Egypt's Economic Catch 22

Egypt is in the midst of an economic Catch 22: Foreign investments require stability and stability requires foreign investment. Currently, Egypt has neither, and it will definitely need one or the other to get the ball rolling in recovery.

Egypt is trapped and its economy is slumping. Tourism has plummeted while unemployment is skyrocketing. Poverty is spreading and some economic forecasts predict that as much as two-thirds of Egypt could slide into short-term poverty by the fall. The once rosy predictions of 7% growth now seem like wishful thinking. After the revolution, salvaging 3% or 4% growth would be considered a victory although most predictions hover around 2%.

While addressing the growing poverty must be one of Egypt’s main focuses, many in the government are equally concerned with attracting foreign investment. In order to do so, the transitional military council must demonstrate political and economic stability. A roughly 0.25% decline in the value of Egypt’s stock market since March won’t help. Neither will the looming uncertainty of the elections. The Egyptian military has gone on record on several occasions announcing foreign investment in the first quarter was near zero.

If Egypt is to survive the political upheaval, it will have to win back the confidence of foreign investors (and tourists) and prove that the revolution was actually a positive change that will usher in less corruption and graft and a more open transparent economy.

However, currently Egypt has two factors working against it: The first is the increasing worry of instability. Not only did the stock market tank and Egypt lose 25% of its value in a period of a few months, there is a movement among many leftist leaning parties that has called for expanding public employment and even the possibility of the Egyptian government's re-nationalizing some private industry. 

“We now have a rotten capitalist regime and rotten corrupt capitalists,” Rifaat el-Saed, the leader of Egypt’s leftist Tagammu Party announced. “If this ‘trickling down’ does not come by the will of the capitalist, it must come by the will of the state.” Many economists, including John Sfakianakis, an economist with the Saudi Fransi Bank in Riyadh, believe that even the threat of Egypt's nationalizing businesses will keep potential investors away and send those already here running. ”In many ways, they [economic problems] go back to the 1950s, when the industry was nationalized. In many ways, the entrepreneurial class of Egypt was destroyed since the 50's.”

The second problem is almost just as daunting. Since the revolution, hundreds of Egypt’s top businessmen have fled to avoid possible persecution on corruption charges or simply because they feel they can’t survive in Egypt’s current business climate. If Egypt’s business leaders remain abroad, investors will not reconsider Egypt because the companies and business executives with good relations won’t be there to recruit and woo them.

With upcoming elections and a growing dissatisfaction among a widening low-income class, the Egyptian military is running out of time and good-will. Can they break the cycle and restore both stability and foreign confidence? It won’t be easy.

Photo Credit: David Dietz