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Chatham House dissects Egyptian economy

Royal Institute of International Affairs examines interim government performance, post revolution economy political participation and IMF development

Royal Institute of International Affairs examines post 3 July  interim government performance (AFP Photo)
Royal Institute of International Affairs examines post 3 July interim government performance
(AFP Photo)

The interim government is unlikely to take decisive action to support the ailing Egyptian economy, London-based Royal Institute of International Affairs, Chatham House, asserted in a November report on the government’s economic performance.

The “Egypt in Search of Economic Direction” report attributed this hesitation partly to “the cushion of the Gulf aid, partly because of political uncertainty and partly because of lingering hostility to neo-liberal economic policies among the political forces behind the revolt against Morsi.”

It added that “the government formed by Prime Minister Hazem El-Beblawi after the coup against Morsi has a similar profile to those during much of the Sadat and Mubarak eras, drawing on technocratic and academic elite broadly supportive of liberal economic policies and prepared to tolerate a degree of authoritarianism.”

The report stated that the financial support the interim government has received from the Gulf countries, namely Saudi Arabia, the United Arab Emirates (UAE) and Kuwait, will enable it to survive the next few months without facing a balance of payments (BOP) crisis.

The economic research indicates that encouraging private investment and the pursuit of medium-term targets, which will help in gradually decreasing the fiscal deficit, formed the base of the policy framework for international assistance.

The report added that the risk the government now faces is the fact that Gulf aids may be offering a temporary stabilisation effect on the BOP adding that sufficient confidence in the country’s political and economic prospects is essential for private investors’ commitment in new projects.

“The Gulf aid will help to build such confidence. But investors will still be deterred by the threat of political violence and by the new regime’s heavy reliance on coercion to keep the Muslim Brotherhood in check,” the report said.

“Without significant inflows of foreign direct investment and a recovery in exports and tourism, Egypt’s dependence on Gulf aid and on increased remittances will only grow,” the report continued, adding that “the aid tap could be turned off abruptly if oil prices were to fall or if the political mood in Egypt or the Gulf states were to change, and remittances are also vulnerable to the same factors.”

Post-revolution economy

The report discussed the economic development through the political discourse over the past two and a half years and explored the extent to which the underlying economic forces that have shaped policy continue to operate.

On the economically driven revolution, the report stated that “the slogan ‘Bread, freedom and social justice’ made clear that the cause of creating a more equitable economic system was at the heart of the revolutionary movement.”

The report stated that the failure of the governments that ruled after Mubarak’s overthrow left the country in a “perilous state.”

On the dangerous economic situation, the report said that “real GDP growth averaged only 1.4% during the two-and-a-half years after President Hosni Mubarak’s overthrow.”

The report further explained that “foreign exchange reserves provide only three months of import coverage despite recent inflows of billions of dollars from Gulf Arab states, the fiscal deficit has reached almost 14% of GDP and the official unemployment rate has risen to 13.3%.”

The economic study added that the economy suffered the effects of the political turbulence the country witnessed with growth slowdown, capital pour out and absent tourists.

“Responsibility for day-to-day management of the economy has remained with technocrats embedded in the system since the Mubarak period,” it added.

Political participation

Discussing how the political developments influenced the economic improvement the report mentioned that the Muslim brotherhood focused their energy on consolidating its political position” at the cost of polarizing society and neglecting the economy.”

On how political groups have participated in the economic discourse, the economic report said that opposition groups didn’t constructively participate with economic issues such as lining up behind an IMF-approved.

The report pointed out that even though civil service since the revolution, the Mubarak-era civil service has been left to manage the economy on the basis of the systems left in place.

It mentioned, however, that “continuous struggles for control over the state have meant that there has been no group with a sufficiently secure political base to take responsibility for an economic policy programme that would have to be presented, promoted and defended before the public in a coherent and consistent manner.”

IMF fluctuations

On the development agreement with the International Monetary Fund (IMF), the research institution said in its report that the technocrats submitted relevant documents to the IMF and that a standby credit was made available in May, however, “the SCAF [Supreme Council of Armed Forces] was not prepared to take the risk of signing off on the programme.”

Following the Muslim Brotherhood’s rule, another agreement was announced, which according to the report would have passed to the IMF executive board in December, if not for the hold the Brotherhood placed in order to consolidate their power through the constitution and parliamentary elections.

“A pattern has been set over half a century, whereby Egypt has sought to play the IMF off against other donors in order to secure financial support at the lowest cost in terms of reforms to be implemented, based on the presumption of the country’s strategic importance and that it is too big to fail,” the report explained.

The final announcement by Deputy Prime Minister Ziad Bahaa El-Din on Tuesday that Egypt had postponed any decision on taking a $4.8 billion loan from the IMF has given the government the luxury of time while it makes economic reforms.

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