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State of denial - Egypt’s economy



Egypt has squandered billions of dollars in aid. With more on the way, is it at last ready to reform?



Source: http://www.economist.com/news/middle-east-and-africa/21703393-egypt-has-squandered-billions-dollars-aid-more-way-it





Economy in State of Denial !!

إتاخر خدني جنبك ٢| مصر بتشحت



AFTER Abdel-Fattah al-Sisi, Egypt’s president, welcomed hundreds of foreign dignitaries to the seaside resort of Sharm el-Sheikh last year, he made them a simple pitch. The upheaval that followed the Arab spring in Egypt was over, said Mr Sisi, who had ousted his Islamist predecessor, and the country was ready for their investment. He promised stability and economic reforms. His guests, in turn, rewarded Egypt with cash, loans and new business. It was “a moment of opportunity”, said Christine Lagarde, the head of the IMF.

That opportunity has been squandered. A team from the IMF is now back in Egypt negotiating a new package of loans thought to be worth $12 billion over three years. Mr Sisi desperately needs the cash. His government faces large budget and current-account deficits (almost 12% and 7% of GDP, respectively), as Egypt’s foreign reserves run perilously low. An overvalued currency, double-digit inflation and a jobless rate of 12% complete the dismal picture. Potential investors are staying away.

Egypt’s government inspires little confidence. The new IMF package would be contingent on reforms that politicians have talked about for years, but failed to implement. Take a value-added tax, which would raise much-needed revenue. A proposal is now before parliament, but it has caused uproar owing to concerns over inflation, which has just hit 14%. Similar misgivings caused Mr Sisi to back away from a promise to end fuel subsidies, after trimming them in 2014. Parliament is holding up reform of Egypt’s bloated civil service, despite Mr Sisi’s pledge that nobody would be fired.

In the face of such inertia, the World Bank has withheld a separate package of support. The African Development Bank may do the same. Even the Gulf states, which strongly support Mr Sisi and have given Egypt billions of dollars in aid, seem to be losing faith. The United Arab Emirates is believed to have pulled its advisers out of the country in dismay. The latest instalments of aid have been slow to arrive.

Hoarding is haram

The government’s fecklessness extends to Egypt’s most pressing problem: its overvalued currency. While the official exchange rate is 8.83 Egyptian pounds to the dollar, the black market rate is over a third higher. The demand for dollars has outpaced supply owing to steep drops in tourism and foreign investment, key sources of hard currency. So the government has tried to keep dollars in Egypt by, for example, limiting bank withdrawals. Al-Azhar, the country’s Muslim authority, has declared it a sin to hoard foreign currency. But these efforts have merely scared off potential investors and hobbled Egyptian importers.

There is concern that a weaker pound would lead to even higher prices, as Egypt imports many staples, such as wheat. But the government ought to worry more about its broken subsidy schemes. Egypt is the world’s largest market for wheat, which is bought by the state and used to make heavily subsidised bread. The state buys some wheat at home at an outrageous mark up to encourage local farmers. This scheme drains public coffers and is horribly corrupt. Farmers mix foreign wheat with their own and sell it at jacked-up prices. Bureaucrats exaggerate the amount of wheat in government silos and pocket some of the subsidies. A smart-card system that is meant to track bread purchases has been hacked, allowing some bakers to load up on subsidised flour.

Mr Sisi warns that “harsh economic measures” are coming. Tarek Amer, the governor of the central bank, admits that defending the pound was a “grave error”. The government seems likely to pass a number of reforms and even devalue the currency. But economic policy is seldom implemented properly. The government, for example, has backed off a plan to start paying Egyptian farmers the market rate (plus a small subsidy) for their wheat. Rather, Mr Sisi has trumpeted various mega-projects, such as expanding the Suez Canal, to pump up national pride—and his ego. But, they have done little to boost the economy. Revenue from the canal has actually fallen since the expansion was completed last August.

A related project will create a special economic zone, supposedly with fewer regulations and lower taxes than the rest of Egypt, along the canal. The head of the zone, Ahmed Darwish, has insisted that “we are completely independent of the government decision-making process.” Still, few companies have signed up to join the zone—perhaps because Mr Darwish’s claim has already been undermined by the government’s decision to raise the corporate-income-tax rate, even in special economic zones, from 10% to 22.5%. Compare that with Dubai’s Jebel Ali port, where companies will pay no tax at all for 50 years.

Plagues of Egypt

At least policymakers are thinking of ways around Egypt’s overbearing regulatory system. Mr Sisi uses the army for many of his projects, increasing its already large role in the economy. Ordinary firms, though, are strangled by red tape. Nothing moves without a bribe. Egypt comes a woeful 131st in the World Bank’s ease-of-doing-business ranking. An investor must get permits from 78 different official bodies to start a new project, according to the government. Its promise of a “one-stop shop” to replace them all, made 18 months ago, has so far come to naught.

The bureaucracy is so predatory that many stay small to hide from it. An estimated 18m businesses are not monitored (or taxed) by the government. The informal economy is thought to be about two-thirds the size of the formal one.

But informal enterprises find it hard to borrow money, and therefore hard to grow. This year the government mandated that 20% of bank loans go to small- and medium-sized firms, but it is not clear how informal ones will be treated (or whether there are enough promising small enterprises to absorb that much cash anyway). Banks may struggle to finance this plan and still keep lending to the government.

Egypt is also failing to equip its young people with useful skills. More than 40% of them are unemployed. A university education is in effect free, but the quality is poor and universities make little effort to teach skills that local employers actually need. Egypt produces many doctors—but more of them end up in Saudi Arabia than in Egypt. Other graduates count on the public sector to provide work, but job openings are increasingly scarce.

Jobless graduates have held dozens of protests in recent years. Adel Abdel Ghafar of the Brookings Doha Center, a think-tank, notes the “direct correlation between youth unemployment and the socioeconomic and political stability of a state”. As Egypt’s youth population continues to grow, some call the country a powder keg.

But Egypt also has a history of muddling through. Hosni Mubarak, a previous strongman, also received help from the IMF and embraced its suggested reforms, leading to impressive growth in the 1990s and 2000s, even as the masses continued to struggle. Mr Sisi is hoping for more broad-based development. So far, however, there are few signs that he will do what it takes to achieve it.

From the print edition: Middle East and Africa