Egypt faces political, but also economic challenges

Mubarak has gone. A peaceful revolution organized through Internet has achieved it. After days of demonstrations by Egiptians at the Liberation Square at Cairo, the peaceful revolution succeeded with the congratulations of Japan, Latin America, USA, Europe and other Arab countries, even fundamentalists, such as Iran or Yemen.

The cradle of the Pharaohs seem to have started its way towards democracy, but the ancient “breadbasket” of Africa faces now many challenges not only politic or economic but also, and more important, social challenges.

If the social unrest continues in this country not so much oil producer, but gas exporter, and protests spread over other countries in the region, which have a key strategical importance for the global energy supply, this insecurity could well risk the still weak economic recovery in the West due to a more than predictable rise in the prices of oil and other energy sources.
In fact, the social protests have already bursted in Algeria.

Federico Steinberg, Senior Researcher on Economy and International Trade at the Royal Institute Elcano, speaks about all these issues in his article titled Economy and Crisis in Egypt. We reproduce the whole article it below, with permission of the Royal Institute Elcano.

How has the Egyptian economy evolved in recent years?

Leaving aside that the social outbreak in Egypt has been launched by political factors, recent economic developments hve undoubtedly played its role in the civil unrest. Macroeconomic data from the country show relatively positive developments in recent years. However, they need to be taken with caution not only because the official statistics may differ from the social reality due to the weight of the informal economy, but also because the macroeconomic aggregates tend to hide the problems of inequality, underemployment and low capacity of the Egyptian tax system to redistribute the outcomes of the economic growth.

In addition, any analysis of the economic development in the country should take into account that more than a 50% of the population lives on less than two dollars a day and Egypt was one of the most affected countries (and where the they took place major turmoils) during the global food crisis in 2008.

Which is the oppinion of the IMF on the macroeconomic data of Egypt?

Well, according to the International Monetary Fund (IMF) country macroeconomic landscape of the country reflects a stable and favourable development. Like other emerging countries, Egypt managed to avoid the impact of the global recession and its GDP has been growing by a 5% from 2008. The “official” unemployment rate is somewhat below the 10%, but must one must bear in mind that a 80% of the companies and a 40% of jobs are generated by the informal economy, which means that there is a huge amount of hidden underemployment. Besides, they were worrying both the growth of inflation (it exceeded the 16% in 2009, the latest data available) and the government deficit (around a 8% of GDP). Per capita income, measured in terms of purchasing power parity, stood at $6.367 in 2010 but it has been showing a slow down in its growth from 2007.

What do say the polls about the Egyptians’ disconfort on their economic situation?

Although these figures show a picture of apparent stability, the truth is that the data from a poll on the opinion about material well-being opinion carried out by Gallup show a continued pesimism of the public opinion regarding the personal economic situation and employment prospects. While a 29% of the population declared to be thriving in 2005, this percentage fell to the 25% in 2007, then to the 13% in 2008 and stood at a minimum of a 11% in 2010.

Which economic effects may the Egyptian crisis have in other international markets? Particularly in the energy sector?

The international economic implications of the Egyptian crisis are difficult to anticipate. Beyond of that while political instability continues the Egyptian economy will suffer a continuous deterioration and the tourism sector will be paralyzed (which will benefit other destinations in the Mediterranean). The main adverse impact on the world economy could come from the energy field.

Egypt is not a too prominent producer of hydrocarbons. It virtually doesnt export oil, but gas in the form of Liquefied Natural Gas.
However, the political instability in the Middle East has historically led to a growth in the prices of oil, which has resulted in global recessions. They happened oil crises in 1973 and 1979, and to a lesser extent, in the beginning of the 1990s recession, which was preceded by the first Iraq war.

The current Egyptian crisis could contribute to a further escalation in the price of oil, which is already on top of $100 by at least two reasons.
First, through a continuous political instability, which could spread over other countries in the region, increase geopolitical risk and encourage the accumulation of reserves (strategic and speculative) in consumer countries.

Second, because revolts result in generating problems in the global energy supply through transport break down both in the Suez Channel (Egypt) and the Straits of Bab el Mandeb (Yemen) and Hormuz (Iran).

If stability returns to the streets in Egypt soon and do not generate similar turmoils especially in countries located at the Middle East region this rising prices scenario should not become materialized. But on the contrary, the increase in oil prices could generate inflation rise, which will force central banks to raise interest rates, and this could lead to truncate the weak economic recovery in the developed countries, especially in the periphery of the euro zone, United Kingdom and the United States.

Image over the headline.- The Nile River at El Cairo (Egypt). Photograph by Raduasandei in English Wikipedia.[Public domain], from Wikimedia Commons

Related Eastwind links:

Why is it expanding this social protests wave through several Arab countries?

Related Eastwind Marketing links:

The rise of the “Fifth Power”

IJMA3 urges the Egyptian Government to fully and immediately restore Internet connectivity