When Abdel-Fattah Al-Sisi was elected president of the Arab world's most populous country in May last year, he knew that Egypt's economy, hard hit by four years of political turmoil, would be his biggest challenge. Many people were pessimistic about the direction the country was heading. The president was also facing the daunting task of restoring stability after the removal of former president Mohamed Morsi in a military-backed popular uprising. Analysts said that the new government would need a radical reform programme that included fiscal restructuring and austerity measures. The alternative would be that Egypt's economy would collapse — the outcome that Morsi's supporters were seeking. Because Al-Sisi has made it his priority to shore up the Egyptian economy he appears all but assured of winning the challenge. The economic situation has significantly improved. With a growth rate of some four per cent, up from 2.2 per cent when he took power in June, this success has become a political trump card that Al-Sisi hopes will help him put Egypt back on track. A bold reform programme he has implemented during his eight months in power is credited with turning around Egypt's economy, with GDP growth of five to 6.8 per cent now predicted in 2016, according to a January report by Dcode Economic and Financial Consulting (Dcode EFC). In December, Fitch Ratings, a global rating agency, upgraded Egypt's credit rating to B+ from B- with a positive outlook, based on evidence of returning confidence in the market and falling costs of insuring Egyptian debt against default. The International Monetary Fund (IMF), in a report on Egypt's economy published on 12 February, also stated that Al-Sisi's reforms were beginning to produce results. ECONOMIC OPTIMISM: The main reason for optimism lies in Al-Sisi's economic reform agenda, which counts on trimming the government budget deficit, and an incentive package to spur economic growth. In a five-year stimulus plan, the government has set out to cut the budget deficit by lowering public debt, through a restructuring of energy subsidies, and reform the tax system to encourage growth. Finance Minister Hani Kadry Dimian told Reuters in an interview at the World Economic Forum in Davos last month that the budget deficit for this year would fall to between 10 and 10.5 per cent of GDP, down from 12.5 to 12.6 per cent in 2013-2014. According to government statements, the 30 per cent cut to state fuel subsidies and the rise in the prices of commercial and household electricity in July last year has saved an estimated $7 billion, the equivalent of two per cent of GDP. The aim is to almost completely end fuel subsidies within five years. By lowering the deficit and cutting subsidies, Al-Sisi has avoided enacting austerity measures that would have been politically sensitive at a time when the government is facing security challenges. Moreover, analysts have noted that recent data, such as the HSBC Egypt Purchasing Managers Index (PMI) for the non-oil private sector, show business activity has recovered after the subsidy cuts, another sign of a reversal in the slowdown in the economy. While the removal of energy subsidies will accelerate structural reforms to the economy, it will also allow the government to use the savings to increase badly needed spending in sectors such as health and education. Recent reports have also suggested that the move will encourage energy companies to make additional investments in the country's energy market. One such company mentioned as being ready to expand its operations is Apache, whose assets in Egypt include large holdings in the Western Desert, with some 72 per cent of these undeveloped and ready for expansion. In addition to the restructuring of the energy subsidies, the other key element in the government's economic reform programme is to lower the budget deficit by cutting spending and increasing tax revenues. Though cutting subsidies and controlling state expenditure are expected to reduce the deficit, one way envisaged by the government to generate more taxes is by amending taxation policies to bring tax evaders inside the tax system. The government is also seeking to introduce a value added tax in 2015. In recent weeks the Central Bank of Egypt (CBE) has loosened its control of the value of the Egyptian pound, leading to a quick weakening of the currency against the dollar. It made the move in order to wipe out the black market for dollars that has long existed in parallel to the official rates set by the regulator. Many analysts argue that the trend is good and will send positive messages to the global financial and business communities by encouraging exports and luring both direct foreign investment and portfolio investment. Among economic reforms planned by the government is a new investment law that aims to set up a hassle-free system for starting new businesses and is expected to attract more domestic and foreign investment. Tourism, one of Egypt's main sources of foreign revenues, is beginning to return to levels not seen since before Mubarak's fall in 2011. The Central Agency for Public Mobilisation and Statistics (CAPMAS) reported in December that the number of tourists visiting Egypt saw a sharp increase, as nearly a million foreigners entered the country in October compared to the same period in 2013. But the centrepiece of Al-Sisi's economic uplift programme remains the mega-infrastructure projects, such as upgrading the Suez Canal, construction of road networks and building new industrial cities. This focus on infrastructure projects seeks primarily to increase employment, since these projects are labour intensive and rely mostly on outsourcing to small- and medium-sized companies. Many of the projects in the infrastructure sector such as roads, bridges, and housing are being carried out with the involvement of the army, which the government says is to ensure speed and efficiency. CHALLENGES REMAIN: Egypt's economic problems are more complex than just the regeneration of high growth rates and the rebuilding of the foreign reserves. The upcoming government to be formed after next month's elections will need to tackle many problems that former governments could not solve, in addition to the difficulties of the country's transition. Egypt's foreign currency reserves are less than 50 per cent of what they were before the 2011 Revolution, for example, threatening the country's ability to pay for basic commodities. It remains to be seen if the new policy to eliminate illegal trading in currencies will stop the depletion of the foreign reserves. In addition to the budget deficit, Egypt's overall debt is more than its economic output. Government debt is 89.2 per cent of GDP, and overall debt is more than 100 per cent of GDP. Notwithstanding the fiscal difficulties, both external and domestic debts remain a formidable challenge. Inflation has been accelerating, with consumer prices rising 9.7 per cent a year in January, threatening a surge in prices and increasing pressure on the