Policy reforms prepare Egypt for historical and modern challenges

 

In comparison to the years before 2011, Egypt’s post-revolutionary period has been defined by political upheaval and dynamism. The country has adopted a new constitution, moved to a unicameral legislature, had two presidents; Mohamed Morsi, who was appointed in the country’s first free presidential election and departed two years later in 2013, and the current serving president, Abdel Fattah El Sisi.

However, as such agitation is beginning to settle, the country is faced with a familiar set of challenges: that of the political engagement of Tahrir Square – the focal point of political demonstrations over the past several years – has been largely extinguished, the government has instituted a continued state of emergency in the face of a persistent security threat and economic anxiety has gripped much of the electorate. The re-election of El Sisi will mean stability with regard to economic reform policies undertaken in his previous term, as well as a continuity of policy in other important areas such as security and diplomacy.

Elections

Despite the uncertainties, the El Sisi administration has persisted with an optimistic vision for national renewal based on economic reform, largescale investment and political stability. Many saw the 2018 presidential election as an important test of this ambitious plan. With the country seeking a return to stability and new investment, Egyptians went to the ballot box at the end of March 2018 to decide who would lead the nation for the next four years. El Sisi announced his candidacy in January 2018 and won re-election with 97.08% of the votes among a registered voter turnout of 41%. Furthermore, a recent parliamentary approval in February 2019 may allow El Sisi to run for a further two terms in office, if ratified by a future national referendum.

Economic Agenda

The election was seen as a symbolic evaluation of El Sisi’s performance relative to the economy and security matters over his four-year term. The positive results have also been interpreted particularly as a sign of stability by the business community. The El Sisi administration has taken a number of significant steps to improve economic order and stability in the country, and there have been attempts to improve public finances, reduce the size of the state and make the investment environment more attractive. In November 2016, the government began to carry out an IMF-backed reform programme, beginning with the floating of the Egyptian pound, leading it to fall significantly with its value halving shortly after. However, the IMF has expressed confidence in the process, suggesting that the reform agenda was engendering “macroeconomic stabilisation and return of confidence”. In its fourth review of Egypt’s economic reform programme under the Extended Facility Fund, the IMF stated that “[Egypt’s] macroeconomic outlook remains favourable, supported by strong policy implementation”.

With the mandate of the recent election the administration hopes that it will be able to move forward with its reforms and key investments and that the associated growth will lead to an improvement in living standards and increased prosperity. Ordinary Egyptians have not always shared this same optimism, however. While many of these reforms are seen as necessary, they have also brought further – potentially short-term – economic pain to many Egyptian citizens.

Inflation

Following the currency flotation, the country experienced high inflation, reaching 33% in July 2017, the highest level since 1986. More than 22m Egyptians live in poverty, and the subsidy reduction for basic commodities like sugar and cooking gas has disproportionately affected these citizens.

Even before the rapid surge in inflation, price hikes associated with subsidy reductions were leading to significant political ramifications. Furthermore, it is not only the poorest Egyptians that have been affected, but the middle class has also been impacted, specifically by wage stagnation and rising costs of living. In April 2017 however, the official unemployment rate dipped below 12% for the first time since 2011 and has since continued to decline, but youth unemployment still remains high, at approximately 34.3% in 2018.

One indicator supporting the IMF’s positive outlook is Egypt’s annual headline inflation levels, which according to the Central Bank of Egypt (CBE) fell from 33% in July 2017 to 14.3% in February 2019. While the IMF-led measures are surely to put the economy back on the right path in the long term, there are likely to be challenges in the short to medium term. The government has been criticised regarding its reform agenda, and the government and the president have both faced some parliamentary opposition to some of their boldest reform efforts. For example, the Parliament has previously launched opposition to a civil service reform package that would reduce the size of the country’s bureaucracy and the burden it places on the public finances; Egypt has 7m civil servants whose salaries account for 25% of the annual budget.

At other times, the government has appeared to concede that its austerity measures are untenable. In May 2017 the government announced an increase in civil servant salaries and state pensions in a bid to soothe discontent over austerity.

New Investment Law

The government has generally maintained its adherence to the IMF blueprint, and despite some opposition, has been able to push through much-needed legislation. A key example of this was a new investment law in June 2017, following two years of efforts aimed at passing this legislation.

