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Egypt’s 2011 revolution sent seismic tremors through the country’s economy. Uncertainty about the direction of government policies has resulted in reduced levels of domestic and foreign direct investment. The decline threatens to complicate Egypt’s transition to a market system. The private sector and the government, in collaboration with civil society organizations, must work together to avert an economic crisis and promote growth, stability, and the consolidation of democracy in Egypt.

Key Themes

• The private sector employs some 70 percent of Egypt’s labor force. Without a marked increase in investment in the private sector, the government will not be able to restore economic growth.
   
• Businesses are represented by a variety of associations. The collusion between many such associations and political elites in former president Hosni Mubarak’s regime contributed to the private sector’s negative image in Egypt. A number of the postrevolutionary associations are closely affiliated with the new Muslim Brotherhood–led regime. 
   
• Numerous new political parties have emerged since the revolution. Many are pro-business, but there are also several Islamist and socialist parties with less private-sector-friendly agendas.
   
• The government has taken steps to restore the private sector’s faith in the Egyptian economy, but the business community has not yet responded with new investments or initiatives. 

Recommendations for the Private Sector

• Develop a viable, concerted economic vision that will provide realistic policy recommendations on how to achieve market-driven and sustainable growth while increasing employment and social justice. 
   
• Expand existing efforts to include small and medium enterprises and reach out to stakeholders, such as labor unions. 
   
• Launch initiatives promoting corporate social responsibility at the community level. Coordinate with civil society organizations to identify priority areas in which to undertake these initiatives.
   
• Adopt clear positions on accountability, the minimum wage, taxation, subsidies, and competition regulations. 

Recommendations for the Government.

• Reduce policy uncertainty by establishing a reliable framework of policies and regulations for doing business in Egypt that is consistent with international norms.
   
• Minimize intervention in the credit market.
   
• Adopt a more transparent approach to public finance and to the military’s role in the economy.
   
• Promote decentralization to empower local communities.
   
• Reform public sector institutions that deal with investors and limit officials’ margin of discretionary action.
   
• Launch a credible transitional justice process to help the population distinguish between predatory business leaders who profited from widespread Mubarak-era corruption and the rest of the private sector. 

Introduction 

Egypt’s 2011 revolution, which upended an entrenched political system, sent seismic tremors through the country’s economy. Ambiguity and uncertainty about the direction of government policies have resulted in reduced levels of domestic and foreign direct investment. This decline threatens to complicate Egypt’s economic challenges during its political transition and restrict the government’s fiscal and economic maneuvering space at a time when public expectations are running high. 

Three issues will be crucial to Egypt’s economic—and thus ultimately its political—future. The Muslim Brotherhood–led government will need to establish a reliable framework of policies and regulations for doing business in Egypt that is consistent with international norms, introduce a higher degree of transparency regarding the military’s role in the economy, and incentivize the private sector to help revitalize the country’s sluggish economy. 

The private sector has a critical role to play during the transition process. Egypt’s private sector currently employs some 70 percent of the country’s labor force. Without a marked increase in private sector investment, the government will not be able to create robust economic growth or satisfy the economic aspirations of its people. The government also has to build trust between itself, the old and new business elites, and a population desperate for accountability. Egypt’s best hope for avoiding the economic crisis that threatens to derail the revolution is a public-private-civil society pact. If these stakeholders work together, they will be able to promote growth, create jobs, protect vulnerable groups, and help consolidate the transition to democracy.

Without a marked increase in private sector investment, the government will not be able to create robust economic growth or satisfy the economic aspirations of its people.

The Private Sector After the Revolution   

To date, the government has taken some steps to restore the private sector’s confidence in the Egyptian economy. It has expressed its willingness to sign an agreement with the International Monetary Fund (IMF), established committees to coordinate between the president and the private sector, and reduced ambiguities concerning private-public partnerships. However, these steps have failed to assuage uncertainty about the direction of overall economic policy under the Brotherhood.  Some in the private sector are also concerned that the Brotherhood partially promotes a negative image of the business sector, accusing some of its major players of being responsible for the reprehensible conditions of the Mubarak years, including unfair monopolies, large income disparities, increasing poverty, and expanded budget deficits. 

