Public protests cost Egypt $310m a day

By Mai Phuong

The weeks-old protests in which tens of thousands are demanding President Hosni Mubarak's ouster are having a huge impact on Egypt's economy.

With the Arab world's largest economy, Egypt has long been seen as a pillar of stability. But that is no longer the case.

Despite a promise to increase salaries and pensions by 15 per cent in the latest attempt to defuse public anger, and an announcement by the newly appointed Finance Minister Samir Radwan that some 6.5 billion Egyptian pounds (US$960 million) will be allocated to cover the increase for the 6 million people on public pay rolls, it still seems like it's not enough to end the crisis.

For nearly three weeks, economic activity was at a virtual standstill. Supplies dwindled and ATMs ran out of cash due to the closure of shops and banks. Domestic and international trade was disrupted and tourism evaporated.

The unrest that began on January 25 led to the shuttering of all businesses and companies. The Egyptian Stock Exchange was also shut down and will likely remain closed for weeks. All banks have been closed as well, bringing a significant bulk of economic activity to a near standstill while most factories have ceased or slowed production.

The unrest has also led to price spikes for food and others essential products in many areas of Cairo, further straining the wallets of Egyptians who had complained about rising costs.

A recent report by the investment bank Credit Agricole published on the FoxNews online service says at least $310 million is lost everyday due to the economic slowdown and if this costing is true, by now a total of more than $5 billion could have been lost since the protests began.

The bank also warned it was revising down its forecast for Egypt's economy growth to 3.7 per cent from 5.3 per cent this year.

World markets have been reacting strongly to the protests in Egypt that have continued without pause for 15 days straight, forcing the country's president to appoint a new cabinet, and calling into question the future stability of the country.

Any post-crisis government will face major challenges in rebuilding the country's image and dealing with a range of fundamental economic problems that are sure to be exacerbated by the unrest, analysts said.

The losses are the tip of the iceberg of Egypt's economic woes.

Egypt's GDP grew by about 7 per cent for three years, before the global meltdown cooled the economy to a still respectable 4.7 per cent in 2009.

Poverty is rampant, with about 40 per cent of its 80 million people living on or below the $2 per-day poverty benchmark set by the World Bank.

Unemployment is officially pegged at around 10 per cent, but believed to be more than double that – particularly among the youth. Food inflation has hovered at about 17 per cent per year, raising the cost of living for millions.

The disruption to daily life stemming from the protests has only exacerbated those issues.

The crisis has also dealt a hard blow to the vital key tourism sector since tens of thousands of tourists have fled the country because of the violence.

Egypt's new vice president said on state television that the unrest has cost the country $1 billion in tourism revenues.

Damage

The new finance minister, meanwhile, told state television the damage to businesses and infrastructure during the rioting are estimated at about $862 million.

Also likely to be hit is foreign direct investment, a key cash cow for the government. And, while worker remittances are unlikely to be affected significantly, there is a risk, at least in the short term, of a spike in capital outflows – money leaving the country.

The Egyptian pound could fall by as much as 20 per cent relative to the US dollar in the short-term, dragged down by a drop in investments and an increase in capital outflows. That would bring the pound down to about 7 pounds per dollar, based on the current exchange rate of around 5.85 pounds to the dollar.

While the Central Bank would likely intervene to support the pound by drawing on foreign reserves, "political tensions, a run on local banks as well as expected dollarisation of some of the deposits will impact the short-term currency outlook," said the report.

While Egyptians are yet to
specify the final dest-ination for their "revolution" – and only they can, and should do so – there is little doubt that the country is now on an uncertain road toward brighter areas of economic development. The next few days and weeks will be critical in determining the journey for a country that is central to the stability of the Middle East.

Undoubtedly, domestic political developments hold the key to what will happen. Egyptians need to converge on a common understanding and vision of "managed change". And this vision must satisfy the millions of Egyptians – from all ages, religions and walks of life – that unite in Tahrir (Liberation) Square and elsewhere to better influence and improve their destiny.

Yes, street and state politics are the undeniable drivers today. This will involve both upheavals and compromises. Yet economy and finance will also play a crucial role, especially when it comes to the urgent recovery of an economy that has experienced one of the most dramatic "sudden stops" in recent history. In the process, this will also define how Egypt's friends and allies can come off the sidelines and help the country's unprecedented transformation.

Commenting on the situation in Egypt, Mohamed A. El-Erian, the CEO of PIMCO said the nation's economy will need to restart and reset.

"Three factors stand out in a process that is critical for the longer-term well-being of the country, including the millions of Egyptians that are protesting for greater freedoms," said El Erian.

The economist suggested that first, Egypt's banking system must resume normal operations in an orderly fashion. A very good start was made to bring part of the system back on line, and important challenges remain.

Second, the Finance Ministry should deal properly with the unanticipated collapse in tax revenues. It must make sure that this temporary interruption in government receipts does not lead to even more destabilising spending disruptions. Salaries must be paid promptly, and all supplier bills must be met.

Third, particular emphasis must be placed on targeted social spending, particularly when it comes to health, food subsidies and shelter. Egypt's poor are extremely vulnerable to the current economic and financial dislocations.

The challenge of such an orderly reset is an enormous one. It cannot be met without a return to a normal and stable situation. Moreover, the Egyptians will need help; and their courage and determination warrant international support. — VNS