Shortly after Defense Minister Abdel Fattah El-Sisi and his Supreme Council of the Armed Forces (SCAF) removed the former President Mohamed Morsi from power, an Egyptian owner of a small technology start-up told me that the ouster of the Muslim Brotherhood president was a positive development for Egypt’s economy. “The military understands the importance of foreign investment, and they will bring stability back to Egypt. Foreign investors and tourists will return now that the Muslim Brotherhood is gone,” he confidently declared. Nearly eight months later, it is clear that neither foreign investment nor tourists have been pouring into Egypt. Less clear, though, is where exactly to place the blame for Egypt’s economic woes. A close examination of Egypt’s economy reveals bleak prospects in the short-term; however, there is nevertheless some hope for cautious optimism.

Egypt’s Economy in Context
The three years following the January 25 Revolution of 2011 have not been kind to Egypt’s economy. During this period, the inflation rate increased to double digits, unemployment rose by 4%, and economic growth settled at an average of 2% annually. To make matters worse, the Central Bank of Egypt’s foreign exchange reserves of $35 billion decreased by nearly 50% in three short years.

The continual political instability within Egypt has certainly played a major role in creating the current economic predicament within Egypt. These last three years can be broadly classified into three distinct periods of relative instability: the post-revolution, Muslim Brotherhood rule and return of SCAF.

The post-revolution period lasted from January 25 of 2011 until the election of Mohamed Morsi in 2012. The transition government installed during this period was unable to undertake any major economic initiatives. Moreover, deadly clashes between protesters and SCAF contributed to a general atmosphere of political unrest. Though the IMF visited Egypt in April of 2011 and outlined a financing package, the negotiations between Egypt and the IMF never came to fruition.

The second period lasted from former President Morsi’s election and ended with his removal on July 3 of 2012. This period was characterized less by political instability and more by a general absence of any cohesive economic program. Rather, the Morsi administration appeared to rely more heavily upon divine intervention and financial assistance from wealthy neighbors partial to the Muslim Brotherhood cause than upon a well-formulated set of economic initiatives.

Finally, the last and current stage in Egypt’s economic plight was ushered in when Defense Minister El-Sisi removed former President Morsi from power on July 3 of 2013. Saudi Arabia, Kuwait and the UAE immediately responded to Morsi’s removal by promising approximately $12 billion in financial assistance. In return, the transition government, led by Hazem el-Beblawy, proposed an economic plan intended to raise the minimum wage, increase the foreign exchange reserves, address energy shortages and implement a financial stimulus package. It remains to be seen how effective these initiatives will be in reviving Egypt’s economy.

The Central Issues
While the challenges facing Egypt’s economy are various and multi-faceted, the issues of subsidies, tourism, foreign currency and financial assistance from abroad are particularly important in today’s economic climate. Exorbitant subsidies are a problem in Egypt that must be solved sooner or later. Annual subsidies account for approximately 10% of Egypt’s GDP and consume approximately one quarter of the country’s budget. Energy subsidies represent the lion’s share of all state subsidies, constituting approximately 20% of state spending. Reforming these unsustainable subsidies is a necessary step towards achieving long-term economic growth as well as a prerequisite for working with the IMF. The transition government of 2013 understood this quite well, but reforming subsidies in Egypt is no easy task. The state has long relied on subsidies as a quick-fix solution for complicated economic issues. As a result, many of Egypt’s poorer citizens have become dependent on the continuation of subsidies. Removing or curtailing these subsidies, especially during a period of economic hardship, would put millions of Egyptians at risk.

Egypt’s large tourism has also suffered substantially during the last three years, and 2013 was a particularly difficult year for the industry. Last year, the tourism industry brought in 41% less revenue than the previous year. Unfortunately, the beginning of a new year has not resulted in any good luck for this ailing sector of Egypt’s economy. Following a string of bombings throughout Egypt, a suicide bomber recently targeted a tour bus in the Sinai Peninsula. Ansar Bayt al-Maqdis, a terrorist group with ties to al-Qaeda, claimed responsibility for the suicide attack that left two South Koreans and one Egyptian bus driver dead. The group then warned tourists to leave the country in a move that was apparently part of the group’s attempt to cripple Egypt’s suffering tourism sector.

