Unlike its Tunisian counterpart, Egypt's revolution is looking less like a benign flower and more like a thorny branch that has pricked the fingers of its holders, and yet, they refuse to let go. I can understand why: this chance comes only once in a lifetime. Nonetheless, as benevolent is the cause that these "rebels" may have, one cannot ignore the consequences that this uprising would entail. Consequences of which I would like to explore from an economic perspective in the aim to see if the costs outweigh the benefits.
Egypt has one of the Middle-East's largest economies and serves as one of the stabilizing pillars of the region. Its economy in recent years has experienced relatively positive growth and has allowed for the emergence of a middle class: a huge feat considering that Egypt has been plagued by high income inequality, illiteracy, and unemployment for most of the last decades. This middle class was their ticket to join a new league of players allowing for more opportunities to arise and paving the way to rectifying its ills. Yet, the latter's fate depends on the outcome of this uprising.
Furthermore, as it is known to most, this revolution has been ongoing for more than 10 days and is expected to last for a couple more. In my previous post I have mentioned that the financial sector in Egypt has been brought to a screeching halt with its banks closed and its stock market put on hold (both planning to reopen early next week). In consequence, people were forced to live on whatever money they had prior to this shut down. Fine at first, these savings began to dwindle as the days went by leaving most of the populace strapped for cash and therefore temporarily increasing their demand for money which will only get worse the longer this event stretches. Moreover, capital has been observed to leave the country as a consequence to the loss of confidence by foreign investors. What the latter entails is the possible rise of interest rates in the short and medium run. Internally, this signifies that there will be higher lending costs once this storm resides, therefore hindering new investment opportunities and lesser access to loans in an economy where 20% of its population falls under the poverty line. In addition, the loss in confidence should not be taken lightly since Egypt's economy is partially dependent on foreigners namely for its tourism, textile, and manufacturing sectors; large components of its national gross income. And until this confidence is restored, the economy may have to plow on through with lesser income. On the global scale, the rise in interest rates may transform into an appreciation of the Egyptian currency, in other words, Egyptian goods may become more expensive to foreign buyers, thus further hurting its manufacturing and export sectors and probably causing further unemployment.
Finally, let us not forget the contagion effect that this uprising has had on the region’s economies and the world namely through the speculation over the operational status of the Suez Canal: an important shipping hub between both corners of the world. Its effects are already being noticed with reports of oil prices increasing in North America and Europe which may eventually trickle down to a variety of oil dependent goods. In addition, neighboring stock markets suffered from the fear of not being able to cost effectively export their oil.
In conclusion, Egypt’s Finance Minister has said that a War Chest has been instated just for instances like these. While it may allow them to stabilize the local economy through quantative easing and payments of their commitments and debts, it will not be able to restore the lost confidence in the country. The latter can only be restored by the incoming government which should reaffirm Egypt’s image as a country worth investing in and execute the latter as swiftly as possible since the longer this instability last, the more it will be harder for the country to get back on its feet.
(Caricature via Mahjoob.com)
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