Egypt fosters false economic expectations

Egypt fosters false economic expectations

Things will get tougher before they get better in Egypt. With rich reigning in ballooning fiscal deficit and unemployment still on the rise, it may be cause more costly unrest.

November 29, 2011 2:15 by Reuters

Egypt is fostering false economic expectations. In the post-Mubarak era, the moderate Muslim Brotherhoodmovement’s call for “social justice” is now popular with almost every political force running for election to the country’s new parliament. But the idea is vaguely defined, and delivering the democratic dividend — with high hopes of economic improvement among the millions of poor — will be a struggle.

The removal of Mubarak has had a short-term financial cost. GDP growth is expected to slow to 1.2 percent for the fiscal year ending June, down from an average of 6 percent since 2006. Tourism and foreign direct investment, big engines of the economy, have dried up. Foreign exchange reserves have plunged, limiting the central bank’s ability to defend the currency. Any benefits from devaluation would be offset by the impact on the cost of imports such as wheat. A sudden fall in the pound could be especially messy. And the retail-driven stock market has halved in value.

Rich Egyptians expect to bear the brunt of efforts to reign in the ballooning fiscal deficit, which is heading towards 10 percent of GDP. Income and corporate taxes may be raised from flat rates of around 20 percent. Subsidies that eat up 33 percent of the budget may also be restructured so they no longer benefit the wealthy. Capital gains and property taxes could also appear.

Even if a new government makes tough decisions and adopts a social market economy, based on free-market principles but with a safety net, the poor are likely to be disappointed in the early days. Reforms may increase government revenues but will take time to implement, and the state of public finances limits the scope for higher public spending. The minimum wage has already been lifted by 67 percent and official figures point to rising unemployment, now at 11.9 percent, although many Egyptians work in the black economy.

People will probably feel things are getting worse before they better, whichever party that takes the lead in the new parliament. As demand falls, those factory workers that are still employed want better pay and conditions. Reform needs to be accompanied by a clearer, more realistic dialogue, around economic issues. Without that, the risks of further strikes and protests are high — and that could ultimately prompt more costly unrest.

(The author, Una Galani, is a Reuters Breakingviews columnist. The opinions expressed are her own; Editing by Chris Hughes and David Evans)