By Mohamed A. El-Erian
Already struggling to meet citizens’ legitimate needs and aspirations, the Egyptian economy has suffered a series of additional setbacks in recent years. So much so that, for the first time in many years, the population has had to cope with power cuts, shortages of goods, and partial controls on foreign exchange. With a new government committed to meeting the objectives of the 25 January Revolution, Egypt now needs to decisively overcome four major problems; and it can do so using four major attributes.
Tackling four major challenges
Of all the headwinds to Egypt’s sustained prosperity and social justice, four major ones stand out today. And while they do not explain all of the forces holding the economy back from delivering on its considerable potential, it is unlikely to develop strong forward momentum unless each of them is addressed in a decisive and sustained manner.
First, the country faces twin financial deficits in the form of a large budget shortfall and a deepening balance of payments imbalance.
These two deficits fuel inflation, put upward pressures on interest rates, weaken the currency and undermine a wide range of productive activities. The longer they persist, the deeper they become embedded in the structure of the economy and, therefore, even harder to solve and much more damaging to the country’s longer-term wellbeing.
The deficits have also been interacting – via increasingly unfavourable dynamics – with Egypt’s second major problem: disappointing economic growth.
The country’s inability to maintain a multi-year period of high and inclusive growth holds back living standards, makes it very hard to create enough jobs for a rising and young population, worsens inequality, and frustrates the attainment of important social and political goals. Simply put, the country’s low growth/high unemployment equilibrium eats away at Egypt’s engines of growth and expansion, as well as its social fabric – thus threatening both current and future generations.
There is also a worrisome financial angle. The lower the growth, the greater the pressures on the budget (through both higher spending needs and lower revenue collections); and the harder it is to earn foreign exchange through exports and efficient import substitution.
The third major problems relate to weak institutions.
Notwithstanding the drivers and achievements of the 25 January Revolution, Egypt is yet to reform its institutional structure sufficiently. As such, too many institutions remain overly bureaucratic, frustratingly inefficient, and inappropriately positioned to deliver on their important responsibilities. In addition to failing to properly serve the general public, the weak institutional setup has channelled too much of the country’s economic gains to a small set of privileged insiders.
Finally there is the problem of Egypt’s large social deficit.
The country’s social indicators have lagged behind those of many other countries. As such, too many Egyptians, particularly among the vulnerable segments of the population, suffer from poor access to basic services such as health and education. Meanwhile, income and wealth inequality has worsened, as has the already-worrisome imbalance in access to opportunities for self-improvement and advancement.
Exploiting four major attributes
None of these four problems are easy to overcome, especially quickly. After all, they have been many years in the making; they are deeply entrenched in the economic and political fabric; and they involve pockets of well-established self-interest that resist change. And, when put together, their cumulative effects constitute a significant challenge that requires many years of steadfast policy implementation, and one that commands broad-based understanding and sufficient buy-in from wide segments of the population.
As such, no one should underestimate the challenges facing the new government. Fortunately, in attempting to overcome them, Egypt can draw on four important attributes that can place the country in a potentially strong position to bounce back in the context of positive self-reinforcing dynamics. It is a position that, judging from my multi-decade experience of closely following and studying similar cases, puts the country’s “initial conditions” ahead of those of other nations that succeeded in their difficult economic turnaround tasks.
First, Egypt possesses lots of low economic “hanging fruits” that may be harvested quickly to generate higher growth and employment.
Tourism is a clear example of this hypothesis. With the return of security and better public communication internationally, there is no reason why the number of tourists – and the economic activity, foreign exchange, and jobs they generate – cannot quickly approximate historical highs. After all, Egypt’s magnificent physical attributes are all in place, from spectacular monuments and culture to unmatched beaches and deserts. The renowned kindness and hospitality of its citizens has not gone away, and the hotel and transportation infrastructure is in place and under-utilised.
A similar logic applies to many other economic sectors that are functioning well below potential. With some adjustments in their operating context, existing plants would easily expand production, sales and jobs. The great of power supplies would greatly help manufacturing and other sectors. A more responsive bureaucracy would lift unnecessary and harmful restrictions on economic activities and trade. Some well-targeted infrastructure investments would enable and empower multiplicative economic activities. And better negotiations with external partners would transform Egypt’s considerable potential for more exports into a reality that benefits the country in many ways.
Second, there is lots of cash on the sideline that could – and, under the right conditions, would – be deployed to finance labour hiring and investments in new plant and equipment.
Foreign direct investment is falling far short of historical averages, and certainly is well below what would be expected given Egypt’s attributes. Many “win-win” public-private partnerships are under-exploited despite the need for greater investment in pro-growth and pro-employment facilities. Moreover, with significant funds on the sidelines waiting for greater economic clarity, the country’s own private sector can put more of its money to work in pursuit of commercial objectives that are aligned with Egypt’s needs. And there is also considerable potential and interest among Egyptians living abroad.
Third, Egypt has solid regional friendships willing to provide considerable financial resources to support the country’s economic reforms and recovery.
Kuwait and, especially, Saudi Arabia and the United Arab Emirates have been at the forefront of deploying both cash and energy products to alleviate Egypt’s short-term economic and financial pressures. In their high-level meetings with the President and other high-level Egyptian officials, they have also conveyed their commitment to supplement this support with additional investments in housing, energy development, infrastructure, management and other areas that benefit the country’s growth engines. Moreover, they have signalled their willingness to help coordinate a broader international effort to promote investment and growth in Egypt.
Finally, Egypt has a committed leadership in place that commands broad-based popular support.
The new political leadership led by President Al-Sisi has already expressed awareness of the economic and financial challenges facing the country and intention to deliver results. A comprehensive policy framework is being developed, subjected to comprehensive design and broad consultation. And implementation has started as part of this more holistic, multi-year policy approach that is starting to attract expanding international support.
Many point to all the challenges confronting the Egyptian economy, and understandably so. It faces many headwinds at a time when people’s needs are considerable, and should be met. Yet the focus on the challenges should not crowd out a simultaneous appreciation of the country’s important attributes and huge opportunities. Indeed, by recognising the challenges and unleashing the potential, Egypt would make important strides in realising its considerable upside and meeting the population’s genuine hope and legitimate aspirations for a better tomorrow.
Mohamed El-Erian is the Chief Economic Adviser of Allianz, a multinational services company. He also chairs US President Barack Obama’s Global Development Council. El-Erian is the former CEO and co-CIO of PIMCO, a global investment firm, and one of the world’s largest bond investors, with approximately $2tn of assets under management as of December 2013.