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Why the outcomes of the Egyptian election might make the country’s economic challenge tougher.

egypt elections

The success of two polarizing figures in Egypt's presidential election could make it harder to put in place an effective government that can tackle an economic crisis and secure vital foreign aid.

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May 31, 2012 5:32 by



IMF DEAL

 

Egypt’s main share index has dropped 6.2 percent since the first-round vote, with investors voicing fears that the result sets up the country for further instability.

 

Companies on the benchmark index lost half their value last year before rebounding 31 percent in 2012. The Egyptian pound has fallen just 3.8 percent since the uprising, shored up by central bank purchases, economists say.

 

The new president will have a window of three to four weeks to appoint a cabinet and carry out talks with the IMF, not long enough for the first economist, who said he believed an IMF deal that could help restore trust in Egypt’s economy was now unlikely before September at the earliest.

 

Egypt has asked to borrow $3.2 billion from the IMF to help it plug a budget deficit that currently stands at 10 percent of GDP, but the IMF is insisting the government put together a programme that reins in spending or comes up with new sources of revenue.

 

The new leader’s work will be complicated by the absence of a new constitution to define his powers.

 

“The new government will need a new budget law and a new reform programme as the Brotherhood has rejected the interim government’s programme,” the economist said. “This process is going to be slow.”

 

A $1 billion tranche of financial aid from Saudi Arabia and a $3.2 billion takeover this week of Egyptian mobile phone operator Mobinil by France Telecom could buoy Egypt’s dwindling foreign reserves, which have more than halved since Mubarak’s overthrow to $15.2 billion. That would help avoid a sharp currency drop for now, economists say.

 

But foreign investment is still largely absent, tourism is well below pre-uprising levels and recession in Europe is dimming demand for Egyptian goods.

 

“Economic vulnerabilities are building,” said Said Hirsh, an economist at Capital Economics. “Unsurprisingly, the markets have reacted unfavourably to recent events.” (Editing by Susan Fenton)



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