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Strategy management consultant & Engineer. I write about politics, economics, business,and technology. I'm a nationalist with libertarian capitalist views

2011-06-09

Egypt's ruined economy


Egypt's ruined economy

Everyone will agree history was made in Tahrir Square and Egypt's politics took a great step forward with the ouster of President Hosni Mubarak. But have Egypt's economics taken a big step backwards?
One of the generals running the country presented a picture of his country's economy that made me think, "What in the World?"
He says foreign direct investment is now down to zero. Egypt's foreign reserves are fast getting depleted. Then there's the tourism industry, which employs 2 million people but is sitting idle with the world continuing to shun the Pyramids of Giza and cruises down the Nile.
That's $1 billion of lost revenue every month. Growth has crawled to a standstill. 
Meanwhile, tens of thousands of workers, emboldened with a new sense of freedom, are staging strikes to demand better pay. Confronting them would mean work stoppages. Appeasing them will cost money, and the state's coffers aren't exactly overflowing.
Then there's oil. The revolutions of the Middle East has sparked a cycle of pain in the crude markets. Look at three countries that have been hit hardest by people power movements - Egypt, Tunisia, Syria. They are all oil importers. Egypt then will go from growth in 2010 to shrinking GDPs this year.
Now, look at their neighbors who managed to stave off the wave of protests through a mix of bribery and appeasement - Qatar, Saudi Arabia and Kuwait. They're all net oil exporters with vast cash reserves.
That's why the dichotomy is actually getting worse, because oil importers need to spend more to buy the same amount of gas. Also, to keep political support at home, they need to increase subsidies on things like food - potatoes, carrots - because everything costs more, thanks to oil-driven inflation here.
And then there's this. Unlike previous years, the gulf countries, the oil-rich countries, actually want oil prices to be priced higher because they need the cash. They need to support their own spending plans for new cities and to more payouts to suppress dissent. For the first time in history, oil is averaging nearly $100 a barrel for more than a year. Even the Saudis need that cash.
If Egypt's economy doesn't stabilize soon, the IMF will soon come knocking on its door. And what will it demand? Economic reform to promote growth, of course, which means what? A devaluation of Egypt's currency, possibly? The reduction of subsidies? The privatization of industries? Anything to get the fiscal house in order and generate new economic growth.
But the problem is that economic reform is now a tainted idea. In the people's minds here, it's a phrase associated with Gamal Mubarak, Hosni's son, and his businessmen friends.
Those policy changes made by Gamal Mubarak in 2004 onwards triggered strong growth in Egypt, though also unequaled growth and charges that it unduly profited friends of the regime.
Over the last decades, however, countries from China to Brazil have found that if you want economic growth, the surest path is reforms that open your economy up to markets and trade. But no Egyptian politician is going to say that today. So the demands of economics will bump up against the demands of politics.
Who will win? Egypt's future might depend on finding a creative solution to this problem.

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