Rising hopes following the January 25 Revolution touched the sky, but there was nothing to celebrate on the economic front in 2011. A normal transitional period is, by nature, temporarily costly. However, this transition has proven to be lengthier than expected and uncertainty has grown with time due to the unclear political process. It was this ambiguity on the political scene that affected consumption and investment decisions and led to a net outflow of capital and an economic slowdown harming both the state budget and the balance of payments.

Nevertheless, the transitional cost could have been weathered with the support of the international community; however, the latter has demonstrated its usual weak support and unfulfilled promises. Internationally, the US and EU debt crises, leading to a fall in global demand, have only accentuated Egypt’s external balance vulnerability and increased pressure on economic decision makers.

During 2011, four ministers of finance took on the responsibility of reshaping the economy and meeting social demands. However, public discontent has prevailed, and dreams of immediate prosperity and improvement after the revolution faded. So what happened during these 12 months in terms of economic management and challenges?

It started in January, during the Youssef Boutros-Ghali era, when economic activity was recovering from the impact of two successive global financial crises. Real GDP growth was estimated at around 5% in 2010/11, with expectations for even higher growth the following year. Despite ambiguity surrounding the planned presidential elections in 2011, most internal and external analysts were expecting a smooth and stable transition of power. Moreover, many new big projects and expansions for existing investments were either planned or in the pipeline, engendered by both domestic and foreign investors (mainly from the Gulf), building on economic recovery, strong fundamentals and prospects that were enhanced by structural reforms implemented during the previous five years.

The political tsunami of January 25, followed by the removal of the previous regime, brought economic activities to a near halt and deteriorated security to its lowest level in recent history. The newly appointed minister of finance at the time, ILO expert Samir Radwan, was considered a savior. Eloquent, close to the people, supported by his international experience and using a developmental approach, he gained the people’s confidence to face economic challenges and accommodate high social demands. 

Consequently, the Ministry of Finance formulated the 2011/12 budget to include ambitious social programs leading to an estimated budget deficit of around 11% of GDP. The budget, despite its high deficit level, was then unconditionally supported by an International Monetary Fund (IMF) program, based on the belief that the government would return to its path of fiscal consolidation after the transition period. However, the military council asked the government to revise its budget deficit downward to around 8.6% of GDP, cutting several important developmental plans, and to reject the IMF loan — a decision that proved to be very costly afterward. Facing social pressure for undelivered promises, Radwan was forced to leave in another cabinet reshuffle.

Urgent versus important

Hazem El-Beblawi, a visionary economist and intellectual with a strong belief in market economy and the rule of law, was subsequently appointed deputy prime minister and minister of finance. He soon discovered that GDP growth was not expected to exceed 2% in 2011/12 and therefore the budget deficit was doomed to rise again to its previously estimated level of close to 11% of GDP.

The most urgent need facing Beblawi was to secure financing for the growing budget deficit. He tapped Gulf countries and the G8 Deauville partnership with modest success. Interest rates on domestically issued treasury bills soared in November to around 15% compared to 9% before the revolution. Measures aiming to reduce the budget deficit and borrowing from the IMF while tapping other financial institutions and donor resources seemed unavoidable to cover Egypt’s financing needs. 

Meanwhile, political turbulence forced Essam Sharaf’s government to resign. 

The newly appointed minister, Momtaz Said, a legend at the Ministry of Finance and a key player and lieutenant for most ministers of finance over the last 20 years, will have to face all the previously mentioned challenges: reducing budget deficit and public debt, finding new sources of finance, meeting increasing social demands and helping the economy regain momentum. 

Prospects for the Egyptian economy are nevertheless enormous. Egypt owns a well-diversified economy that proved its resilience in the time of two global economic crises. Capitalizing on strong domestic demand and diversified skilled labor, the investment opportunities and growth potential in Egypt are unlimited.

During 2012, attracting investments and a flow of capital will depend mainly — but not only — on a reliable political roadmap to ensure the smooth transition of power from the ruling military council. It will also require a clear and honest plan from the newly elected majority in parliamentary elections (Islamic parties), who must reveal their true intentions on issues such as the future of the economic system, tourism and financial sectors among others.

Managing high expectations for social justice and prosperity also remains a major challenge in 2012, which the majority hope and believe will be brighter and more stable than what has been an explosive 2011. bt