Egypt's Economy Reels As Capital Flees

Egyptian voters line up at the polls in large numbers. Islamists have won the majority of the vote while capital pressures the country., a photo by Pan-African News Wire File Photos on Flickr.

Egypt's Economy Reels as Capital Flees

Political unrest is hurting Egypt's economy: GDP is falling, factories are closing, and the nation's finances are worsening

Just a few days before Egypt’s elections, Mohammed Mohsen threaded through the protesters in Tahrir Square as they fought with police. Briefcase in hand and a surgical mask on his face to ward off tear gas, Mohsen was trying to get to his job at a Cairo medical lab. “This paralyzes our lives,” he says, pointing to the protesters. “People will see these images playing out on satellite channels. Then the investors whom we’ve been pleading with to return will stay away.”

Despite the protests, Egypt went ahead with largely peaceful Parliamentary elections on Nov. 28, a positive step toward democracy. Ahead is a drawn-out handover of power from the army to civilians that could fuel more economic troubles.

Since President Hosni Mubarak stepped down in February, tourists and investors have shunned Egypt. The gross domestic product contracted an annual 4.2 percent in the quarter through March and grew only 1.8 percent in the fiscal year ended in June. Egypt’s benchmark stock index is down more than 44 percent this year, and the government is paying almost 15 percent to borrow for nine months on domestic markets.

A rise in crime and violence has rattled local business. Makram Mehany, chairman of Global Napi Pharmaceuticals in Cairo, canceled overnight shifts at his factories after guards at one of his plants were fired on, he says. Ragab al-Attar, a Cairo spice and nut wholesaler, had to triple the guards on his payroll. During Ramadan—a high season for almonds, hazelnuts, and other delicacies—he imported 80 percent less than last year. “There’s no security for people to go out and shop,” he says.

Some protesters are going after business. One person died in clashes between security forces and demonstrators blocking a main road to the northern port of Damietta, which effectively shut down operations. The demonstrators were protesting pollution from a nitrogen plant partially owned by Agrium (AGU), a Canadian fertilizer producer. The Damietta port’s closure cost the government 35 million Egyptian pounds ($5.8 million) a day, the transport minister told reporters on Nov. 16. Minister of Industry and Foreign Trade Mahmoud Eissa asked Damietta’s residents to urge protesters to “have mercy on the economy and industry of Egypt. We don’t have much left to lose anymore.” The port has since reopened.

Egypt may ask the International Monetary Fund for the $3 billion loan the country rejected earlier this year. Private banks are hurting. “The banking sector has been affected by the government’s borrowing needs, which overcrowds the money available to the private sector,” says Said Hirsh, Middle East economist at Capital Economics, the London-based consultant. A currency crisis, says Hirsh, has erupted as foreign investors flee the bond market. The central bank has had to spend nearly 40 percent of its reserves to keep the Egyptian pound at the current rate. “This is unsustainable,” Hirsh says.

Tourism, valued at about $12 billion annually, dropped 35 percent in the first half. At least increased shipping drove earnings up 11.7 percent for the state-owned Suez Canal Authority, to $3.5 billion, in the first three quarters. Remittances, valued at about $8 billion annually, have flowed steadily from Egyptians working outside the country. Those abroad can see their families at home need help.

The bottom line: After contracting 4.2 percent in the March quarter, the Egyptian economy now must deal with a currency crisis.

Fam is a reporter for Bloomberg News. Alexander is a reporter for Bloomberg News.