Tuesday, November 10, 2009

EGYPTIAN ECONOMY AT A ‘CROSSROADS,’ SAYS REPORT

By Theodore May / Daily News Egypt
First Published: November 4, 2009

Straying from what officials and analysts have been saying recently, a report released this week poured cold water on those continuing to celebrate Egypt’s resilience throughout the economic crisis.

In a note titled “Egypt Rebounding: The Turtle or the Hare,” Cairo-based brokerage firm Beltone Financial starts off by saying that the country did manage to sustain a positive growth rate throughout the worst of the slowdown, which is an achievement that not many in the developed world can boast.

The problem that the brokerage firm foresees is that the country may be very slow to rebound to levels necessary to meet the growing demand for jobs and income.

For the 2008-2009 fiscal year, which ended in June of this year, the economy grew by 4.7 percent. That increase exceeded Beltone’s own prediction of 4.5 percent, and many analysts were buoyed by Egypt’s sustained growth at a time when so many other economies were collapsing.

Beltone notes that while domestic demand remained strong, it may well have been sustained external demand for Egypt’s goods that kept the Middle East’s most populous country in the green.

But in order to deal with the economic crisis, Egypt had to run up serious deficits as it sought to mitigate the recession’s effect domestically.

Beltone said it sees high deficits as one among a number of factors that could lead to a slow recovery for the economy.

“Despite growth being higher than expected,” said the note, “we believe the Egyptian economy is at a crossroad, having to deal with higher fiscal and external deficits and the specter of inflation, at a time when parliamentary and presidential elections in 2010 and 2011 could reduce the government’s willingness to proceed with difficult and sensitive economic reforms.”

Beginning earlier this decade, the government enacted a reform plan intended to overhaul a number of facets of the economy. The responsible ministers won a good deal of praise for their efforts.

But many of these plans, like, for instance, privatization, were derailed when the global economy hit the rocks last fall. For Egypt and most other countries around the world, damage control became the name of the game. And now with elections looming, Beltone reports, the government may be less likely to put its plans back on track.

Beltone does say that the economy will make a comeback, but the going will be slow.

For Egypt, like for many developing countries, there is a critical need for high positive growth. With unemployment high, income low, and an increasing number of entrants into the job market, a country like Egypt can’t afford a year of small negative growth, like that which the US experienced.

Many economists say that Egypt has to grow 7 or 8 percent a year just to meet the growing needs for jobs in the country. Belton says that sort of growth, while on the horizon, won’t happen soon.

“We believe that while growing at an expected 5.1 percent in fiscal year 2009/10 and 5.4 percent in fiscal year 2010/11,” said the note, “Egypt’s economy would still be operating below its actual growth potential. We believe the economy has the ability to bounce back from its low growth cycle, compared to 7 percent growth in fiscal year 2006/07 and fiscal year 2007/08, under certain conditions, which could pave the way to raising the growth momentum.”

Because Egypt has increased its dependence on foreign investment in recent years, Egypt may have to wait for developed economies like the US and EU to come back before Egypt can hit the growth it needs to sustain its citizens.