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Is the Egyptian economy on the brink of collapse? In recent weeks, a great many media reports and official statements have responded to this question affirmatively. For instance, a well-known presenter on a private channel several weeks ago held that the Egyptian economy will go bankrupt in three months. Such statements demonstrate a lack of knowledge of basic economic concepts and are more often than not contradicted by economic reports issued by the government itself and international financial institutions such as the IMF and the World Bank.
To start with, economies as the total of productive activities by a given population cannot go bankrupt because they are not legal entities like governments or companies that may fail to meet their financial obligations. Hence, the TV presenter’s remark shows how the economy and the state have been confused, perhaps deliberately, in the media discourse. Moreover, the financial position of the government is not in a state of peril at the present time. Indeed the Egyptian economy has been suffering from severe contraction since the breakout of the revolution in January 2011, but the slow down has very little to do with the explanations being circulated.
It’s true that government revenues have been hard hit by the economic slow down, which has resulted in a widening public deficit. The deficit this year is expected to hover around 11 percent of GDP as compared to 9 percent in 2010. This is not a dramatic increase considering that the deficit hit almost 20 percent of total GDP during the external debt crisis of the late 1980s. The same applies to the inflation rate that now sits at 12 percent, a figure not significantly different from the average inflation rate since 2006, which has been increasing due to rising international food and fuel prices.
Public debt has been a structural problem inherited in full from Mubarak's long reign and is not a result of recent developments. Public debt in Egypt has been in the red for the last decade or so as it approached 80 or 85 percent of the total GDP according to conservative estimates (100 percent according to other sources), which exceeds any safety limit if the Copenhagen criterion of 60 percent is taken as a standard. Yet, there are no indicators that the government is facing imminent default in the short term. The bulk of the public debt is denominated in Egyptian pounds as the Mubarak regime maintained quite a conservative external borrowing policy since the massive debt relief of 1990/1991 in which more than half of Egypt's foreign debt was slashed and the other half rescheduled. As a matter of fact, foreign debt stock remained constant in absolute terms ranging from 28 to 30 billion dollars between 1993 and 2010. This resulted in a decrease of debt service as a percentage of total annual exports from 15 percent in 1993 to 9.6 percent in 2000 and further down to 5.6 percent in 2006. This makes foreign debts quite manageable and may even enable the Egyptian government to conclude syndicated loans from the World Bank to undertake some capital injection into the economy.
There does however seem to be a problem with international reserves, which have been declining at alarming rates in the first half of the current fiscal year. Dollar-based reserves fell from USD 36 to 28 billion. This rate of depletion may eventually lead to a decline in exchange rates and can thus cause an upsurge in import prices leading to higher inflation. However, this drop is not unprecedented. Foreign reserves fell from 20 to 14 billion dollars in 2002/2003 and the economy did not collapse back then. Foreign reserves are there to be used in times of crisis; using them for their proper purpose is not necessarily a sign of danger.
Meanwhile, not all foreign earnings have been hit by the recent political events. The Suez Canal has been functioning quite normally with a 12 percent income increase in the first two months of this year. Egyptian workers' remittances stand at an estimated LE 8 billion. The hammer has fallen the hardest on tourism, which has proven to be quite volatile, and foreign investments. Yet, the decline in tourist arrivals since January 2011 is no worse than the aftermath of the Luxor massacre in 1997.
The discourse of economic collapse is a useful tool to curb labor strikes and protests in general, but it doesn’t match up to the facts. Immediately after the ouster of former President Hosni Mubarak, the media and government criticized labor strikes and sit-ins as “factional” and warned that these actions threatened Egypt’s economic well-being. The fears being peddled about an impending economic collapse are no different. Egypt is suffering from an economic slowdown and maybe a recession. The IMF has cut its forecast of economic growth to 1 percent, which is negative in per capita terms, from a previous forecast of 5.5 percent in 2011. Yet, this is far from a collapse. The current political upheaval in Egypt has disrupted relative prices (interest, inflation, exchange rates, etc.), which may lead to an economic contraction in terms of productivity, investment and consumption. However, as much as the crisis has hit the economic "superstructure", the infrastructure (employment, factories and public utilities) remains intact. Hence, the Egyptian economy is expected to rebound once political certainty is regained.