This situation is compounded by the widespread negative perception of the corporate private sector that persists throughout Egyptian society. Some political parties, civil society organizations, and media outlets have helped promote this negative image, accusing the private sector of being unwilling to assume a proactive role during the transition period. In several cases, the media have contributed to the negative image by equating the private sector with corruption. It has also been difficult to distinguish between individual actors within the private sector and determine the impact of the process of privatization more generally. 

For its part, the prerevolutionary business elite has failed to articulate a new role for itself in the transition period and beyond. Nor has it managed to agree on a unified set of demands to facilitate its interactions with other stakeholders. This silence reflects its hesitancy to act while the political situation remains in a state of flux.

The established private sector must contend with a number of new Islamist-leaning business groups and associations that have emerged since the ouster of Mubarak. Most of these new groups tend to be quite politicized, using slogans of “social justice” and openly supporting the program of the Muslim Brotherhood and President Mohamed Morsi.¹  It is not yet clear how relations between the old business elite and these new, more explicitly Islamic organizations will evolve.

In addition to these Islamist organizations, several new secular parties have emerged since the revolution. Each of these parties—Islamist and non-Islamist alike—employs slightly different rhetoric when it comes to economic issues. Some of them have close ties to business leaders, and most of them have adopted an agenda that advocates a market economy and promotes social justice. But the rather general policy statements that many have promulgated fail to specify what is really meant by either “market economy” or “social justice.” They lack clear positions on key issues such as taxation, minimum wage, and privatization. 

Perhaps more importantly, these political parties have failed to forge effective alliances with social forces, such as labor unions, which have emerged as one of the most influential players in the political arena. The number of strikes organized by labor movements has increased over the past two years, with demands for better working conditions and higher wages.²  The average annual number of protests following the revolution has doubled compared to the period between 2007 and 2010, during which the average number of protests did not exceed 700.³ 

The private sector must find a way to navigate this emerging postrevolutionary landscape. Its productive operation within Egypt’s new economic framework will be crucial to helping pull the country out of its increasingly dire economic situation.

Economic Performance After the Revolution 

In the two years since the revolution, Egypt’s economic performance has been weak. The economy has slowed since the revolt. The IMF had predicted that the Egyptian economy would grow by 3 percent in 2013, but it has now downgraded that figure to 2 percent. Recorded growth for 2012 was 2.2 percent—that is, very close to the 2011 population growth estimate.⁴  The balance of payments has deteriorated, mainly because capital outflows, such as the purchase of necessary food imports and the repayment of foreign debt installments and services, have persisted while capital inflows have dried up due to the high risk associated with business investment and a significant drop in tourism. The result has been a plunge in foreign currency reserves from $24.1 billion in September 2011 to about $15.04 billion in September 2012, which is equivalent to about 2.6 months of imports.⁵ 

The fiscal deficit has now reached more than 10 percent of Egypt’s gross domestic product (GDP). Stalled economic activity accounts for some of the rise, as does the government’s increase in public spending in response to rising demands from the street. Outlays include a pay raise for public sector workers and increased subsidies to cover the increasing price of food imports. To finance this spending, the government has resorted to short-term borrowing from the domestic market at high interest rates. Such loans accounted for 16 percent of the treasury’s bills in September 2012. 

This pressure on the credit market has pushed interest rates to new heights, limiting the private sector’s access to financing and crowding out its investments. An estimated 65 percent of commercial bank deposits has been extended as loans to the public sector.⁶  Such an outcome implies an adverse selection problem because this money, instead of being invested smartly, is being used mainly to fuel consumption and imports. 

