Basha said. “We know they will eliminate most of the fuel subsidies by the end of the IMF program in 2019.”

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