An Economy Shutting Down

EGPEgypt’s economy is slowly shutting down under the MB regime, and continuing on the same path is a luxury that we cannot afford.

What do I mean by an economy “shutting down”? What we are going through is not a regular crisis driven by some global or local problem, like the global financial crisis or the real estate bubble bursting. We have passed that point last year. Today, our economy is slowly “shutting down” with permanent and irreversible damages starting to hit several areas. To use the analogy, we are like a patient suffering from organ failure.

This is not a pessimistic rambling, but rather a call for action, because the current situation is simply not sustainable.

So what does an “economy shutting down” look like? First, On the sectoral side, we can see many sectors severely suffering.

The tourism sector, which used to be 11.3% of the GDP, accounting for more than 19% of our foreign currency revenues; the tourism sector is shutting down. Egypt was recently ranked last among the world’s touristic destinations in terms of safety. Many hotels and resorts that fought for survival over the past two years in hope of a quick rebound are closing or considering closing. No new investments are coming to the sector. If the security situation and political stability are not back within a year, many resorts, hotels and other dependent businesses will shut down, laying off hundreds of thousands of employees and workers.

The manufacturing sector is also suffering, mostly from repeated labor strikes and disputes as well as an unfavorable business environment. Figures of factory closure are growing. Although figures are not officially confirmed, different reports claim that more than 1,200 factories have already closed. Last month I was talking to a young businessman who manages his family business. He told me that he decided to shut down his family factory, lay-off the 350 workers, and enjoy horseback riding instead because “it wasn’t worth it anymore.”

The construction and real estate sector is suffering in some segments. Construction and its supply chain constitute one of the most active and labor intensive industries. Over the past year, most of the infrastructure and large construction projects slowed down due to land disputes, problems in payments, and overall political uncertainty. The only part that is still active (and actually growing) is the informal building on agricultural lands! Abusing the deterioration in the state’s capacity to enforce zoning laws, many are grabbing the opportunity and building on precious agricultural land around Cairo and in the delta. Besides that, there are few if any new contracts for infrastructure or real estate development.

On the services side, many small businesses are suffering because consumers feel unsafe and are less willing to go out as Egyptians were always known to. Food and clothing retailers are suffering from declining sales.

The agriculture sector is facing a different challenge due to fuel shortages. Farmers depend on small tractors for their harvest and the fuel shortages are threatening their ability to harvest their crops on time, especially wheat. This is creating an uncertainty in the wheat supplies for next year.

Second, In addition to the sectoral problems, there are other structural issues.

Investments are drying up, whether local private, government, or FDI. Local private investments have been the main driver for growth over the past few years. Last year, most local capital was hiding and awaiting more clarity in the political situation. The lack of an end game for the political turbulence will keep this capital hiding. Government investments are shrinking as most of the revenues are redirected to maintaining social subsidies, paying debt interest and increasing government employee salaries. Foreign direct investments (FDI) went down from a peak of $11.3 billion in 2009 to less than $0.5 billion in 2012. The overall impact is that the GDP growth went down to ~2%; and is unlikely to grow until investments are back.

One of the reasons for the decline in local investments is the lack of a vision on how to deal with the business class. Most businessmen are now labeled as “feloul”. they are harassed by a government seeking more taxes; MB businessmen seeking to buy their businesses at dirt cheap prices; revolutionary youth accusing them of benefiting from the crony capitalism of the previous regime; workers seeing to extract higher wages; and a deteriorating infrastructure with frequent blackout, fuel shortages and port closures. For many, it is “not worth it anymore.” All of the above accusations are probably true for many of them; however, a country cannot afford to lose its business class. Egypt tried this before during the Nasser era with nationalization of businesses, confiscation of wealth, and kicking out most of the foreigners who constituted a big part of this business class. The results were grim. It takes a country 1-2 generations to re-build a globally networked and professionally trained business class.

In the midst of all of this, the only sector that is growing is the informal sector. Informality is quickly crawling over the little order that we used to have in Egypt. Street vendors are expanding like cancer and blocking the entrances to stores that pay rent. Traffic is blocked everywhere most of the day. Securing one’s assets are becoming a personal or business responsibility, with thefts growing exponentially. Everyone is rushing to buy electric generators to survive expected blackouts during the summer.

*   *    *

 Up till last year, most of our economic problems were “problems of transition” and everyone was waiting for the political transition period to end, hopefully with a more competent regime, to get back to their work, and to higher growth rates. Today, with no end in sight for the current incompetent regime, many of these changes are becoming permanent. It may take several years to reverse them.

In addition to the above, macro-economic problems are prevalent. For example, our foreign debt is growing a scary rate. We already borrowed or are planning to borrow around $21billion (this includes that anticipated World Bank). At this pace, we may double our national debt over the next 6 months (from 34 Billion). Our government budget suffers from a huge deficit of around one third of the budget.

If we end up in a new “equilibrium” point, it is likely to be a miserable one, characterized by social and political tension, worse security, higher unemployment and higher inflation, lower investments. We still do have a window of opportunity to save Egypt and its economy from the slow organ failure, but that window is likely to diminish if we do nothing before the end of the year. More later on how to do so.

To quote the Economist Magazine (in a different context), “hope is not a policy.”

Amin Elmasry.
13 April 2013.

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