The law offers many benefits, including protections for foreign investors, reductions of bureaucratic procedures and a range of incentives, including tax breaks, for new investments. This includes a 50% tax discount for investment in underdeveloped areas and rebates for industrial projects that begin production within two years of land acquisition. It also includes specifications on how long the government can take to approve licences and clearances for the first time.

The Ministry of Investment launched an electronic investor map in 2018, which provides region-specific information related to various investment incentives and procedures. “[Investors] want to look at a comprehensive map where they see different opportunities and can compare if it is worth it to invest in Upper Egypt, what are the incentives provided and what is the proximity to the nearest port,” Sahar Nasr, minister of investment and international cooperation, told international press in June 2017.

Security

The El Sisi administration, however, will not be judged on economic stewardship alone. Another important issue for the Egyptian electorate which is closely connected to socio-economic well-being is the country’s security situation. With regard to security, the government has displayed mixed success.

In the first quarter of 2017 Russian commercial flights to Egypt resumed following the imposition of a ban after a Russian charter plane was shot down over the Sinai Peninsula in October 2015. The government lobbied hard for the resumption of flights and had to introduce a number of new security measures at the country’s airports. The Russian decision is seen as a sign of returning international confidence in Egypt’s security situation and provided a boost to an ailing tourism industry. Although tourism arrivals fell from 14.1m in 2010 to 9.1m in 2015, and even as low as 5.4m in 2016 according to World Bank data, the number of tourists to Egypt had rebounded to 11.5m in 2018. Tourism revenue rose by 45.7% during the first three months of the fiscal year, according to numbers released by the CBE.

While the tourism industry has seen an uptick in recent times, security threats have not been completely extinguished. Indeed, there have been a number of attacks in recent years, not only directed at police and security apparatuses but also towards specific groups, such as Egypt’s Coptic Christian population. During Palm Sunday on April 9, 2017, attacks on churches in Alexandria and Tanta killed 45 people, and a shooting targeting a Cairo church and Christian shop killed 11 in late December 2017. Following the Palm Sunday attack, El Sisi declared a state of emergency in the country, which has been extended every three months since. This is, at least in part, a recognition that the security challenge has yet to be fully won.

Neighbouring Libya also poses a challenge in terms of security. Since 2014 the El Sisi administration has supported the Libyan National Army (LNA) of Khalifa Haftar, a move designed to help drive out Islamists and militants from eastern Libya and the Egyptian border. While the security threat in Egypt is mainly driven by domestic groups in places such as Sinai, Upper Egypt and Cairo, the Egyptian state sees a link between activity in the country and Islamist militants in Libya. Given these concerns, Egypt has been quite active and vocal on the issue of Libya. The government has lobbied the UN to lift the arms embargo on Libya, so that it can support the LNA in its fight against militants in the east. However, Egypt’s position has not yet been fully backed by the international community.

Health Insurance

The government got another legislative win in December 2017 with the passage of a new health insurance law. The regulation makes health insurance mandatory through the General Authority for Health Insurance and will see the gradual phase out of state-funded medical care. The government will also cover the cost of insurance for Egyptians living below the poverty line. The move is seen as a means of both improving the financing mechanisms for health care in the country and also improving the provision of, and access to, services for all Egyptians. The expanded insurance scheme will cover a range of diseases and procedures that are not currently included in insurance policies, and extend the hospital network that is covered. Currently, only six hospitals in Cairo are in the network for government health insurance.

The legislation is not without its critics. The law has been criticised for the lack of public consultation and speed of its passage. Furthermore, groups such as the Egyptian Medical Syndicate, and political parties such as the Popular Alliance and Al Tagammu, have expressed concern that the law has led to the complete privatisation of medical provision. “The new system requires [the government] concluding fixed-term contracts with government hospitals based on specific quality standards, which would exclude government hospitals from the new health insurance plan in favour of private hospitals,” Ehab El Taher, secretary-general of the Egyptian Medical Syndicate, told regional press. Thus, the success or failure of the mandatory health insurance scheme will likely come down to the specific details of the administrative regulations and implementation.

Outlook

While significant progress has been made over the past two years, specifically with significant improvements to the macroeconomic picture and investment environment, the country continues to be affected by a number of familiar problems. The determining factor for the long-term success of this nation will be whether people feel real improvement – in terms of their standard of living through higher wages and levels of employment – before increasing economic pressure may require deviation away from a programme that is already benefitting many businesses.

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The Report: Egypt 2019

Country Profile chapter from The Report: Egypt 2019

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