The surprise resignation of Egypt’s government in February led on 1 March to the appointment of yet another cabinet, the sixth new administration since the removal of President Hosni Mubarak from power on 11 February 2011. The prime minister, Hazem el-Beblawi, was replaced on 25 February by former housing minister Ibrahim Mahlab.

El-Beblawi and his government, appointed following the ousting of President Mohamed Mursi on 3 July 2013, had been expected to shepherd the country until the presidential elections, due to be held by 18 April. But in a nation that in the past three years has grown used to constant political change, the impact of the latest reshuffle was muted.

Few changes

The outgoing cabinet was an unelected interim administration and Abdul Fattah al-Sisi, the powerful head of the armed forces and the leading candidate to be Egypt’s next president, retained his position as defence minister. In all, the new administration includes only 11 new members in a 31-member cabinet.

The difficulties that contributed to the fall of El-Beblawi’s government, however, foreshadow the challenges that will confront not only the latest interim administration, but also the cabinet to be appointed after the presidential elections.

In recent weeks, El-Beblawi’s government has faced a wave of strikes by workers demanding improved working conditions and better salaries, and a terrorist attack on a tourist bus in the Sinai peninsula. There have been growing accusations that the former premier has done too little to tackle the country’s economic problems, a failure exemplified by shortages of cooking gas and widespread electricity blackouts.

“The underlying deterioration in the external sector is masked by $10.7bn in [GCC] support”

Raza Agha, VTB Capital

A widely accepted interpretation of recent events is that El-Beblawi quit in order to ensure Al-Sisi was not tainted by the failures of government colleagues during his run for presidency. Al-Sisi has not formally announced that he will stand in the elections, but after hundreds of thousands rallied in January in favour of his candidacy, he has indicated as much. “Field Marshal Al-Sisi said he cannot turn his back when the majority wants his nomination in presidential elections,” reported Egypt’s official news agency, Mena, on 3 March.

Assuming the defence chief runs for the presidency, he is expected to win a landslide victory, thanks not only to his popularity but also to the military’s crushing of the Muslim Brotherhood, as well as the lack of other viable candidates. But the problems encountered by every administration that has taken the reins of power since the removal of Mubarak will not evaporate with the election of a new president.

For the past two years, Egypt’s economy has been kept afloat only through the support of finance from Gulf countries. Mursi benefited from funding from Qatar and, although some of this has since been returned, the military rulers are now reliant on huge bequests from elsewhere in the GCC. “The underlying deterioration in the external sector is masked by $10.7bn in support from Saudi Arabia, Kuwait and Abu Dhabi,” says Raza Agha, chief economist for the Middle East and Africa at VTB Capital in London.

Even with that support, the economy is struggling. “The macroeconomic outlook remains extremely weak,” says Agha. “For three consecutive years, growth has been about 2 per cent, while inflation is running at about 12 per cent, driven by a weaker Egyptian pound, higher public sector wages and low real interest rates. The fiscal deficit was about 14 per cent of GDP last year, one of the highest levels in the world, while public sector debt levels are about 90 per cent of GDP.”

Government deposits at the central bank dropped to an all-time low of £E12.1bn ($1.7bn) at the end of December, from £E70.7bn in October, as £E30bn was drawn down to reduce public borrowing and ease pressure on domestic interest rates.

Unemployment challenge

Keeping up with Egypt’s growing population and controlling an already high unemployment rate is another challenge. “Every year, the country needs growth of 6-8 per cent to create jobs just to keep unemployment where it is now, which is at least 15 per cent,” says David Schenker, director of the Arab politics programme at the Washington Institute. In a report published in late February, US credit ratings agency Moody’s Investors Service forecast another year of subdued growth, predicting real GDP growth of 2.6 per cent in 2014.

Egypt faces serious stresses in every area of the economy. Tourism, oil and gas, the Suez Canal and foreign investment – the pillars that have supported the weight of an 85 million-strong population in recent years – are all under considerable pressure.

Tourism accounts for 11.3 per cent of GDP and 12.5 per cent of employment, according to the government. But in the second half of 2013, income from the already struggling sector collapsed. Revenue fell to $6bn in 2013, compared with almost $13bn in 2010, and will have deteriorated further after a terrorist attack on a bus in the Gulf of Aqaba resort of Taba in February left three foreign tourists dead. In 2013, 9.5 million tourists visited Egypt, compared with 14.7 million in 2010.

