El Sisi must solve multiple economic problems if Egypt is to bounce back

There are three main economic problems on which Mr El Sisi’s government should move immediately: energy, public finances and external financing, says Mohsin Khan

Abdel Fattah El Sisi, the incoming Egyptian president, has inherited an economy in distress. Since January 2011, economic growth has averaged 2 per cent per year, inflation has been in double digits, the unemployment rate has shot up to 13 per cent, and the fiscal deficit has risen sharply.

The 2011 uprising exposed major fault lines in the economy. These include high rates of youth unemployment, rampant and widespread corruption, crony capitalism and widening wealth inequalities. All these need to be addressed.

Mr El Sisi has yet to properly articulate his vision for the Egyptian economy. During the election campaign, however, he identified high youth unemployment, dependency on foreign assistance, high rates of poverty and large income inequalities as key challenges – and offered a mixture of populist and traditional free-market policies to address these challenges.

There are three main economic problems on which Mr El Sisi’s government should move immediately: energy, public finances and external financing.

Egypt is in the midst of a serious energy crisis that has resulted in countrywide electricity shortages.

The proximate cause of the energy crisis in Egypt is lack of inputs. Installed capacity is 24,700 megawatts while electricity consumption is only 13,000 megawatts. Egypt generates electricity mostly by using gas and oil, and the country’s inability to pay for inputs has led to a cut-off in supplies and a consequent fall in electricity generation. The solution is to ensure that oil and gas inputs are available to the existing plants.

Egypt must eliminate payment arrears to international oil companies, currently amounting to $5.7 billion (Dh20.9bn). It must also raise electricity tariff rates to a level that eliminates subsidies. And it should seek to obtain oil and gas from the Gulf Arab countries as grants or on a deferred-payment basis.

The budget deficit, meanwhile, has shot up to 14 per cent of GDP. This is unsustainable and the government will have to move quickly to reverse the public finances, a fact acknowledged by the El Sisi campaign, which calls for reducing the deficit to 8.5 per cent over the next three years. The important question will be how to improve the fiscal position without creating downwards pressure on growth. The simple answer is that the country will need to create fiscal space to allow for expansionary spending policies that are essential in generating growth in the short-run.

This can be done by reforming the expensive subsidies system. Egypt will need to obtain sufficient external financing to support a fiscal stimulus programme and will need to increase taxes on higher earners.

Egypt will also need substantial foreign support to fill its financing gap. In 2013, soon after the fall of the Morsi government, Kuwait, Saudi Arabia and the UAE announced a package of $12 billion to ease the pressure on Egypt and to provide funding for the government’s plans to invest in infrastructure, support industry and increase wages. As such, Egypt was able to avert a full-blown foreign exchange crisis. It also enabled the interim prime minister Hazem El Beblawi to launch two fiscal stimulus packages totalling $8.6 billion last year.

The El Sisi government will need to seek further assistance from the Gulf of at least the same amount as was provided in 2013.

This financing would be directed into both budgetary support and projects that the president has highlighted as essential to Egypt’s future: infrastructure, housing and employment.

It should also negotiate an economic programme with the International Monetary Fund (IMF). This could bring in $5-6 billion directly from the IMF on very favourable terms, as well as additional financing from the European Union and other international financial institutions whose support is conditional on an IMF programme being in place. Floating bonds in the international capital markets, that are presently flushed with liquidity, could also easily generate $2-3 billion on relatively favourable terms.

Major economic reforms are necessary if Egypt is to generate the sustained high growth that will create sufficient jobs to absorb the new entrants into the labour market.

These reforms will take time to yield their benefits. In the meantime, it is essential for the government to demonstrate that the economy is turning a corner.

If the government can make sufficient progress in energy, public finances and in its external financing arrangements, it will likely be given time by the Egyptian public to put long-term economic reforms in place. Short-run economic success can breed long-term success, but failure could spell major political troubles for Egypt down the road.

(This article originally appeared on the Atlantic Council’s MENASource blog.

http://www.atlanticcouncil.org/blogs/egyptsource/three-immediate-economic-problems-sisi-must-tackle)

Mohsin Khan is a resident senior fellow in the Rafik Hariri Center for the Middle East focusing on the economic dimensions of transition in the Middle East and North Africa