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Egypt's economic woes

Anne Allmeling / cscJanuary 14, 2013

The revolution in Egypt has plunged the country into an economic crisis which could worsen in the coming weeks. Still, President Mohammed Morsi remains confident.

ILLUSTRATION - Eine ägyptische Ein-Pfund-Münze mit dem Motiv von Tutanchamun, aufgenommen am 15.08.2012 bei Geierswalde. Foto: Arno Burgi/lsn
Eine ägyptische Ein-Pfund-MünzeImage: picture-alliance/dpa

No one knows whether Egyptian President Mohammed Morsi secretly worries about the future of his country but he has enough reason to. The economy is in disrepair, tourists and foreign investors are staying away, and the Egyptian pound reached a new low in recent weeks. But the country's leader, who was a member of the Muslim Brotherhood until entering public office, doesn't appear to be worried. The upcoming elections are likely to be more important to him than the economy.

In two months, Egypt will vote for a new parliament. The results could issue a warning for the ruling Muslim Brotherhood. They could show just how important the country's economic problems really are.

Lack of tourists and investors

Egyptian foreign exchange reserves have fallen from more than $20 billion to $15 billion (from 15 billion euros to 11.2 billion euros) since the revolution, which ended with the fall of President Hosni Mubarak in February 2011. One reason is that tourists are staying away. Although the numbers of tourists rose in the first half of 2012 after the turbulent events in 2011, demonstrations and riots in November and December ended this positive trend.

An image showing a few number of tourists visting the pyramids in Egypt. (Photo: JULIEN WARNAND/EPA)
Only a few tourists are visiting the pyramidsImage: picture-alliance/dpa

"Cultural tourism especially is suffering," Torsten Schaefer from the German Travel Association (DRV) told DW. "That applies also to tourism at the pyramids or the Nile, despite there not being demonstrations there. The loss of interest from holidaymakers affects everyone who works in the tourism industry."

Investors are also being cautious. The Muslim Brothers have especially lost the confidence of companies in the West and the Gulf States due to their power politics in recent months. While foreign direct investment (FDI) was just under 7 billion dollars between 2009 and 2010, it fell to 1.8 billion dollars between 2011 and 2012. As a result, the Egyptian pound has fallen significantly against the dollar in the last two years. At the beginning of 2011, the rate was 5.82 Egyptian pounds to one dollar, last week, it was 6.51 pounds. And if more Egyptians exchange their pounds for dollars, the latter's share of total cash assets in the country will rise and accelerate the decline of the local currency.

Dwindling foreign reserves

Middle and upper class Egyptians are transferring their assets to the Gulf States or moving there. This has contributed to the strong growth of the real estate market in Dubai, which had been suffering from the financial crisis, but is now being rescued by Egypt's economic problems. But the emigration of highly qualified and wealthy individuals doesn't just apply to Egypt. All the countries which were especially affected by the Arab Spring are experiencing this trend.

Egypt is in the grip of a serious bread crisis brought on by a combination of the rising cost of wheat on world markets and inflation. (PHOTO: KHALED DESOUKI/AFP/Getty Images)
The Egyptian government subsidizes breadImage: Khaled Desouki/AFP/Getty Images

While the Muslim Brotherhood has become more influential in recent months in Egypt, it has not managed to get the country's economic problems under control, as the Central Bank of Egypt has recognized. On December 28, the bank warned that the foreign reserves had reached "the minimum and critical limit." The Brotherhood has only managed to keep the country from going bankrupt thanks to financial aid from abroad. Qatar recently doubled its financial support to five billion dollars - and thus is made it clear that it continues to back the Islamists.

Elections during an economic crisis

The Egyptian government is also hoping to obtain a 4.8-billion-dollar loan from the International Monetary Fund (IMF). But it has to meet certain conditions and cancel subsidies, which account for a large part of the national budget. Currently, the government subsidizes bread and electricity, among other things.

Traders selling food in Cairo (Photo: Hannibal dpa)
Egyptians are concerned about the rising food pricesImage: picture-alliance/dpa

"The removal of subsidies, for example, is disproportionately likely to hit the least well-off in Egyptian society," University of Aberdeen Egypt expert Andrea Teti told DW.

"This is certainly going to lead to protests from several quarters - both from the groups of people who have opposed the Islamist government thus far, as well as from those who have always provided the bedrock of its support, particularly in the provinces," he added.

Pundits expect food prices to rise in the coming weeks. Wheat and sugar are imported and the falling pound would make imports more expensive. Egyptians could choose to punish the Muslim Brotherhood.