Egypt: Uncertainty is bad for business

CAIRO, Egypt — In the tense aftermath of the January 25 Revolution and amid the ongoing violence of the ‘Arab Spring,’ the economic situation in Egypt is in turmoil.

But the hard economic impact, in terms of lost tourism dollars, unemployment and inflation, is perhaps not as bad as some feared. The turmoil is largely political and as the labor movement seeks to capitalize on the populist sentiment for social justice that coursed through the Tahrir Square uprisings, the business sector is worried.

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The most persistent problem is still a climate of uncertainty in Egypt as the Supreme Council of Armed Forces (SCAF) is hesitant to send clear signals about a timeline and strategy for a handover of power to a civilian government. The pending November 28 election will serve as a test of sorts of whether Egypt can find the stability it seeks.

But while the country tries to move forward, Mona Said, economics professor at the American University in Cairo, said fears are mounting in the business community that populist economic approaches to achieve social justice could create an economic environment unfavorable to investment.

"I think at the moment the biggest hindrance to investment is a lack of clarity about the transition and worries about security. I suppose [investors] are waiting to see if there are strong socialist overtones, and if the elected government will try to nationalize the private sector,” explained Said. “Foreign capital is very [fearful] as they say, they want to steer away from a lack of clarity now."

Said believes there is no conflict between social justice and investment as long as an elected government can set long term economic policies and lay the foundations to a well-functioning economic institutions that will encourage investment.

Magda Kandil, Executive Director of Egyptian Center of Economic Studies told GlobalPost that the lack of a clear vision to hand power to an elected civilian authority causes an investment drain as investors wait for a stable government willing to set a long-term economic policy.

"The government continues to borrow to offset the increasing budget deficit, in addition to the lack of a consistent economic policy to accommodate the demands of labor strikes," she explained, adding that the government met the demands of workers in some sectors, which encouraged the rest of workers to demand the same.

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"The government did not clarify from the beginning what could be accommodated and what could not be accommodated,. A firmer approach could have been taken since the beginning so that it would have stabilized the economy before everything is out of control," Kandil added.

But the consensus among economic analysts is that things are not out of control.

The most significant impact, economists say, may come from the country’s budget deficit, which increased about 30 percent to LE 130 billion in September from LE 98 billion last year, according to the Ministry of Finance's September financial report.

The Central Agency for Public Mobilization and Statistics (CAPMAS) said that unemployment rose to 11.9 percent in the first quarter of the financial year 2011, from 9.8 in the forth quarter of the financial year 2010. Meanwhile the growth rate decreased from 5.8 percent in 2010 to 2.6 percent in 2011, according to reports by the Ministry of Planning and International Cooperation.

The interim government and SCAF blame the economic turmoil on the instability created after the revolution, specifically labor strikes spanning across Egypt demanding social justice and setting minimum and maximum wages.

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"The government completely understands the legitimacy of these demands, especially after the long history of injustice and lack of transparency in the available resources during the past regime," Minister Hazem El-Biblawy said at a press conference at the Stock Exchange Market.

"But on the other hand, the situation is really difficult and needs everyone to cooperate with the government where everyone goes to work first," he added.

He also confirmed that the first step to stabilize the economy is that the government restores the trust of the people that the government is really working for their benefit.

On the contrary, political activists, analysts, and international rating agencies blame an absence of a clear political and economic vision by the Egyptian authorities to end the gloomy transition period.

Standard and Poor’s (S&P) and Fitch Ratings have downgraded Egyptian currency ratings to negative as wavering political policies to end the transition period take longer than expected.

"Fitch Ratings believes Egypt cannot begin its long-term recovery until there is more certainty about its political future," the agency said in a statement released early in October.

"Fitch has previously said it expected the sharp fall in foreign currency reserves largely as a result of substantial capital outflows to start being reversed by external support in Q4. The delays to the political transition are now causing concern, with reserves continuing to fall, and the global backdrop less supportive," the agency stated.

