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May 27, 2014

Washington, D.C., May 27, 2014 - This week Egyptians will elect Field Marshall Abdul Fattah El Sisi as their new President. Even as they give him their overwhelming endorsement, President Sisi remains strangely mum about his plans for rescuing the country from the deep discord that has prevailed for more than three years. On the evidence so far, the prospects for Egypt remain uncertain with large risks to the downside.

The challenges President Sisi will face on his first day in office are daunting. The political landscape, appearing superficially supportive and calm, is in fact fragile and deeply fractured. Similarly, social and economic conditions since the January 2011 uprising continue to deteriorate.

The chaos, the breakdown of security, and the frequent outbursts of violence have stymied investment and growth. Unemployment is in double digits and has soared especially among the youth. Tourism, a source of livelihood for a large segment of the labor force, is down by a third while factories are running far below capacity. The budget deficit this fiscal year (excluding grants) will approach 15% of GDP, and government debt could rise to near 100% of GDP, from 79% at end 2010.

The ascendancy of Sisi since July of last year, projecting an image of decisiveness and strength, has helped calm fears temporarily. At the same time large financial assistance from the principal Gulf countries has brought about economic relief and buoyed financial markets. Without a fundamental change in policies, however, this shift in market sentiment will prove to be only fleeting.

With his vast popularity and the support of virtually all state institutions (the military, the judiciary, the security establishment and civic society), can he provide the key to healing Egypt's economic and social ailments? Even more crucial, what happens if he doesn't succeed?

President Sisi will inherit a political and economic system that is years past its expiration date. An ossified political system dominated by a corrupt state-sponsored party and an antiquated economic system weighed down by a bloated bureaucracy and loss-making state enterprises. Having missed out on the fundamental reforms that the forces of open trade and globalization have forced on many emerging market countries, Egypt's growth has lagged that of its peers for decades.

There is of course the hope that President Sisi should have the political capital to launch the bold, structural reforms that Egypt so badly needs. Among other things, these would require overhauling state structures and unleashing market forces to fuel investment and growth. Unfortunately, President Sisi is unlikely to turn on an establishment that helped him rise to the top leadership, and there is no political constituency of any significance in Egypt that is advocating for such reforms.

So we are back to "˜incrementalism', a path Egypt has often taken in the past. This means that following the election, reforms may be put forward but these will focus on the usual "˜low hanging fruits' of improving the efficiency of subsidies (not the fundamental reform needed) and of government spending more generally, ,superficial improvements in the business environment to draw in domestic investors (foreign direct investment is not viewed favorably). Continued financial assistance from Gulf countries should facilitate these cautious steps and help finance numerous job-creating infrastructure projects.

At some point, the Gulf and multinational donors will advise recourse to the IMF and this could augment these modest reforms. A program with the IMF will also catalyze substantial additional funds from other potential donors.

What such a program will produce are moderate rates of growth and modestly improved economic conditions, but no material shift in the growth path from historic trends and no qualitative difference in the lives of ordinary Egyptians. President Sisi however, sees himself as a man of history, destined to make Egypt again a powerful and prosperous country, and modest results may not be his goal. He will then have a choice. Would he simply continue to muddle through, or would he take advantage of an improved environment and make a push for fundamental reform, by transforming Egypt's economy and reforming its political system?

If President Sisi does challenge the status quo and succeeds, he could finally unlock Egypt's vast potential and launch the economy onto a path of high and sustainable growth. Over a number of years, Egypt could begin to glimpse the prosperity for which it yearns. Meanwhile, economic success could also begin to induce political reform. Egypt's prospects would look good indeed.

However, if President Sisi chooses not to challenge the state's hegemony, Egypt could revert to the conditions of slow growth and growing discontent. The consequences of such an outcome would be both serious and ironic. For failing to meet the public's high expectations that Egyptians had pinned on him, President Sisi could find himself at the end of this period of relief, facing the same crowds in the streets of Cairo in whose name he claimed the reins of power in the first place.

By George T. Abed, Senior Counselor and Director for Africa and the Middle East

Media Contacts

Dylan Riddle

Tel: +1 202.857.3626

Email: driddle@iif.com