The Egyptian economy, currently in
dire straits, is vital to the country's stability, and stability in
Israel is a central interest
of Israel . While in the long term,
future governments can adopt and implement policies to improve
Egypt ’s economy, the short term
impact of the recent political revolution exacerbates the current conditions.
Adopting an outward strategy and reconnecting the Egyptian economy with the
global economy is the only way to encourage growth and build a long term
sustainable recovery.
The reality speaks for itself.
Political instability, fiscal deficits (13 percent of GDP), and shortage of
foreign exchange reserves limit the spending ability of the Egyptian government.
The spending power is critical in an economic environment where fuel and food
(mainly bread) subsidies are an important pillar of the economy. Recent aid
packages from the Gulf
states provide some breathing space for the next six
months, but it is unclear what will follow. Egypt ’s labor
market is weak, unemployment is 13 percent, including among one third of the
young people, and wages are low. Food prices have risen 50 percent since 2010,
and services in the public sector are poor.
First, the government must
strategically increase foreign direct investment (FDI) in the country. The
United Nations Conference on Trade and Development (UNCTAD) 2013 Investment
Report from June 2013 shows a modest increase in 2012 in North Africa and the Levant,
with Egypt receiving in absolute terms the
largest share due to its large GDP. Yet Egypt 's inward FDI is shrinking
quickly due to political and economic instability. The inward FDI in the nine
months to March 2013 was $1.4 billion, compared to annual levels of $10 billion
a few years ago. According to many studies, higher FDI will provide jobs,
increase salaries, and strengthen stability.
Several initiatives can help
increase inward FDI. The interim government should signal the market that it
will not adopt game-changing policies that may be reversed by the next permanent
government. Foreign investors seek stability, and another six months of
inconsistency is not helpful. In addition, the ongoing political instability
calls for improving the political risk insurance market. Egypt is
desperately looking to finance sizable energy projects designed to reduce its
power shortage. Many of these projects can be insured against political risk by
multinational institutions, such as the Multilateral Investment Guarantee
Agency. Securing an IMF loan can improve the relationships between
Egypt and many multilateral
institutions and increase the volume of political risk insurance policies with
lower premium rates.
Furthermore, the rule of law
principle and regulatory clarity and stability are important components of any
FDI framework. Denouncing international agreements may send a signal that
Egypt cannot promise foreign
investors the commercial environment they seek. While a regulatory stabilization
clause is common in international agreements in developing markets, the
government can and should do more to protect investor interests.
Egypt 's decision to suspend its
agreement to supply gas to East Mediterranean Gas, which supplied gas to the
Israel Electric Corporation, may present a risk to other state-to-state
financial agreements and energy deals. While in Israel the
market follows this story from a geopolitical view, for most investors it is a
case study of the ability to meet commercial terms and contractual obligations.
Similarly, Egypt should avoid discriminatory
actions against foreign investors, or the perception thereof, as in the recent
alleged tax evasion cases.
The second track for
Egypt is to change the
international trade bias that traditionally – and naturally – has favored the
Gulf states .
In light of its unique nexus with the Gulf, Egypt 's current
trade map does not reflect recent changes in the global economy. The government,
for example, can open commercial offices in new and less traditional
markets.
Third, bilateral trade and
investment agreements have been quite instrumental in building sustainable trade
and investment relations around the world. Egypt can continue to negotiate these agreements,
making sure that the new agreements open Egypt to new
markets. The proposed Egypt-China Free Trade Agreement, which also includes an
investment chapter, is a case in point. The parties negotiated the agreement in
2012 but the process is not moving forward. The government should expedite the
negotiations process in 2013 since many of its competitors in competitive
products already have such agreements in place. While some analysts question the
effectiveness of trade and investment agreements, the cumulative effect of these
agreements on the economy as a whole and the region is
significant.
These agreements should follow macro
economic trends. Egypt-China bilateral trade, for example, sees a year-on-year
increase of 18.8 percent and reached nearly $7 billion in 2010.
Egypt is China 's fifth largest trade partner in Africa,
and Chinese cumulative investment in Egypt reached $335
million.
Fourth, the government needs to
educate the street better on the role of the IMF and other multilateral
institutions in the Egyptian economy. The perception that the IMF conditionality
will lead to unnecessary structural reforms should be replaced by conveying the
role of IMF financing in stabilizing markets, inducing other institutions to
finance the Egyptian government (such as the European Union), and providing
legitimacy for internal economic policies. The proposed IMF loans will force
Egypt to address its fiscal crisis
seriously by reducing local spending and subsidies, a move that would require a
shift in public opinion.
Fifth, Egypt should leverage the large sovereign funds
in the Arab world and convince them to increase their asset allocation to the
region's private companies in general, and Egypt 's
companies in particular. The current situation whereby these funds invest
globally and leave some of its neighbors behind is not sustainable. Recent
improvements in the Egyptian stock market are promising. Aid packages provided
by the Gulf states should be replaced by direct
Greenfield
investments. The International Finance Corporation's shift toward direct
investments in developing markets by private funds, which are financed partially
by sovereign governments, can be a role model.
Finally, Egypt should
reorient the national economic dialogue from a culture of aid to a culture of
regional and global economic integration. Indeed, the IMF loans and the US and
EU civil and military aid are critical to Egypt's operations, and Israel, which
has an interest in Egypt's economic and political stability, should continue to
support foreign aid of this sort from its allies in the US and Europe. Yet this
aid should not become a goal in and of itself, and prompt the neglect of private
sector initiatives. The coming months are critical. For instance,
Egypt needs to roll over about $5
billion in dollar-dominated Treasury bills matured by the end of 2013. Adopting
long term strategies that look externally and not internally will help
Egypt to position itself better to
deal with the serious challenges in the months ahead.
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