Tourism hard hit, but hopes high

Tourism has undergone a severe decline since February, directly after the toppling of the country's strongman Hosni Mubarak. It began to pick up in the following months, especially in areas away from Cairo where instability was greatest.

"Numbers of tourists are coming close to the normal in the Red Sea, Sharm El-Shiekh, Hurgada as occupancy rates in hotels reach up to 65 percent. The big problem is in Cairo which is associated in the mindset of everybody with the political turmoil," Chairman of the Egyptian Tourism Authority Amr El-Ezabi told GlobalPost.

"The accumulated decrease of tourists from the beginning of the events until now is around 40 percent. In February, we witnessed a decrease worth 80 percent; 60 percent in March; 40 percent in April and in September the decrease is only 20 percent," he added.

El-Ezabi expects the rate will come back to normal by February of next year.

Mina House restaurant manager Ehab El-Husseini said that the hotel is suffering a decrease of 70 percent in occupancy rates, adding that tourists get easily affected by what he believes are incorrect perceptions about the political turmoil in Egypt.

"We were expecting a foreign delegation of 817 tourists to stay in our hotel, but a rumor circulating about a mass protest in Tahrir following Maspero violence decreased the numbers of tourists coming to only 70," El-Husseini said.

"A rumor of a protest that never took place affected us that much," he added. "People perceive that the protests all spanning the entire country, but they do not know that they are only in certain places away from touristic destinations."

El-Ezabi agrees. "A lot of things happening now are a matter of perception. There are labor strikes worldwide, in London, in Spain and in Wall Street."

He added that labor strikes took place in front of the parliament and the cabinet even before the revolution, but they increased in frequency "which is normal in a country like Egypt where the rights of organization, expression and communication are the real basics of an evolving democracy,"

El-Husseini said a clear roadmap for ending the transition period with a specific timeline for parliamentary and presidential elections is the only solution left to boost tourism and bring back investment influx into the country.

"We need a civilian president; a military rule cannot create a fertile investment environment. Add to this a weak government that cannot intervene to control the security vacuum and approach strikes," El-Husseini said.

Being severely affected by the political turmoil in Egypt, vendors and camel jockeys working in the pyramids at Giza find it hard not to blame labor strikes for causing their economic disparity.

Her face tan after staying for hours selling water bottles and Pepsi cans near the pyramids and a big green veil covering her entire body, Om Hassan, 52, wishes more tourists would visit the pyramids after the strikes in the country stop. The mother of three hopes that will boost the "production wheel," citing a term first coined by ousted president Hosni Mubarak in his second speech during the uprising when he called on Tahrir protesters to go back home.

"These protest harm us, there are no tourists here," said Hassan, pointing out at the pyramids. "I used to earn LE 200 a day, now I barely earn LE 20," she added.

Although she can easily sell her goods in Tahrir Square during the hot days of the protests, Hassan said she fears of getting caught up in the violence.

"Here in the pyramids, police trucks are here to protect the tourists, so I feel secure. But in Tahrir, a police truck means a catastrophe, so I do not want to get myself in trouble," she added.

Ashraf El-Gammal, a camel jockey, who worked for the last 20 years in the industry, said that the months following the revolution were the worst.

"We had to sell our camels to feed our children," El-Gammal said. "We need to restore to calmness so that the government can work to boost the production wheel," he added.

Ahmed El-Naggar, head of the economic division in Al-Ahram Center for Political and Strategic Studies, blamed the counter revolution and remnants of the old regime for the fall of tourism.

"The revolution was completely civilized and peaceful, but allowing thugs to attack the protesters, allowing state security forces to operate freely to use excessive violence against the protesters during the revolution, and the withdrawal of police forces from the streets created a security vacuum that negatively affected the tourism industry and foreign investment," he said.

El-Naggar added that overcoming the crisis is possible if there is a political will to control the security vacuum.

