MarketLine Blog

Egyptian economy suffers after prolonged political uncertainty and instability

Hosni Mubarak being thrown out of power by a people hell bent on determining its own political future might have had a positive emancipative effect, but, wholly in terms of Egypt’s economy, the event was most definitely a negative one.

First, the original revolution in 2011 took immediate negative effect on the Egyptian economy. GDP slumped as events in Tahrir Square and the fight for control of the country obviously diverted attention and effort from economic production: output fell nearly 4% in the first quarter of 2011, and it took another year to grow substantially again.

Employment, too, took a terrible hit. When the original revolution began the rate of unemployment shot up from approximately 9% to 12% and has continued rising ever since to its present level of nearly 14%. Political instability has evidently made things both bad for production and the labour markets.

One of Egypt’s great economic cards has been its ownership of the Suez Canal, however, even this great artery of global trade had been affected, as, naturally, shipping and logistics companies chose to take their business through safer waters. The average number of vessels passing through the canal per month fell from pre-revolution highs of 1800 to a post-revolution low of 1400 in the first month of 2013.

Indeed, it is the continued instability which is destroying the Egyptian economy, not the immediate revolution and its fervour.

All this has proved extremely bad for Egypt’s foreign currency reserves as investors shunned the country. Egypt’s trade balance went from (approx.) a negative $22bn immediately prior to the revolution to a negative $35bn; the country’s FX reserves fell from (approx.) $32bn down to just over $10bn.

This in turn affected, of course, the country’s imports as Egypt could no longer pay for its overseas goods. In particular, and with political consequences, this affected the supply of wheat, of which Egypt is a massive net importer. The pre-revolution import highs of (approx.) 12m tons dropped to current levels of just over 8m tons. And as domestic prices caught up to this economic fact, a seemingly self-perpetuation of political anger was only catalyzed by the increasing cost of living.

Indeed, inflation peaked immediately after the revolution, but as prices have curbed demand, the rise in prices seems to have now dropped to sustainable levels of just over 7% (a fall from nearly 25% in food and drink inflation immediately after the revolution).

And so the Egyptian pound has plummeted against the dollar; but, as political events determine economic events far into the future, it will be the will of the people of Egypt – as we have seen – which will determine the economic success of the country, not international markets.

Find this interesting? You may also like our PESTLE report on Egypt.

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