Egypt’s Broken Economy

WASHINGTON, DC – Egyptians’ political aspirations have dominated the country’s public life since the fall of President Hosni Mubarak last year. Unfortunately, as those aspirations are addressed, the economy has entered a steep decline, jeopardizing one of the revolution’s main goals, namely improvement in Egyptians’ living standards and welfare.

Indeed, the populist rhetoric of Egyptian politicians threatens to undo the economic reforms undertaken by the Mubarak regime. In 2004, a major reform program was launched under former Prime Minister Ahmed Nazif. It was aimed at removing bureaucratic constraints to growth by restructuring the financial sector, streamlining business regulations, liberalizing foreign trade, and reducing the government’s role in the economy.

The 2004 reforms, with their elimination of restrictions on access to foreign exchange and reduction of import tariffs, gradually improved the business and investment climate. Coupled with favorable international conditions, Egypt’s annual GDP growth rate rose to 7.2% in 2008, from 4.1% in 2004, and remained at 5% in 2009-2010, despite the global recession. The new measures also helped to attract large capital inflows and foreign direct investment, underpinning a dramatic rise in foreign-currency reserves, from $14.8 billion in 2004 to more than $36 billion by the end of 2010.

In 2011, the situation worsened on virtually all fronts. Annual growth fell to about 0.5%, and inflation remained in double digits. The unemployment rate reached 12.4% in the fourth quarter, up from 8.9% in the same period of 2010. The current-account balance deteriorated rapidly, owing to the loss of more than $4 billion in tourism revenues and a sharp fall in remittances by Egyptian workers abroad. The fiscal deficit widened to 10% of GDP, causing government debt (including external debt), which had been falling steadily, to rise to 76% of GDP.