Labor strikes and the fight for social justice: Destabilizing the economy?

Recently, labor strikes have extended from workers in privatized factories to doctors, teachers, public transport drivers, and communications company employees, among many other sectors.

In 2006, labor strikes demanding social justice started in Mahalla textile factories and extended for different sectors in the economy, reaching their peak on April 6, 2008 when police forces used violence to crackdown on the protests and dozens were killed and injured.

The protests coincided with a call for a general strike against increasing prices of basic goods called by a group of youth who later founded April 6 movement that later became one of the forces calling for January 25 revolution.

"Any strike in the world directly affects the production process of the institution where the strikes take place, but the question we should answer is: Are they demanding legitimate rights or not? Definitely they are, and actually the demands are below what they really deserve," El-Naggar said.

"Then the other logical question that should follow is how far the government is willing to meet these demands, I would say that government can immediately tackle them," he added.

El-Naggar explained that one step could be taken to stop all labor strikes by setting a minimum wage of LE 1200 and maximum wage of 15 times this number.

"Restructuring the wage system in Egypt is a major step towards achieving one of the revolution's demands to achieve social justice," El-Naggar said, describing wages in China, mostly known for being the lowest worldwide, as triple the wages of the minimum wage called by the labor movements in Egypt.

"What the government needs LE 40 billion monthly to meet the minimum wage demands. The government allocates LE 95.5 billion for energy subsidies, LE 75 billion goes to heavy industries like Cement, Steel and Fertilizers industries that export their products higher than the international prices" El-Naggar added.

On the contrary, the government pays the poor only LE 2.4 billion in the form of social security pensions, "which go to 1.5 million families, nearly 7.5 million citizens, giving only LE 26 per person, being extremely unfair," he explained.

Renationalization of government-owned factories that were sold through corrupted privatization contracts are on the rise after the revolution, as rights organizations coordinating with labor movements managed to stop the privatization contracts of many companies that were sold before the revolution.

Shebine El-Koom Textile Factory is one of these companies, sold for LE 174 million despite an original estimated value of LE 600 million, according to a report released by the Egyptian Center for Social and Economic Rights.

Even after winning a court case in September to end the company's privatization contract, workers in Shebine El-Koom factory see a crisis looming as the investor is reluctant to hand in the factory to the government ownership.

"Moreover, the Indian investor is preventing row materials to be processed into the factory, completely paralyzing the production process," Ali Nour, a factory worker told GlobalPost as he prepares for a protest in front of the cabinet demanding the government's intervention to end the crisis and implement the court verdict.

"We have been fighting since 2006 to get this factory back to Egypt. We were the only competitors for the investors' main company in Turkey and India, so this deal was done to end Egypt's competition in the international markets," Nour added.

Nour expresses his concern about the "production wheel," saying that workers are most affected by the economic crisis. "But we cannot bear the burden of the increasing prices of basic goods as our salaries cannot feed our children. People are asking us to wait. Wait for what? The death of our children?" Nour wondered.

Head of Mahalla worker union Wael Habib said that the crisis in textile sector is more than just privatization.

"Even if the factories are government-owned, cotton prices are on the rise especially after the revolution, as land rents, prices of fertilizers and chemicals dramatically increased," said Habib, adding that the government is unwilling to buy cotton from the farmers to process the needed row material to the textile industry.

"Why isn't the government directing some of the excessive energy subsidies to partially subsidize cotton so that we can boost an industry?" Habib asked.

Between calls by political activists and analysts for a swift transition to civilian rule to achieve social justice, and accusations by the SCAF and the interim government of the labor movements of causing the economic turmoil, hopes in the future remain high as parliamentary elections are scheduled to start late November and tourism sector promising of a hike starting February.

"This is all what we have, hoping for a better life, hoping for finding the bread to feed our children, raising our hands to God and say: Ya Rab!" Om Hassan said.

This story is presented by The GroundTruth Project.