“Several countries have issued warnings against travel to the Sinai peninsula, which is a major destination for European tourists,” says Mohamed Abu Basha, economist at local investment house EFG Hermes. Hotel occupancy in the Red Sea resort of Sharm el-Sheikh, one of the country’s most popular destinations, fell to 48 per cent at the end of February, according to the government. On some days, occupancy in parts of Egypt was 0 per cent.

Canal disruption

Suez Canal traffic has held up relatively well, but has not been unaffected. The number of vessels passing through the waterway fell by 6.6 per cent year-on-year in the first half of 2013. In January 2014, there was a 16 per cent year-on-year fall in traffic and a 10 per cent drop in revenue after riots broke out in the Port Said area.

In December, the government launched a licencing round for 22 new hydrocarbons concessions, and in February it signed three new oil and gas exploration agreements. It also insists that plans for a $4.8bn petrochemicals plant and a $3.7bn refinery project are going ahead. But the country’s energy balance has turned on its head. The government has received $4bn-worth of fuel products from the Gulf since July, and expects it will need another $1bn-worth over the summer months.

The former major gas exporter is now seeking options to import liquefied natural gas (LNG) to keep pace with accelerating domestic demand. But the government’s plans were dealt a blow in February, when Norway’s Hoegh LNG turned down commercial terms offered by Cairo to build an LNG terminal. In January, the UK’s BG Group issued force majeure notices for its LNG exports from Egypt after the country diverted gas to the local market.

“If the trajectory doesn’t improve, you’re going to get a revolution of the hungry”

David Schenker, Washington Institute

By comparison, the infrastructure sector looks a little more promising. Mahlab said in January that the government plans to deliver 50,000 low-cost homes by mid-2014 and a further 90,000 in another 14 months. In February, the central bank announced it would deposit $1.4bn in local banks to lend to prospective homeowners at a preferential interest rate. On 9 March, the government signed a memorandum of understanding with the UAE-based Arabtec Holding for the development of 1 million affordable houses at 13 locations across the country, in a deal worth $40bn. Construction work on the scheme is scheduled to get under way in the third quarter of this year.

It is but a small step towards resolving the acute shortage of low-cost homes, with an estimated 16 million Egyptians lacking adequate housing.

“We’ve not seen a major deterioration recently in the construction sector,” says Basha. “The government is trying to spend a bit more on infrastructure and projects are moving forward. We’re not seeing a return to pre-revolution levels, and most of the schemes that are moving forward pre-date 2011, but it’s holding up in the context of the past two years.”

The relative political stability that is expected to follow the forthcoming presidential election will help. But even then, Egypt’s structural challenges will be difficult to overcome. As income falls, successive governments have failed to effectively reform the biggest drain on the economy: food and energy subsidies. Subsidies are running at more than 11 per cent of GDP, while public wages and debt servicing amount to about 7 per cent of GDP, according to VTB Capital.

Given the volatile social scene and the government’s often brutal marginalisation of entire political constituencies, these will be tough areas to tackle for any administration. “The outlook for fiscal adjustment rests squarely on growth prospects, as cutting expenditure will be tough in the current environment,” says Agha.

Debt redemptions

There is also $3.7bn of external debt redemptions due in the second half of this year: $700m to the Paris Club in July; a $500m central deposit to Qatar in October; and a $2.5bn bond to Qatar in November. Egypt’s net international reserves were $17.3bn in February, representing less than four months of import coverage, according to the US’ Bank of America Merrill Lynch.

In the short term, the country’s economic survival will rely on the continued generosity of its Gulf allies. “Egypt’s gross external financing needs to remain above $20bn annually,” says Agha. “The most important factor for the macroeconomic outlook is the continuation of Gulf support.”

There is broad agreement that this financial support will continue throughout 2014, but beyond that there will need to be some signs that the fundamentals of the country’s economy are moving in the right direction. If they are not, then further civil unrest is likely. “If the trajectory doesn’t improve, you’re going to get a revolution of the hungry, if not in a year, then in a couple of years,” says Schenker.