With the overwhelming success of the Egypt Economic Development Conference, the opening of the New Suez Canal and a reform-minded president one year at the helm, Egypt is living a true watershed moment – a moment defined by the creation of new opportunities
The keystone of the Middle East and a major player in regional and world politics, Egypt is emerging from one of the most tumultuous periods of its recent history, with President Abdel Fattah El-Sisi looking to continue down the road to recovery since celebrating his first year in office in May.
Much like his predecessors, Hosni Mubarak, who reigned for 30 years before being deposed in the wake of the Egyptian Arab Spring in 2011, and Mohamed Morsi, the leader of the now banned Muslim Brotherhood, President from June 2012 to July 2013, President El-Sisi’s core challenge can be summarized in two figures. Two thirds of 90 million Egyptians are under 35 years old, and a quarter of the population lives under the poverty line, according to the International Monetary Fund (IMF).
It’s the frustration and aspirations of a vast and predominantly young population that fuelled the revolution of 2011, threw it into the arms of a cunningly populist “brotherhood”, and now spurs President El-Sisi’s government’s drive for economic reforms that are just as essential to domestic peace as they are to regional stability.
Speaking at the World Economic Forum in Davos, Switzerland, earlier this year the Egyptian President said, “there is no doubt that sustainable development is an issue of paramount importance” and that “Egypt is fully aware that it needs to open up to the world to realize its ambitions.”
With strong financial backing from the Gulf countries, which have pledged or given a combined total of $35 billion in the past year with the aim of strengthening an ally they consider crucial to counter the Islamist threat, the government of President El-Sisi has already accomplished a lot to recover from the economic wreckage of the past four years.
“The authorities have embarked on an economic reform program to raise growth, create jobs, and contain fiscal and external deficits and the loss of foreign exchange reserves”
Christopher Jarvis ,
“There is no doubt that sustainable development is an issue of paramount importance…Egypt is fully aware that it needs to open up to the world to realize its ambitions”
Abdel Fattah el-Sisi , President of the Arab Republic of Egypt
While it has been experiencing recent difficulties, the Cairo Stock Exchange beat all of its competitors around the world in 2014, with an index that grew by nearly 30% in dollar terms, and offering the best returns for investors.
But the key word in Cairo is not so much economic growth but rather inclusive development. Indeed, President El-Sisi is acutely aware that the economic well-being of millions of impoverished families is the safest way to ensure political stability and prevent radicalism. One of his key reforms was to gradually suppress subsidies on food and energy that weighed heavily on the State’s budget – Egypt spent $3 billion a year on wheat imports, making it the largest importer in the world – and were a source of corruption.
An innovative initiative in this sense was the introduction earlier this year of a smart card system for subsidized flour and bread. Reuters news agency reports “under the new system, families are issued plastic cards allowing them to buy five loaves of bread per family member per day. Buyers no longer have to queue. Bakeries are paid for the subsidized loaves they sell, rather than being given a fixed allotment of cheap flour, making it harder to siphon off subsidies.”
This measure “has freed up billions of dollars in the government’s budget so that we can now invest more in education and health care programs for those who really need it,” says the Prime Minister, Ibrahim Mahlab. “Working on creating a social safety network is perhaps the most important thing we are doing right now.”
The government’s 2015/2016 draft budget envisions a 12% increase in spending on social programs at 431 billion Egyptian pounds ($55 billion), or nearly half of total public expenditure, and a deficit of 9.9%, lower than the current 11%. The budget is based on encouraging indicators: growth rose to an annualized 5.3% in the first half of this fiscal year, compared with 1.2% in the same period the year before. Unemployment, a particularly pressing issue, is still achingly high at 12.8%, with 55% of all those unemployed aged 15 to 24, according to national statistics (2013), but it is falling from its January 2014 peak of 13.4%.
The IMF has lauded the reforms implemented so far: “Egypt has chosen a path of adjustment and reform which, if followed resolutely, will lead to economic stability and growth,” it stated in February. “For a number of years, Egypt has suffered from large fiscal deficits, rising public debt, fragility in the balance of payments and, hence, losses of foreign exchange reserves. But the authorities have embarked on an economic reform program to raise growth, create jobs, and contain fiscal and external deficits and the loss of foreign exchange reserves,” added Christopher Jarvis, IMF Mission Chief for Egypt.
On the expenditure side of the budget, the government started to reform the system of energy subsidies. It also started to get a grip on the public sector wage bill. On the revenue side it introduced measures such as higher tax rates for high earners. “Those measures have already made a big difference in curbing the unsustainably high fiscal deficit,” said Mr. Jarvis.
The fiscal program also includes enacting a long-awaited value-added tax which, if implemented successfully, “can greatly boost government revenues and, hence, improve the country’s fiscal position at large.” Last but not least, “the authorities are pursuing structural reforms and developing measures to protect the poor, increasing cash transfers and spending on health, education, and infrastructure,” the IMF summarized in its report.
In parallel to reforming a notoriously bureaucratic and cumbersome economic system, the El-Sisi government is wooing foreign investors, well aware that it needs foreign money to compensate its deficit and its debt, which stands at 95% of the GDP. The new investment law presented a few months ago goes a long way towards achieving this.
“When we began reform in June 2014, we had a very clear vision based on three pillars: structural adjustment and fiscal consolidation; an investment stimulus plan with the launch of mega-projects and incentives to the private sector; and improving the investment climate,” emphasizes the Minister of Investment, Ashraf Salman.
The objective of the new investment law is to streamline regulations and facilitate investment and job creation. Up until now, an entrepreneur had to obtain 85 different permits in order to set up a company, a process that could last up to five years. Now, they will be able to manage all the paperwork through a one-stop agency. “This is a major change and it will take some time to implement it,” adds Mr. Salman.
Although it will certainly take time, investors have already voted with their purse and their feet. No less than 2,800 international political and business leaders flocked to the Egypt Economic Development Conference (EEDC) held in March in Sharm El Sheikh. The event had been carefully designed by the Egyptian authorities to send a message to the world: we are open for business. “Egypt is going towards the future. Egypt is welcoming investors who are seeking to use the chances given to them by Egypt and giving a better life for Egypt,” said President El-Sisi in his opening address.
The conference was a resounding success from both a political and a business perspective. Aside from the U.S. Secretary of State, John Kerry, and Managing Director of the IMF, Christine Lagarde, the conference gathered the Italian Prime Minister, Matteo Renzi, the Crown Prince of Saudi Arabia, Muqrin bin Abdulaziz – whose country offered $4 billion in funds to Egypt – and the United Kingdom’s Foreign Secretary, Phillip Hammond, who came leading a strong British delegation of businesses, including British Petroleum (BP), which signed a $12 billion investment deal in the West Nile Delta, the single largest investment deal in Egypt’s history. In total, the conference garnered more than $130 billion in direct investment and signed commitments.
Concerning mega-projects, and apart from the opening today of the New Suez Canal, which was financed by a public bond transaction that “raised $8.5 billion in eight working days”, as the Minister of Investment proudly notes, the government unveiled at the conference plans for a sprawling new capital city to be built 28 miles (45 km) east of Cairo. The government hopes this new $45 billion development will create 1.5 million jobs.
However, in his closing address, President El-Sisi called for more foreign investment and said that his country needs “no less than $200 to $300 billion to have real hope for the 90 million Egyptians to really live, really work, and really be happy.” If Egypt delivers on the promises made at the conference for reforms and stability, President
El-Sisi’s objective seems definitely attainable given that before 2011, Egypt was emerging as one of the world’s top destinations for foreign capital.