Egypt’s Economy in Turmoil

Revolution is rarely good for business. The events in Egypt of the past few days have shut down banks and a number of other businesses in many cities. Multinationals like Electrolux AB OTCMKTS:ELUXY) and Royal Dutch Shell (NYSE: RDS.A, RDS.B) have closed plants. Germany and the UK, among others, have advised against traveling to Egypt. While the country is suffering from deadly political turmoil, its economy has been dangerously slowing. These developments are taking place against a background of an already depressed economy and high unemployment, exacerbating their impact. What is likely to happen, and what can be done?

President Morsi was ousted on July 3rd, 2013, and only a couple days later on July 8, the military, supported by the interim government, attacked demonstrations calling for Morsi’s reinstatement. Since then, camps of Morsi and Muslim Brotherhood supporters have appeared throughout Egypt, and on August 14, after weeks of failed mediation, the military began a large-scale process of dismantling the camps and sit-ins. Hundreds have died in a matter of days, prompting immense protests against the interim government, and condemnation from the international community.

However, without financial help from the international community, Egypt’s economy will probably not survive the current crisis. United States lawmakers have still not decided whether to halt the approximately $1.5 billion in aid they send to Egypt every year. Promisingly for the Egyptian economy, a number of Persian Gulf states have already pledged $12 billion to the military-backed interim government, clearly demonstrating their concern over the stability of the region. We can only hope that the current government will use the funds in the best interests of the Egyptian people.

The unrest has also spooked private international investment. Ishaq Siddiqi, market strategist at ETX Capital in London explained that foreign investors are in a hurry to pull out of Egypt, and are especially concerned since Egyptian Pounds are often difficult to convert into US$. Mr. Siddiqi also ominously predicted a rise in unemployment from 13 to 15% by the end of the year, if drastic changes are not implemented.

International aid cannot on its own save the Egyptian economy. The 21st century economy requires adequate economic relations with other nations. It is evidently a difficult task for Egypt at the present time to restore confidence in its economy, and if the political situation does not improve, it may be impossible in the short term. Law scholar Efraim Chalamish articulated in a post on the Roubini Global Economics EconoMonitor blog how Egypt can reinvigorate its economy: “[r]econnecting the Egyptian economy with the global economy is the only way to encourage growth and build a long-term sustainable recovery.” If the political issues can be resolved, the international community should look to one of Africa’s largest nations and involve it again in the global economy.

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