It is also important to note that tourism is largest source of foreign currency for Egypt. Huge losses in the tourism industry combined with violent protests in 2012 sparked a run on the currency that forced the government to spend billions of dollars in an attempt to stabilize the Egyptian currency. Nevertheless, the Egyptian pound continues to weaken, reaching nearly 7.0 pounds to the dollar. Economic forecasts predict that the pound could fall to as much as 7.29 pounds to the dollar by June of 2015.

The billions of dollars in financial assistance to Egypt from Gulf states played a central role in Egypt’s economic plight. Relying on financial assistance from Gulf states is not sound economic policy, and this is especially true when the financial assistance seems heavily influenced by political circumstances. It is no great coincidence that Saudi Arabia, Kuwait and the UAE pledged $12 billion to Egypt just days after SCAF removed former President Morsi. Considering that America suspended its annual aid to Egypt, it is particularly troubling that Egypt is more dependent than ever on Gulf handouts that come with unspoken political expectations.

On the other hand, the financial assistance from the Gulf has provided the country with much needed capital. The transition government already used some of this aid to implement a $4.3 billion stimulus package intended to increase employment and consumption. This fiscal stimulus package funded spending on infrastructure and increasing wages, and the IMF supported the initiative. Though it has yet to be introduced, a second stimulus is planned to increase the salaries of public sector workers. The IMF’s approval of these fiscal initiatives is encouraging and provides some reason for cautious optimism.

Hope for the Future
Though many of the economic indicators in Egypt are worrying, there are some signs for optimism. First, Egypt has secured, for the time being, capital in the form of financial assistance from the Gulf. With billions of dollars having already been secured and billions more promised, the Egyptian government can temporarily afford to be less concerned with its relationship to America as well as the suspended US aid. Instead, aid from Saudi Arabia, Kuwait and the UAE funded an economic stimulus intended to improve infrastructure, and a second stimulus promises to increase the wages of public sector employees. These measures are likely to result in modest increases in employment and consumption, and consequently it is unsurprising that the IMF approved of these initial measures.

The elusive IMF loan to Egypt may also become an actuality at some point in 2014. Talks over the loan, which would provide approximately $4.8 billion to Egypt, began in 2011 but fizzled out over the past two years. It is unlikely that the transition government will finalize any final agreement with the IMF, and this is especially true because any IMF loan will only be dispersed if strict financial reforms are enacted. Therefore, it is likely that the transitional government will let the new government weigh the costs and benefits of introducing austerity measures in order to secure an IMF loan.

Of course, the IMF’s $4.8 billion pales in comparison to the money that Gulf states are pouring into Egypt. Yet Gulf aid is influenced heavily by the prevailing political situation in Egypt, and the political winds in Egypt are prone to change directions quite quickly these days. An IMF loan, on the other hand, would be dependent on enacting sound economic policy, a move Egypt can’t afford to postpone much longer.

Political instability, increasing instances of terrorist attacks and long-ignored economic challenges have severely hampered Egypt’s ability to demonstrate significant economic growth since the January 25 Revolution of 2011. For the time being, Egypt has secured capital from the Gulf; however, that money will not last forever nor is it entirely unconditional. Egypt must seize the opportunity to develop a coherent fiscal policy and a sound economic vision for the country. Considering that Egyptians built the Great Pyramid of Giza nearly 4,500 years ago, there’s no reason to believe that they can’t come together to create a more effective economic policy today.  

By Robert Mogielnicki
Robert Mogielnicki works as a business analyst with Oxford Strategic Consulting. He is currently pursuing a graduate degree at the University of Oxford where he focuses on issues of economic integration in North Africa, nationalization policies in the GCC, and business development in the Middle East. He can be contacted at robert.mogielnicki@oxfordstrategicconsulting.com.