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Egypt makes big economic push as leader-in-waiting Sisi courts Russia

Russian President Putin praised Field Marshal Sisi's leadership when he visited Moscow this week. But if the Egyptian economy isn't revived, its leaders may face another revolt.

By Roshanak TaghaviCorrespondent / February 13, 2014

Russian President Vladimir Putin, right, shakes hands with Egypt's Military chief Field Marshal Abdel-Fattah al-Sisi in the Novo-Ogaryovo residence outside Moscow on Thursday, Feb. 13, 2014.

Mikhail Metzel, Presidential Press Service/RIA Novosti/AP

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Cairo

As Egypt gears up for a presidential election in April, its military-backed government is trying to rescue the economy and inject a measure of stability, a feat that eluded its ousted predecessor. It’s a race against time, and against political uncertainty. Without economic improvement, Egypt's next leader – presumed to be Field Marshal Abdel Fattah al-Sisi – will be hard-pressed to maintain legitimacy.

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When it seized power last July, the military inherited a country with dire and complex economic and social problems. Far from dissipating, the despair that fueled the 2011 uprising against a wrong-footed dictatorship has deepened in the last three years, at the same time as political polarization has sharpened. A low-level insurgency has moved its attacks beyond the restive Sinai Peninsula into Cairo, the capital.

Regardless, Egypt’s powerful Planning Ministry has put itself on the clock. By June, the end of Egypt’s fiscal year, it aims to boost economic growth, reduce state debt, and revive the ailing public sector where many Egyptians work.

“We cannot [delink] the political and economic situation,” Planning Minister Ashraf El-Araby told The Christian Science Monitor in an interview at his Cairo office.  “We are hoping to restore political stability as soon as possible, in order for the economy to grow.” 

Egypt’s challenge is huge: Growth slipped to 2 percent last year, compared to an annual average of 5 percent between 2005 and 2010 under former President Hosni Mubarak.  Today, unemployment is 13.5 percent, up from an average 9.8 percent during Mubarak’s final years. Youth unemployment – a tripwire for instability across the developing world – is now above 30 percent, according to Dr. El-Araby.

Yet the apparent appeal of Mubarak-era stability – economic growth under dictatorship – may be illusory. World Bank statistics show the distribution of national income was stagnant for much of the last two decades.  Despite rapid growth and falling unemployment, the absolute gap between rich and poor actually widened during the former dictator’s final years. 

Stimulus spending

Egypt has gotten some relief from Gulf countries that have pledged billions of dollars in grants, interest-free loans, and fuel shipments. This assistance boosted Egypt’s foreign reserves and helped to strengthen its currency. The Gulf aid also helped underpin a $4.3 billion stimulus package last fall, and an additional $4.9 billion package this week.

But the aid package raises the politically sensitive question of whether Egypt can afford to continue subsidizing certain types of fuel and other daily essentials, subsidies that have long been a huge drain on the public purse. 

This year, the government will spend $14.5 billion on energy subsidies alone, says Yasser Sobhi, chief of macro-fiscal policy in Egypt’s Ministry of Finance. He says the pressure is growing to reduce this burden, which mostly benefits wealthy Egyptians. “This government is determined to implement the first phase…and phase out energy subsidies gradually," he says.

The Planning Ministry is focusing on a series of labor-intensive infrastructure projects, most of which were started in 2011 but never completed. These include plans to accelerate the construction of low-income housing, finish building a new local airport, expand the public bus system, and more quickly boost the number of households connected to the country’s national gas grid, says El-Araby.  

“During these times, it’s even more important to stimulate than to lower public expenditures. We received good money from the Gulf, [and] look to spend it wisely on investment spending instead of current spending, such as subsidies,” the planning minister says.

Egyptian officials and members of the business community say the country’s financial woes mean the government has to grasp the third rail of economic reform, and sooner rather than later.

Angus Blair, the head of Cairo-based research and investment firm Signet LLC, says the stimulus package is an important first step. But to make a real dent in the deficit – now 14 percent of GDP – growth would need to be above 3.5 percent, up from his forecast of 2 percent in the year to June 30. (El-Araby says the government is aiming for 3 percent.)

Much hinges on Egypt’s uncertain political and economic dynamics. “Change the dynamic,” Mr. Blair says, “and you can get growth above two percent.”

Political sacrifice

Analysts say any economic gains must trickle down to ordinary Egyptians so that last year’s military overthrow of elected president Mohammad Morsi, and the bloody upheaval that accompanied it, was worth the sacrifice. 

Another important constituency is Egypt’s bloated public sector, which includes sprawling state enterprises, the armed forces, and the country’s six million-strong bureaucracy. 

Last September, the interim government granted a 72 percent minimum wage increase for government workers, boosting monthly earnings to about $180 a month. Public school students also became exempt from paying any sort of school fees or tuition.

The government also amended a law on public contracting which allows a minister or governor to directly award no-bid contracts for infrastructure projects to state and military enterprises in times of emergency. The law previously capped such contracts at $45,000; the limit is now $1.5 million.

When asked why the Planning Ministry decided to circumvent the bidding process for its stimulus spending, El-Araby’s answer is simple: to save time. “We are in a rush.  If we succeed in implementing the stimulus package by June, the situation will be much better relative to the last three years.”

Follow Roshanak on Twitter @RoshanakT

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