Tunisia did it. Now, Egypt is banking on smooth, timely elections. The finances of the post-revolution economy may no longer be on the brink, thanks to the financial support pledged by Gulf countries. But, a rapid transition to democracy is vital for Egypt to finance its ballooning fiscal deficit, kickstart the flagging economy, and deal with rising unemployment.
The euro zone crisis has reduced expectations that the G8 would deliver on its aid promises. But, Qatar, Saudi Arabia and the UAE have reiterated their commitments of around $7 billion of aid through an unspecified mixture of direct budgetary support, government bonds purchases, and central bank deposits. The speed of the decline of foreign reserves — $24 billion at the end of August, down by a third since the uprising — should slow or even begin to reverse as the aid is collected.
Fears over a dramatic widening of the current account deficit have also eased. Tourism has collapsed. But, according to HSBC, new data show imports have also fallen sharply and were flat in July in dollar terms compared to the previous year. The International Monetary Fund now reckons the current account deficit will fall to 1.9 per cent of GDP or, $4.4 billion, in the financial year ending June. It was previously forecast to rise to 2.7 per cent. But, Egypt still needs to lure back foreign investors to alleviate pressure on domestic banks and help finance its fiscal deficit, forecast at 10 per cent of GDP in 2011. That is unlikely to happen until the central bank abandons its informal policy of defending the pound to avoid triggering a second major capital flight this year. Egypt’s currency has barely moved over the past three months, making it, bizarrely, one the strongest performing of the emerging markets.
Investors expect a gradual 5-10 decline in the pound once the Egyptian political environment stabilises and the country proves it can stage peaceful parliamentary elections, due to start at the end of November and run until early March. This makes it difficult for Egypt to sell its short-term bonds. But, without a return of tourists — which a gradual devaluation would help — the country will find it hard to achieve six per cent growth, instead of the current 1.2 per cent, it needs just to keep unemployment steady. Even with the promised Gulf aid, Egypt’s fortunes hang on its upcoming elections.