CAIRO – Egypt's economy has lost at least $3.1 billion as a result of the political crisis in the country, investment bank Credit Agricole said in a report released on Friday, as tens of thousands of protesters massed in downtown Cairo demanding the president's ouster.
The unrest that began on Jan. 25 led to the shuttering of businesses and companies, the closure of banks and the stock exchange and the exodus of thousands of tourists as the demonstrations. The ensuing violence almost overnight drove a nation once seen as a pillar of stability to the brink of chaos.
Credit Agricole, in one of the first assessments quantifying the damage to the economy, said the crisis is costing Egypt at least $310 million per day. The bank also revised down its forecast for 2011 GDP growth to 3.7 percent from 5.3 percent and said the Egyptian pound could see a depreciation of up to 20 percent.
The losses are the tip of the iceberg of Egypt's economic woes.
Any post-crisis government will face major challenges in rebuilding the country's image and dealing with a range of fundamental economic problems that are sure to be exacerbated by the unrest.
"The economy is at the heart of Egypt's problems," John Sfakianakis, chief economist at the Riyadh-based Banque Saudi Fransi-Credit Agricole Group, said in the report.
Egypt's GDP grew by about 7 percent for three years, before the global meltdown cooled the economy to a still respectable 4.7 percent in 2009.
Still, Egypt faced major obstacles that have helped fuel, if not spark, the popular uprising.
Poverty is rampant, with about 40 percent of its 80 million people living on or below the $2 per-day poverty benchmark set by the World Bank. Unemployment is officially pegged at around 10 percent, but believed to be more than double that — particularly among the youth. Food inflation has hovered at about 17 percent per year, raising the cost of living for millions.
The disruption to daily life stemming from the protests has only exacerbated those issues.
The vital tourism sector, which accounted for 6 percent of GDP in 2010, could "easily retreat" to pre-2004 levels of under $5.6 billion, said Sfakianakis, adding that the "shortfall in tourism receipts will have to be addressed by additional budgetary support."
Egypt's new vice president said on state television Thursday that the unrest has cost the country $1 billion in tourism revenues. In a reflection of the impact on tourist arrivals, airport officials in Cairo said Friday that the only foreigners now flying in are journalists.
Officials have announced a slew of immediate measures to help mitigate losses felt by the people, including a compensation fund for businesses damaged during the protests, unemployment benefits, and releasing foodstuff from customs without prepayment of taxes.
The new finance minister, meanwhile, told state television that the damages to businesses and infrastructure during the rioting are estimated at about 5 billion pounds ($862 million).
But the government will also be forced to boost spending to appease its population, meaning that subsidies that drain 100 billion pounds per year from the budget will remain sacrosanct.
Reining in the budget deficit will likely be little more than wishful thinking as spending ramps up and Egypt's cost of borrowing climbs. Several of Egypt's key ratings have been revised down by international ratings firms over the past week.
Also likely to be hit is foreign direct investment, a key cash cow for the government. And, while worker remittances are unlikely to be affected significantly, there is a risk, at least in the short term, of a spike in capital outflows — money leaving the country.
Credit Agricole expects that Egypt's gross public debt to GDP will revert to 85 percent in 2011 and 97 percent by 2014, compared to earlier estimates of around 70 percent for the next three years. The budget deficit could reach 12.3 percent this year from an estimated 8.2 percent, the bank said.
Sfakianakis said the economy's overall loss estimates were based on a calculation of the main components of GDP, including, but not limited to, investment losses, the tourism and construction sectors, as well as projected costs for repairs to damages and manpower hours lost.
The Egyptian pound could fall by as much as 20 percent relative to the U.S. dollar in the short-term, dragged down by a drop in investments and an increase in capital outflows, Sfakianakis said. That would bring the pound down to about 7 pounds per dollar, based on the current exchange rate of around 5.85 pounds to the dollar.
While the Central Bank would likely intervene to support the pound by drawing on foreign reserves, "political tensions, a run on local banks as well as expected dollarisation of some of the deposits will impact the short-term currency outlook," said the report.