The Egyptian economy in 2014: Egypt aims to reduce its budget deficit
The Egyptian economy passed through many political, social and security crises since January 2011.
The Egyptian economy passed through many political, social and security crises since January 2011.
The Egyptian revolution carries a challenging transition phase, starting with problems such as low foreign direct investments (FDI), high budget deficit, high debt rate, high unemployment rate, high poverty rate, and low standard of living. Facing the worst energy crisis in years, citizens are mostly outraged over the frequent power cuts, which have been gradually increasing to unprecedented levels throughout the past couple of years.
President el-Sisi has attempted to soften the blow of prospective economic hardship by appealing to ordinary Egyptians with a mixture of charisma, Nasser-style patriarchism and narratives about the importance of working for the greater good.
The crisis of rising US dollar against the Egyptian pound in turn led to a rise in prices of food commodities and gold, which will result in a decrease in the purchasing power and lead to higher inflation.
Although there was an increase of Foreign Exchange Reserves from $16,687 million in June of 2014 to $16,736 million in July of 2014, Egypt’s FX reserves represent a problem for the Egyptian economy. The country’s FX reserves averaged $23,795.90 million from 2003 until 2014, reaching an all time high of $36,038 million in December of 2010 and a record low of $13,448 million in March of 2013.
The total external and internal debt has risen to 1,708 trillion Egyptian pounds, with nearly 200 billion Egyptian pounds in annual interest rates. The net balance of domestic debt owed by the government was 1.445 trillion Egyptian pounds by the end of March 2014, an increase of 184 billion Egyptian pounds during the period from July-March of the fiscal year 2013/2014.
Since the January 2011 revolution, Egypt has been gripped by deepening stagnation, and the combination of slow economic growth and high inflation has placed mounting pressure on ordinary Egyptians.
Furthermore, political instability has spurred capital flight and harmed domestic businesses.
There is also a looming threat of workers’ unrest, which gathered pace after January 2011.
The unemployment rate, currently 13.4%, remains the biggest challenge facing the government.
Despite the announcement of the Prime Minister that overhaul of the state’s budget will reallocate funds in favor of social programs, (accounting for 53% of the total), the move is aimed at reducing the expected budget deficit from 350 billion Egyptian pounds to 288 billion Egyptian pounds. Nevertheless, a lot of criticism is directed against this policy of austerity.
The government cuts have caused public discontent, especially since the new budget will include an increase of 28% for the military and judiciary, while slashing subsidies for medicine and children’s dairy products by half. The government’s decisions, all publicly defended by Prime Minister Ibrahim Mehleb, raised the prices of every form of fuel for both ordinary consumers and industrial facilities and the prices of electricity and natural gas supplies for household use. Consequently, the prices in the market increased and this threatened many industries and economic sectors and reduced demand for goods and services.
The HSBC Egypt Purchasing Managers Index (PMI) for the non-oil private sector stood at 49.0 points in July, down from a six-month high of 51.5 points in June. Readings above 50 indicate expansion, while those below 50 point to contraction.
“The July 2014 numbers may also capture the first effects of last month’s subsidy cuts which seem to have not just lifted prices but hit demand, too.”
Egypt’s President Abdel Fattah el-Sisi has attempted to soften the blow of prospective economic hardship by appealing to ordinary Egyptians with a mixture of charisma, Nasser-style patriarchism and narratives about the importance of working for the greater good (i.e. the Egyptian nation).
A turnaround will not only require an economic reform but more inclusive government and political reconciliation because Egypt’s economic crisis has political roots.
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