Egypt’s Looming Concern: Increasing Violent Unrest and a Fragile Economy

September 21, 2017

Global Risk Insights

The state of the economy of Egypt has garnered the attention of the IMF.  Investments are needed but will the escalating violence and increasing prices hamper such efforts?

The land of the Pharaoh’s is facing a double-edged sword.  Following the ouster of former president Mohammed Morsi, many hoped the situation in Egypt would stabilize with current president Abdel Fattah el-Sisi.  The majority of Egyptians were seemingly exhausted after two Revolutions and years of uncertainty in the political, security and economic establishments.  After all, certainty is needed when it comes to investments, which in turn helps balance other sectors of the country.

However, the current climate in Egypt is filled with economic hardships on one hand and a rising threat of disenfranchised Islamists and the so-called Islamic State on the other.  Detailing some of these factors is crucial when analyzing the future state of Egypt.  Let’s first touch on the economy.

Egypt has been struggling since 2011 to attract both investments and tourists.  The former dropped by 40 percent throughout 2016 and CAPMAS stated that tourists to Egypt fell to 4.8 million in 2016 compared to 14.7 million in 2010.  Before 2011, one in ten people in the workforce worked in the tourism sector, generating approximately $12.5 billion in revenue.

With a budget deficit reaching 12.2 percent of GDP in the fiscal year which ended in June 2016 and unemployment hovering around 12.4 percent in the final quarter of 2016- leaders in Cairo looked to attract foreign investments to help stabilize the fragile economy.  One of the last scenarios many people desire, especially with the region in turmoil, is for Egypt to collapse.

In November 2016 the IMF stepped in attempting to address some of these issues with a 12 billion loan over three years.  Additionally, the Egyptian parliament recently passed the investment law to further attract direct investments to Egypt.  Will loans and favourable laws for international companies alleviate any pressure? Other concerns besides economic troubles loom on the horizon.

The security situation is proving to be quite a headache as well.  Following the removal of Morsi and subsequent dispersal of the sit-in at Rabaa al-Adawiya Square, young Islamists (likely affiliated or sympathetic to the Muslim Brotherhood), are beginning to show signs of organized violence directed against the state.  Although still in a relatively nascent stage, and seemingly sporadic, attacks mostly targeting security forces have occurred with increasing precision particularly in Greater Cairo and the Nile Delta.

Among the more notable groups to emerge is the enigmatic organization known as Hasm(“Decisiveness”) who entered the scene only a couple of years ago.  Widely believed to comprise of Egyptian Islamists largely associated with the Brotherhood, but also possibly elements of Salafi circles, this group has already conducted numerous high profile attacks.  Assassination attempts against police, army personnel, senior judges, lawyers, prosecutors and even the former Grand Mufti Sheikh Ali Gomaa by small tactical hit-and-run units as their preferred method is indeed unfolding.  Those targeted from the list just mentioned were somehow involved (even if just symbolically) in the removal, dismantling and imprisonment of the Muslim Brotherhood / Freedom and Justice Party (FJP) as a political party at the highest levels down to low ranking individual members.

In addition to this threat, there lives a mounting insurgency in northern Sinai.  Jihadists fighting for what was then called Ansar Bait al-Maqdis (ABM) before pledging allegiance to the so-called Islamic State in 2014 have unleashed constant attacks on Egyptian soldiers and their allied tribal fighters.  Moreover, and quite catastrophic for the Egyptian tourism sector, was the downing of a Russian plane packed with tourists over the Sinai.  The plane departed from Egypt’s popular resort town of Sharm el-Sheikh before being brought down by a bomb on October 31, 2015 (include link).

This strategic attack was claimed by the new ISIS affiliate in northern Sinai.  Strategic in a sense because as previously mentioned, the tourism sector is a vital source of income, as well as for the fact that Russians make up a significant proportion of tourists travelling to Egypt (nearly a third of all visitors in 2014).

Once a seemingly distant threat confined to northern Sinai’s desert, the downing of this plane suddenly triggered a reduction of tourists which ultimately deplete revenue flowing to Egyptian coffers.  Hence, terror threats and the overall condition of Egypt’s economy are intimately intertwined. The war in the desert waged between Jihadists, Bedouin tribes and the Egyptian army does not appear so secluded and alienated.

The start of 2017 does not appear to show any signs of this threat abating.  On the contrary, attacks are occurring with more frequency and deadliness.  Not to mention hitting closer to Cairo- as was exhibited with bomb attacks aimed against churches in December 2016 and the most recent Palm Sunday attack.

Security measures are attempting to deal with this threat while the IMF loan acts as a cushion to balance Egypt’s economy and attract overseas investments.  Foreign Direct Investments (FDI’s) will certainly ease the pain.  However, in 2015-2016, 53.2% of FDI was in the oil sector while the five biggest employing sectors in Egypt are agriculture and fishing (25% of the workforce); construction and building (12.4%); wholesale and retail (11.5%); manufacturing (10.7%); and education (9.6%).  The relevance here is that during the same time period only 3.4% of FDI’s went towards manufacturing and almost nothing for agriculture.  Investments are not flowing towards the industries employing the majority of Egyptians.

With subsidies being cut over the coming years and prices for staples (sugar, oil, fuel) increasing, austerity-hit Egyptians who mostly rely on such subsidy programs, will face tough times ahead.  This already on top of youth unemployment hovering around 30-40% in the Arab world’s most populous country.  After all, as previously touched upon, there are organizations gaining strength waiting with open arms for potential recruits.  With security comes investments. Then, it boils down to where those investments settle in order to flourish for the prosperity of society as a whole.

Tags: africa, economy, egypt, politics, risk, unrest, violence
Posted in Africa, Politics Risk, Private Equity