During the last week of 2012, the Egyptian pound reached its lowest level relative to the U.S. dollar since the ousting of Hosni Mubarak, and the Central Bank of Egypt enacted new monetary foreign exchange regulations in an attempt to curb currency speculation and limit inflation.⁷  At around the same time, the credit agency Standard & Poor’s downgraded the Egyptian economy’s rating from a B to a B–, citing the civil unrest that “weakened Egypt’s institutional framework, and the increasingly polarized political discourse [that] could diminish the effectiveness of policy-making.”⁸ The agency had downgraded Egypt’s rating earlier in 2012 from B+ to B, arguing that “Egypt’s external position . . . [had] deteriorated and . . . [was] likely to weaken further, absent stabilisation in the domestic political situation alongside external financial support.”⁹ 

None of the four successive administrations over the last two years has attempted to deal with the long-term economic challenges underlying these developments (see figure 1). Rather, each has responded to the immediate pressure of the street. 

The first government, led by Ahmed Shafiq (January 31, 2011–March 3, 2011), increased the salary of civil servants and military staff by 15 percent. It offered permanent employment to previously temporary government workers. Shafiq’s cabinet also canceled sales-tax fines to encourage the private sector to pay its tax arrears.¹⁰  During this period, growth slowed and the private sector remained somewhat in a state of shock. 

The second cabinet, led by Essam Sharaf (March 3, 2011–December 7, 2011) passed the first postrevolution budget. It was the largest in Egypt’s history—$91.54 billion compared to the previous year’s $69.53 billion (based on an exchange rate of 6.93 Egyptian pounds per dollar). This meant a 20 percent increase in public spending, including a 14 percent increase in allocation for both education and health. Subsidies witnessed a 26 percent increase due to higher food prices in international markets. 

The initial economic reaction to Sharaf’s appointment was positive, with GDP growth reversing its negative trend within two months of his appointment. However, the government, under the influence of the ruling Supreme Council of the Armed Forces, refused to initiate discussion with the IMF regarding a potential loan. Egypt’s leaders did not want to borrow externally due to the ruling army council’s concerns about the overall debt level. They were also reluctant to be tied to the lenient terms offered by the IMF because it sought to avoid foreign interference, especially given the toppled Mubarak’s close ties to the West. These new leaders also wanted to avoid any austerity measures that could be attached to the proposed loan, many of which would be poorly received by the business community because they would increase taxes on Egypt’s largest companies. Thus, in order to fund public expenditures, the government had to borrow from the domestic market, crowding out the private sector and increasing the cost of funds for private enterprises. 

Kamal al-Ganzouri’s government (December 7, 2011–August 2, 2012) adopted a number of policies to consolidate the macroeconomic situation, such as reducing public spending and foreign debt. Al-Ganzouri introduced a public wage ceiling and a new minimum wage and approved two plans to support tourism and the production of cotton and sugar. These initiatives were well received in the market, and growth registered its highest rate of the transition period, climbing briefly to around 5 percent. 

The government of Hesham Qandil took office on August 2, 2012, after the presidential election. Since its swearing in, the government has been clear about its intention to reach a deal with the IMF that would secure a $4.8 billion loan. However, controversy over the new constitution has delayed the conclusion of the agreement. President Mohamed Morsi, who was preoccupied with passing the constitution, has blocked a number of new policy initiatives, including tax increases and elements of an austerity package that were designed to win approval for the IMF loan and shore up finances battered by political turmoil.¹¹  Such contestations in the decisionmaking process have created political uncertainty and weakened other stakeholders’—and especially the private sector’s—trust in the government. 

Structure of the Private Sector

A marginal force during the days of Nasserist state socialism, the private sector grew under Presidents Anwar Sadat and Hosni Mubarak to become Egypt’s primary engine of economic growth. In 2011, the private sector represented 63 percent of GDP and employed 70 percent of the Egyptian labor force.¹²  

The private sector in Egypt is a mix of micro-, small-to-medium, and large enterprises. Microenterprises, employing one to four employees, comprise nearly 91 percent of all Egyptian enterprises. Small and medium enterprises, employing five to 100 people, comprise 8 percent, and large corporations constitute less than 1 percent of total Egyptian enterprises.¹³  In terms of employment rates, microenterprises employ 58 percent of the labor force, small and medium enterprises employ 25 percent, and large corporations account for 17 percent.¹⁴ 

