Monday, 31 January 2011 17:58

Egypt’s instability and the economic implications

Written by Emeka Chiakwelu
People demonstrate in Cairo, Egypt, Monday, Jan. 31, 2011  AP People demonstrate in Cairo, Egypt, Monday, Jan. 31, 2011 AP AP
Instability is the greatest threat to economic development

“Once you let the genie out of the bottle, you never get it back in.,” and this is the conundrum President Hosni Mubarak is facing at the moment as unrest claims Egyptian landscape. The ongoing uprising has both immediate political and economic implications for Egypt and its eighty million inhabitants.

The problem with this current uprising is attributed to 30 years of undemocratic and iron-hand rule of Hosni Mubarak regime together with increasing poverty that has absolutely decimated the Egyptian middle class. In some regions of the country poverty has approached 70 percent while the inflation rate is up to 11 percent at end of fourth quarter 2010 and rising. Although the economy is growing at about 4 percent but that is not adequate to make a substantial impact on the rising poverty and crushing high unemployment among the youths especially college graduates.

Bloomberg reported in December 2010: “The economy of the most populous Arab country expanded 5.6 percent in the third quarter, compared with 5.4 percent in the previous three months. Growth is still below the average of 7 percent achieved in the three fiscal years through June 2008, with the global financial crisis hurting revenue from tourism, foreign direct investment and the Suez Canal.”

The going unrest is dicey because if not safely channeled, the ramification can threaten the whole region and can bring in a period of instability in the region.  When this situation is not managed properly and the radical Islamist captures power in Egypt, the region will become boiling water. It is more than enough having Islamic radicals in Iran but adding Egypt into that mix will be a disaster to the moderate states in the region and a huge threat to Egypt’s peace treaty with Israel.

A member of the Egyptian special forces stands guard on the main floor of the Egyptian Museum in Cairo on Monday. Would-be looters broke into Cairo's famed Egyptian Museum, ripping the heads off two mummies and damaging about 75 small artefacts.

Egyptian special force stands guard on  Egyptian Museum in Cairo AP

We all have to be careful how we define this ongoing ‘revolution’, by no means this is neither American nor French revolution. Egypt does not have a history of Democratic Enlightenment period that predates both American and French revolutions that gave the roadmap to democracy and respect of human rights. For the ‘revolution’ to be sustainable Egypt must be transformed to a true democratic nation that respects fundamental human rights especially freedom of speech, the right to assemble and right to associate with a political body. A new Egypt needs a secular constitution that respects minority and religious rights of her citizen.

Sleepless in Cairo, an economic disaster

For some days Cairo the commercial nerve center of Egypt is witnessing sleepless nights, restive youths were busy parading every nooks and corners of the city. The security apparatus that kept the westernized city safe have disappeared; there were looting and angry mobs.  A government most important function is to protect life and property, the Hosni Mubarak regime has failed on its most important responsibility.

Egypt economic growth is about to dramatically slow down because investors and capitalists do not send money and resources to trouble and insecured land.  When Egypt continues to project and resembles a quintessential third world nation that is vulnerable to lawlessness and hopelessness, then Egypt is finish economically as an emerging nation. Patrick Werr of Reuters put it in perspective, “Egypt is vulnerable to a reversal of large flows of foreign portfolio investment that have been attracted by high yields on domestic government debt. Barclays Capital estimated foreign holdings of Egyptian assets before the protests were close to $25 billion, with roughly half held in Treasury bills and bonds.”  The flow of investments are based on logic not emotion and investors are pretty logical.

Werr further stated that, “Foreign direct investment is based on long-term planning and is less likely to be influenced by the political unrest. Egypt drew $6.76 billion of such investment in the last fiscal year to June 30, of which $3.6 billion went to the petroleum sector. But the damage from any extended disruption to tourism could be considerable; Egypt earned $11.59 billion from tourism last fiscal year. It ran a current account deficit of $802 million in the July-September quarter of 2010, and because of tourism the deficit is likely to be much higher in the current quarter.”

All the major international rating agencies have downgraded Egyptian debt, currency and financial wellbeing by one notch negative. “S&P cut Egypt's long-term foreign and local currency ratings by one notch to BB and BB+ respectively, both with a negative outlook. Moody's downgraded Egypt by one notch to Ba2 with a negative outlook on Monday, saying the government might damage its already weak finances by increasing social spending to calm the protests. Fitch Ratings cut its outlook on Egypt's BB+ country ceiling to negative, saying the political turmoil was likely to undermine the country's economic reform programme,” Reuters reported.

Democracy is a wonderful thing for it encourages capitalism and openness. But investors are not freedom fighters and their main intention for investing is to maximize their returns. It is not news that investors tend to lean to stability at expense of any wonderful things that comes with democracy. Therefore the earlier Egypt stabilizes the better her economic prospect becomes. The major problem with the unrest is that no expert can forecast a rosy climate that will encourage investors to stay put and to attract investments. The sad thing about the unrest is that nobody can predict how long it will last and how it will end.



Last modified on Friday, 04 February 2011 15:30