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Uncertain future - economic problems in Egypt

Politically, Egypt has embarked on a new path. Economically, little is likely to change, the country's problems are too big. To solve it, a new political culture is needed.

Traders work at the Egyptian stock exchange building in central Cairo on June 25, 2012, a day after Islamist Mohamed Morsi was elected the country's first civilian president. The Egyptian press hailed the election of a civilian president, with some newspapers saying that the revolution that toppled Hosni Mubarak had defeated the holdovers of the old regime. AFP PHOTO/KHALED DESOUKI (Photo credit should read KHALED DESOUKI/AFP/GettyImages)

At the Egyptian stock exchange in Cairo, trade is suffering from the countries current state of the economy.

It was a night of frenzy, an hour of unexpected triumph for millions: Egypt's unpopular president would no longer be in charge; his - according to his oppontnts - too religiously oriented rule had come to a sudden end. Since Wednesday night, Mohammed Morsi's opponents have been hopeful the country is again able to move forward.

But can they be proved right? Politically, the country's future is uncertain. Economically, things look grim. At the least, Egyptian's have a long dry-spell ahead of them. Egypt lost out economically over the past two and a half years. Worse still: the whole country been steadily moving in one direction only: down.

Generous subsidies

Silhouettes of protesters waving flags (Photo: Ibrahim Ramadan / Anadolu Agency)

Anti-Morsi protestors celebrate the military coup that outsted the former leader

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.”

Economic impositions

Egyptians on escalators in a modern Cairo shopping center (Photo: KHALED DESOUKI/AFP/Getty Images)

It wasn't long before Egyptian's realized they were getting less for their money

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.

Master of waste

An elderly man is selling oranges on a market in Cairo. (Photo by Jeff J Mitchell/Getty Images)

Unemployment levels in Egypt are on the rise

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

It's because of this risk that some Egyptian businessmen view such forms of foreign aid with a certain amount of sarcasm: Saleh Diab is chief executive officer at the agriculture and energy-focused PICO group, as well as owner of the daily newspaper "Al masry al youm". He says that Egypt doesn't need billions of aid money: "Dollars from abroad would be all spent within one month, since we've had considerable exercise in loosing such Dollars again." As long as Egypt didn't have a clear vision for the future, financial aid would be pointless. "What we need," he says, "is a model, a recipe that we can follow."

Pitfalls and potentials

It's time for Egypt to make a move - and time is running out. Unemployment currently stands at 13 percent. And, year after year, says Masetti, more and more people want to enter the labor market. To keep unemployment levels constant, more than 700,000 new jobs would have to be created each year. "Studies indicate that a growth rate of over seven percent would be needed to stave off a further downturn. At the moment, growth rates for this year are expected to be just three percent.”

An aerial shot of the Suez Canal (Photo: CRIS BOURONCLE/AFP/Getty Images)

Egypt is geographically well positioned

And Egypt has potential, says Masetti. The economy is diverse, and with its 82 million inhabitants the country has an attractive market. “Another factor in Egypt's favor is its strategic geographical position. The country has the Suez Canal and is situated at a crossroads to Europe, Africa and Asia.” But in order to make proper use of this potential, political stability is a prerequisite.

Whether a new government can ensure this stability in Egypt is not yet clear, says Maha Azzam from the British research institute Clapham House. The military might give the impression that the country has become more stable and safer. But under the surface tensions are rising. There is a considerable amount of political divergence, which can explode at any time, adds Azzam. These tensions will only be reduced when there is political pacification within the country. Only when democratic institutions are permanently safeguarded will the investors come back to Egypt, Azzam explains. Before Egypt gets to be economically better off, there first needs to be a political overhaul.

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