Last year it seemed that Egypt's government, lead by the authoritarian Abdel-Fattah al-Sisi, was losing control of the country. However, through a series of economic reforms such as allowing the Egyptian pound to float and lowering government subsidies for oil and electricity. Egypt has generally been weary of letting its currency float, instead opting fro a fixed pound that was too high for foreign investment. with this floating currency, Egypt has seen foreign investment boost in the last year due to this reform with $4 billion of investment in government bonds in January.
However, while these reforms have brought back some foreign investment, Egypt has continued to see a disturbing decline in its domestic market. Because of the drop in government subsidies the Egyptian people must now put more of their money into these kinds of expenditures rather than in firms that they otherwise would have been able to buy goods and services from. Buying goods and services for domestic consumers is also getting quite difficult because of the inflating currency due to the floating pound. For example, the juice and dairy producer, Juhayna, has seen its profits for the third quarter of 2016 drop by 34% from what it was at the same time the previous year.
Will the government's focus on foreign investment pay off before the "bitter medicine" becomes too hard to take for Egyptian firms and the Egyptian people?
http://www.economist.com/news/middle-east-and-africa/21718552-bitter-medicine-starting-work-egypts-economy-shows-signs-life
4 comments:
I think subsidies can work only for so long when it comes to protecting domestic industries, after a certain point it seems to start catering to inefficiencies. So the domestic companies need to figure out a way to lower costs and become more efficient if they want to stay competitive.
I think the inflow of foreign investment was direly needed by the Egyptian economy and if floating the currency helps with that, a certain level of inflation seems like a reasonable compromise to help stimulate the economy. Unless it is spiraling out of control, of course.
I agree with Shamayeta that subsidies are not absolutely good for the economy. Direct subsidy is not sustainable and would cause inefficiency. Also, I think letting currency float and bring foreign investment in is a good phenomenon. In short run, it's true decreasing of subsidies would cause less domestic expenditure and investment, however, this is a changce for domestic firms to reform to produce more efficiently. And also, in the long run, a Egypt will be benefit from the more open market.
It seems that certain markets may benefit more from a subsidy than others. Many businesses that may naturally operate with very high costs and low margins of profit may need to continue to receive a subsidy if their goods are of important benefit to consumers. I agree that a subsidy can not be a panacea for everybody in the economy but it may work well consistently in specific cases. For example, the juice and dairy producer that has taken a huge hit to their profits may be an industry that could benefit from sustained support.
I wonder how long the subsidies will help. Or if they are even really helping. Subsidies tend to promote inefficiencies in the market because weak companies are getting life support. But maybe this is the foundation Egypt needs to move forward. Only time will tell.
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