Economy faces uphill task

Dubai: A reformed Egyptian government must take emergency measures to supply basic necessities in the market, restore transport and logistics and kick-start the production cycle before laying the groundwork to deal with chronic economic problems, Egypt-based economists say.

"In the next few days the priority is to establish stability in the economic environment," said Abdul Fatah Al Gibali, Deputy Director at Al Ahram Centre for Political and Strategic Studies.

Food supplies must be secured to ensure that inflation rates do not increase further due to the shortages and have a negative impact on the poor, he said. The pre-protests inflation rate was 11.2 per cent and that has jumped since the unrest, he added.

The government said it will begin by compensating shops and small businesses for property damage and business delays during the 14-day anti-Mubarak protests that brought the economy to a standstill since January 25. Egypt announced an $854 million (Dh3 billion) compensation fund on Friday.

Agenda

Facing a set of complicated economic challenges ahead, the government has its hands full with priorities on the economic agenda in the short term.

It must attract investors and regain their confidence to remedy the loss of foreign direct investments (FDI) that resulted from political uncertainty, El Gibali said.

It must also fill the hole in private investments, which have reduced due to security issues during the turmoil and the recent account freezes on elite businessmen that are banned from leaving the country. The government is dependent private investments and FDI for a healthy growth rate that it needs to increase employment, Al Gibali said. "There's confusion in the private sector. The government will not be able to fill this gap." The government is also facing the dilemma of increasing expenditure on subsidies on one hand and having a budget deficit on the other that will limit its public spending and ability to meet protestors' demands for better wages, he added.

In an attempt to placate the protesters, Egypt's newly appointed Finance Minister Samir Radwan said on Saturday that the government won't reduce subsidies even if global prices of food and commodities rise.

Public spending will be used as a tool to "achieve social justice," he told a news conference in Cairo. About 63 million Egyptians depend on subsidies.

Deficiency

The government's budget deficit in the fiscal year to June 2010 was 98 billion Egyptian pounds (Dh60 billion) or 8.1 per cent of gross domestic product (GDP). The deficiency is expected to increase to 10 per cent of the GDP in 2011-2012 because of food and fuel inflation, shortage of resources and reduced revenue from tourism, Al Gibali said. Resorting to borrowing will be more expensive as Egypt's credit rating was updated to negative by several credit rating agencies recently.

In the short term, the government also has to assess damage to the economy from the protests and set a recovery plan, said Dr Mahmoud Hussain, managing partner of Integrated Development Consultants, a management consultancy that advises various Egyptian government bodies.

Egypt is losing $310 million a day because of the current situation, according to estimates by French investment bank Credit Agricole.

The government needs to adopt an action plan, a timeline, work mechanism and people to hold accountable for reform, said Hussain.

"Up until now we didn't see a concrete plan for anything. All is talk, all is slogans. They're going to confront unemployment, OK but what actions will they take?"

Multiplier effect

A top priority on the agenda is stimulating the business sector, especially sectors with growth potential that have a multiplier effect on the economy and can generate employment, he said.

The long term economic to-do list will depend on the political direction of the next ruling party, analysts say.

The best-case scenario for the economy is a liberal government taking over and implementing "pro-poor growth policies" and a democratic market, Al Gibali said.

This means letting the market forces come into play but with a strong state that enforces laws and an independent judiciary. "I have spoken with some of the financial and economic ministers and they are convinced of this," he said.

Grim scenario

If the government remains with the same elements from the ruling NDP party, the economic scenario turns grim.

"There will be no econ-omic reform. It will all be patchwork, just statements that absorb people's anger," said Dr Abla Abdul-Latif, a Professor of Economics at the American University of Cairo. "The worst-case scenario is waiting like this. The economic answer lies in the political arena."

There are difficulties ahead for the government in addressing the economic agenda.

Bureaucracy, a slow and inefficient judicial system, corruption and market monopolies are "crippling the business sector, said Hussein.

"The government created monopolies and now it has to face the monster," he said referring to private monopolies in steel, iron, cement and retail.

In the Egyptian stock exchange 10 brokerages control 60 per cent of the bourse, he said.

Solutions

Going forward, the government has to create a planning board of economists and political leaders to study the current situation and propose solutions, said Hussain.

It also must enforce corporate law for a level business field, such as antitrust laws to ensure fair competition, and "water-tight" regulations, he added.

The IMF and World Bank need to step in with a package of aid for Egypt to ensure stability in this critical region, Hussain said.

The question now is whether or not the protestors on the street will give the government the chance to pursue its economic agenda.

Going with the demands of the popular protest—higher wages and more jobs among others-- means ruining the fiscal policy, said Al Gibali, pointing to the government budget deficit.

"We need to stop looking at the budget deficit as a disease. It's a way of activating the economy and solving a problem, then we can correct the deficit later," said Abdul-Latif.

The solution to Egypt's structural problems now is to increase productivity, improve education, and graduate people with skills required in the market, she said.