Global Agenda: A tiger on the Nile?

Most Israelis have no idea that the Egyptian economy is on a tear, chalking up growth rates that are high, rising and very impressive.

pyramid 88 (photo credit: )
pyramid 88
(photo credit: )
The state of affairs in Arab countries, including those directly bordering Israel, attracts virtually no coverage in the Israeli media. Changes in government, and certainly terrorism, rioting or other negative news, are immediately reported, sometimes prominently, but anything normal, such as economic and social developments in our neighbors or in the Arab world generally, are treated on a par with news from Uruguay or Laos. Meanwhile, right-wing Israeli politicians and columnists delight in regaling the Israeli public with fearsome details of Egypt's military program, which they see as aimed at us. Hardly surprising then, that most Israelis have no idea that the Egyptian economy is on a tear, chalking up growth rates that are high, rising and very impressive. The Egyptian government, would you believe, does not only engage in efforts to mediate between the Palestinian factions - which is all we ever hear about - it actually makes economic policy as well and has initiated a slew of economic reforms in recent years, some of them very significant. These have finally begun opening up the economy and shaking it out of its torpor. GDP growth, which averaged 4.4% in the 1990s - not much for a developing economy, especially one with the demographic challenges that Egypt faces -fell further to around 3% in 2002 and 2003 before climbing to 4-5% per annum in 2004 and 2005 and surging to 7% in the current fiscal year (2005/06) and a projected 7.5% next year. This performance has generated talk of Egypt becoming "the China of the Middle East" and, perhaps inevitably, of the emerging "Tiger on the Nile." So let's stay with Morgan Stanley analyst Serhan Cevik as he continues his wanderings around the Middle East and North Africa, and hear what he has to say about the Egyptian phenomenon. The essence of his take is that he is distinctly unimpressed. The reforms put in place are important steps, he agrees, but still no more than a beginning in terms of what really needs to be done. And the growth? More froth than substance. "Egypt's staggering performance is mainly a result of expansionary macroeconomic policies and the global liquidity injection," he finds. Thus the country is "a prime example of liquidity-driven growth stories around the world" - and especially, as we saw last week, in this region. The rapid rise in the growth rate is not good news, or at least has no lasting value and is now entering "overheating territory," in his assessment. Evidence supporting this view is not hard to find: even official inflation data, whose accuracy is debatable, show that the annual rate of inflation has jumped from 3.2% at the end of last year to 11.8% in October 2006, and therefore represents "a significant risk to stability." What is causing this? In part, it is due to one-time and even positive factors such as the much-needed reduction in fuel subsidies, which naturally caused price rises at the consumer level. "But we believe there are more important, fundamental factors behind overheating in the economy - one of the root causes of the unbalanced, inflationary growth is the expansionary mix of fiscal and monetary policy." Although the Bank of Egypt has raised interest rates, these are now below the inflation rate and hence negative in real terms - "expansionary," in economists' jargon. But the real problem is fiscal policy with the budget deficit at around 10% of GDP. Although this fell to 8% in the latest fiscal year, the failure to sharply reduce the budget deficit during these good times suggests to Cevik that the boom is unsustainable and that trouble is brewing. The fact that the share of government expenditure within GDP is growing instead of falling basically gives the game away. The engines behind the economic growth of recent years have been the natural gas industry and a construction boom - the latter, in particular, fuelled by petrodollars from the Gulf. This narrow base of growth means that the economy's productive capacity, hampered by low productivity growth, is lagging behind the burgeoning demand of both consumers and the public sector. In simple terms, too much money is chasing too few goods, with inflation the inevitable outcome. Because of these underlying negative issues that are not being addressed, "the euphoria surrounding the country's [high growth] could easily subside if the global economy goes through an abrupt and painful adjustment phase." There again, the Nile never was tiger territory.