economy. Yet the IMF has predicted that the reforms will lower inflation to a target of seven per cent in the medium term. Some major sources of income, such as remittances from Egyptian expatriates and exports, have dwindled. In addition to the Suez Canal tolls and tourism revenues they form the backbone of the country's foreign reserves, which dwindled to $15.4 billion at the end of January, according to the Central Bank, down from some $34 billion in 2010. Unemployment remains high, at 12.9 per cent, according to government figures. Some international agencies put it a bit higher, suggesting that Egypt remains far from the growth rates necessary to match job creation to its growing labour force. According to CAPMAS, there are 3.7 million people nationwide looking for jobs. The country's labour force totals 27.7 million people. Around 63 per cent of the unemployed are aged between 15 and 29, and 67 per cent hold diplomas and higher education certificates. At the World Economic Forum in Davos last month, Al-Sisi said Egypt aimed to lower unemployment to 10 per cent by 2020. Some 68 million people, or about 75 per cent of the population, depend on a ration system that entitles them to subsidised food. Reducing food and other supply subsidies for the poorest people could prove politically risky. Last year's drastic cuts in fuel subsidies dramatically increased living costs for the poor and drastically affected the lower middle class. The UN World Food Programme warned in November that Egypt's reform of its subsidised food system must do more to help the neediest if the government is to begin reducing the “huge pockets of poverty” in the country. It said a failure to tackle such issues could revive the popular discontent that has toppled two presidents in the last three years. In March, Egypt will hold an international gathering in a message of confidence to global investors in its growing economy. During the high-profile Economic Development Conference in Sharm El-Sheikh the government is expected to showcase its overall economic reform programme, needed to enable Egypt to collect the billions of dollars required for investments in the infrastructure sector and to improve its financial and economic performance. Among the mega-projects the government plans to present are real-estate investment projects in urban communities in Cairo and other provinces. Minister of Housing Mustafa Madbouli told a conference in early February that around 150 real-estate developers in the private sector have been invited to attend. In a move to help ensure a favourable investment climate, the government says it will settle outstanding investment disputes before the conference. Egypt also expects to receive more aid from the Arab Gulf nations. Kuwait, Saudi Arabia and the United Arab Emirates have together pledged $20 billion and have so far reportedly delivered almost $17 billion, including cash and oil products. Last Friday, Riyadh announced that the Saudi delegation to the Sharm El-Sheikh Conference would be headed by Crown Prince Migrun bin Abdulaziz, adding that Saudi support for Egypt would be “strong” and the kingdom's contribution would be the largest of any participant. However, it remains to be seen if the changeover in Saudi Arabia's ruling family last month and a new crisis with Qatar over Egypt's military campaign against terrorist groups in Libya will impact Gulf economic aid to Egypt. Though Saudi King Salman has reiterated the kingdom's close bonds with Egypt following the death of King Abdullah in January, there has been speculation that the new monarch might have a different approach from that of his half-brother, who provided massive support to Al-Sisi, including billions of dollars in financial assistance. Such speculation escalated after the Qatar-owned Al-Jazeera TV network aired secretly taped recordings that were described as conversations between Al-Sisi and his aides. In the conversations, Al-Sisi appears to express contempt for Saudi Arabia and the Gulf rulers. Though relations with Qatar have been tense since Morsi's ouster, the energy-rich emirate has been invited to the Sharm El-Sheikh Conference, and Cairo hopes that Qatar will contribute funds into some of the projects offered for investors. Egypt has given the green light to Qatari companies for plans to build two main projects in Cairo that feature hotels, shopping malls and residential components, including villas, townhouses and apartments. REACTIONS ABROAD: Ahead of the Sharm El-Sheikh Conference, Egypt has also received positive signs from Western nations, including Britain, France and Japan. During a visit by Russian President Vladimir Putin to Cairo in February, Russian and Egyptian ministers signed several agreements, including bilateral cooperation on nuclear power. Egypt and the Eurasian Economic Union (EEU) of Russia, Belarus and Kazakhstan also agreed to establish a free trade zone and to develop a Russian industrial zone in the Suez Canal region. But while the business and financial community waits for Egypt''s economic plans to be revealed during next month's summit, the world is watching the government's moves towards democratic reforms and its human rights record before releasing aid. Cairo is already under fire from the European Parliament, some members of the US Congress and human rights groups for cracking down on dissident voices and passing a series of restrictive laws. In November, its human rights record came under harsh criticism during a UN review. Several Western nations urged Al-Sisi's administration to rescind the measures and release political detainees. The Obama administration and European governments are under pressure to cut economic aid to Egypt to punish Al-Sisi's government for what human rights groups charge are abuses, including the mass detention of government opponents and the killing of protesters. The government has repeatedly said that it is committed to the transitional roadmap for the post-Morsi era, which will culminate in the parliamentary elections next month. But government leaders have not shied away from admitting that they consider stability more important than human rights. It remains to be seen, however, if Western countries will be ready to cut loose a strategic Middle East partner because of the country's record on human rights and democracy. If the past is any guide, the West's geopolitical interests will favour supporting Egypt, despite concerns about freedom of expression. Nothing underscores better how such human rights concerns can wax and wane than US President Barack Obama's assertion, when he travelled to Saudi Arabia last month, that the United States must balance its focus on human rights and equality with other vital issues. Back in Egypt, US Secretary of State John Kerry made it clear that “the central issue to Egypt's future is economic.” He was responding to questions from journalists following a meeting with Al-Sisi in November. They had asked him whether or not he had raised human rights issues with the Egyptian leader.
