Egypt has struggled in the five years since the Arab Spring, as political uncertainty and economic instability erode investor confidence and limit growth.
Its economy has expanded a modest 2.5% annually between 2011 and 2015. Foreign exchange reserves have dipped to precariously low levels. An overvalued currency has hurt Egypt’s export competitiveness. Foreign currency shortages have kept domestic and foreign businesses from fully participating in the economy.
But last month, Egyptian authorities took an important step toward stabilising the economy and revitalising the private sector. A series of bold economic reforms reduced fuel subsidies, introduced a value-added tax, and floated the Egyptian pound. Several initiatives are also being launched to stimulate private investment and reduce the costs of doing business.
These policy changes are the most important Egypt has made in decades, laying the foundation for a new, more nimble economy powered by innovative private businesses and better able to create the opportunities Egyptians crave. Fully implemented, they can help bring the economy back on track, and address rising unemployment and slow growth—by stoking foreign investment, boosting exports, and spurring the development of local businesses.
Getting there won’t be easy. In the short-term, the reforms are likely to be painful, especially for the millions of poor Egyptians who rely on state subsidies for things like fuel. Most importantly, the government’s reforms are accompanied by measures to strengthen social protections for the poorest through targeted subsidies that will reduce inefficiencies that have plagued Egypt for years.
Staying on course is vital
And here’s why: investors have been in “wait-and-see” mode since 2011. Foreign direct investment dropped by more than two-thirds following the two revolutions in the past six years, and today remains a fraction of its peak before the uprisings. We believe the reforms unveiled last month will help to reverse those trends.
Cutting fuel subsidies will remove distortions in the market and encourage companies to be more efficient and use more labour-intensive technologies. It will also be a boon for Egypt’s promising renewable energy industry, making wind farms and solar plants more competitive with gas- and oil-fired power stations.
The new value-added tax will help increase government revenues and alleviate the country’s ballooning fiscal deficit.
Finally, by floating the pound, Egypt will become a more enticing destination for foreign investors and tourists, and Egyptian goods will be more competitive in the world market.
But these reforms by themselves are not enough to revitalise Egypt’s economy. They need to be paired with other structural changes that encourage the development of private business. The recently announced initiatives to improve the investment climate are a good start. The government can take additional steps to bring in business and create opportunity.
First, it must continue to embrace public-private partnerships in the infrastructure sector, so firms can use their capital and know-how to deliver services that make life better for everyday Egyptians. The potential is clear: five years ago, the government supported a public-private partnership that built a pioneering waste-water treatment facility on the outskirts of Cairo. Many other key projects—from power plants to hospitals to shipping terminals—are possible.
Second, Egypt must do more to make it easier for small businesses—the backbone of the economy—to get the financing they need to thrive. To improve access to finance, laws that support secured transactions and collateral registries have been critical. These important pieces of financial infrastructure make it easier for smaller firms to secure loans.
Third, to showcase the untapped potential of Egypt’s young labour force, the government should encourage the development of private colleges and vocational schools—especially those that specialise in fields like IT and logistics. Doing so would arm students with the skills they need to find work in a fast-changing and more open and innovative economy.
Finally, channelling funds to accelerators and venture capital firms is essential. Egypt has a dynamic start-up space, with accelerators like Flat6Labs and venture funds like Algebra and Wamda leading the change. The country needs more of these firms to create a vibrant knowledge economy that offers well-paying and rewarding jobs to young Egyptians.
As an economy, Egypt has tremendous long-term potential. It has a strategic location, a young, dynamic population, a large consumer base, and a rich cultural heritage. But its people have long yearned for greater prosperity and inclusion.
The country is taking strides to lay the foundation for a better future for its youth. Its reforms may take a little time to show results. But the international community stands behind Egypt through this transition to support the government’s goal to make sure that the reforms will work for its people. IFC has invested $2.8bn in Egypt over the past decade, and we plan to continue to support the country’s infrastructure development, while boosting its competitiveness, improving access to finance, and promoting skills development.
The opportunity is great. Now, Egypt needs to do all it can to create even stronger incentives for businesses to invest in the country’s future. At IFC, we stand ready to help finance such investments.
