Unrest takes toll on Egypt’s economic growth

The political upheaval and lingering uncertainty in Egypt means a long wait for a return to the strong economic growth that the country enjoyed until the end of 2010

The tumultuous events of January and February that resulted in the collapse of President Hosni Mubarak’s regime have already had a dramatic impact on Egypt’s economy.

Demonstrations and strikes in the first quarter of the year brought manufacturing output to a near-standstill and political instability stopped tourism and foreign direct investment (FDI) in their tracks. Continued political uncertainty in the coming months is likely to mean a long wait for a return to the strong growth that Egypt enjoyed until the end of 2010.

The lack of comprehensive economic data for the past three months means that analysts are divided over the extent of the impact, but they all agree that it has been significant.

Among the more optimistic forecasts, Cairo-based Beltone Financial expects gross domestic product growth (GDP) of 3.5 per cent in 2010-11 and 4 per cent in 2011-12. This compares with 5.1 per cent in 2009-10. Riyadh-based Banque Saudi Fransi, meanwhile, has downgraded its forecasts for 2010-11 twice this year, first to 3.7 per cent and then to 2 per cent.

Egypt’s economic slowdown

The transitional government’s own expectation is for growth of about 2.5 per cent, a view shared by Moody’s Investors Service, an international ratings agency. “Given everything that has happened in Egypt in the last couple of months, economic growth will slow down to 2-3 per cent for 2010-11,” says Nondas Nicolaides, a banking analyst at Moody’s.

FDI is expected to fall about 40 per cent year-on-year, according to Moody’s. John Sfakianakis, chief economist at Banque Saudi Fransi believes that it could drop more than 60 per cent. Consumer spending is also likely to be weak in the coming months, due to the combination of high unemployment, ongoing strike action, rising inflation and political uncertainty.

Unemployment is likely to worsen as a result of the slowdown in the economy. Before the global economic downturn of 2008-09, Egypt’s government estimated it needed to achieve GDP growth of 7 per cent a year just to absorb incremental demand for jobs.

 “There will be a rise in unemployment,” says a Cairo-based economist. “Some people have already lost their jobs in recent months, and, in addition, there are between 650,000-750,000 new entrants to the job market each year.”

The financial pressures on Egypt’s citizens will be exacerbated by rising living costs.

“Inflation is clearly an issue,” says Richard Fox, head of Middle East and Africa sovereign rating at ratings agency Fitch Ratings. “The value of the Egyptian pound is drifting down and interest rates are quite high. There’s quite a lot of strike activity too, which is not going to help.”

Banque Saudi Fransi has increased its forecast for inflation in 2010-11 from 10 per cent to 11.1 per cent.

“Domestic inflationary pressures will keep on piling,” says Sfakianakis. “The expectation is for inflation to continue to rise for the rest of 2011.”

Tourism slump in Egypt

When it comes to generating national income, some sectors are feeling the impact more than others.

“Those that will be hit most will be tourism, manufacturing and construction activities, as well as financial services,” says Mohamed Rahmy, an economist at Beltone Financial.

The impact on tourism has been particularly severe. Beltone estimates that fiscal receipts from tourism will fall to $8bn for the 2010-11 financial year, which ends on 30 June, compared with $12bn in 2009-10.

“At the beginning of the revolution, occupancy rates fell to 0-5 per cent,” says Rahmy. Tourist arrivals in February dropped by an estimated 80 per cent compared with the previous

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Richard Nield is a freelance journalist, photographer and filmmaker covering the Middle East and Africa. In 10 years covering the region, he has been published and broadcast by clients including the BBC, Reuters, Al Jazeera, The Economist, The Financial Times, The Independent and Foreign Policy magazine. He has reported from throughout the region, including Algeria, Egypt, Libya, Morocco, Tunisia, South Sudan, Jordan, Lebanon, Syria, Kuwait and Saudi Arabia.