Microenterprises are scattered and have little potential for expansion due to structural weaknesses, such as poor managerial skills and few financial resources. Most microenterprises are informal, so it is difficult for them to benefit, even from the government-sponsored programs that aim to enhance their capacities. These businesses require specific programs that target their key weaknesses. Moreover, they face tough competition, and their profit margins are generally very narrow. The workers in these businesses suffer from poor working conditions and, despite their large numbers, are not organized. As a result, they have little political representation and cannot bargain for better wages or benefits.

Small and medium enterprises, which operate in the manufacturing and services sectors, face numerous obstacles, including limited access to financing, poor labor skills, inconsistent standards, and weak links to large firms.¹⁵  They lack effective representation in the existing private sector institutional framework, which is dominated by large firms. The poor business climate, the obstacles associated with adhering to social security requirements, and limited access to financing have forced many medium enterprises into the informal sector.¹⁶ 

Large corporations normally dominate the scene as a result of their effective organizational structures and access to financial resources. They also have disproportionate access to decisionmakers and may be skewing policy in their direction. Large corporations include enterprises that operate in the services, manufacturing, and agricultural sectors. 

Organizations Representing the Private Sector

A wide range of organizations and institutions have represented the private sector in Egypt both before and after the revolution. Some of them have been highly visible and influential in shaping the business environment, while others have had limited influence on the policymaking process. Many are directly or indirectly linked to the Egyptian government, and a number of the prerevolutionary associations played a part in the rampant corruption that marked the Mubarak era. The newer associations pursue the interests of certain businesses that were marginalized prior to the revolution, but they have adopted many of the policies and practices of their predecessors and are not promoting a new economic vision.

Business Institutions That Predate the Revolution

Among the most visible and influential organizations formed before the revolution is the Federation of Egyptian Industries, which comprises sixteen chambers of industry that seek to support Egypt’s manufacturing sectors. It serves as a formal lobby for the interests of its members. Another prominent institution is the Federation of Egyptian Chambers of Commerce. This organization, the member chambers of which represent various governorates, aims to serve the interests of the Egyptian business community in general. 

These federations are semi-official bodies. The government appoints their chairs and contributes to their financing. Since the revolution, a number of business leaders have been demanding amendments to the laws regulating these bodies in order to guarantee full independence and free elections for their leadership.¹⁷ 

Export commodity councils constitute another group of semi-official bodies. They are financed by their members but overseen by secretariats linked to the Ministry of Trade and Industry. There are fifteen export commodity councils that serve the interests of exporters in specific fields and lobby against bureaucratic overregulation and red tape. There are also specific chambers of commerce and associations linked to countries of particular interest to manufacturers and traders (such as the American Chamber of Commerce and the Canadian Chamber of Commerce). 

There are also bodies, such as the Association of Egyptian Businessmen, the Egyptian Junior Business Association, and the Alexandria Business Association, that do not enjoy such high levels of government support. These organizations are not related to the government and were effective advocates of the corporate private sector during the Mubarak era. They have historically been relatively narrow and sector specific in their focus. They do not possess an overarching policy or vision of economic development and have limited resources, which have been expended mainly on internal logistics and operations. In most cases, the little lobbying these institutions have undertaken has been limited to securing specific protection and favorable treatment from complacent government officials rather than focused on developing and promoting a wider growth-oriented economic program that would benefit both them and the national economy. 

A self-interested co-mingling among these business associations and political elites—which became particularly flagrant during the last ten years of Mubarak’s regime—contributed to the negative image of the private sector held by many Egyptians. During that era, business leaders manipulated parliament and the government to shelter their interests and maintain monopolies over certain markets, including the steel and cement industries. These clear conflicts of interest went unpunished as there was no law or code of ethics to govern the relationship. 

The Mubarak regime was driven by the need to solicit support from private sector leaders for the succession of the former president’s son, Gamal Mubarak. A quid pro quo arrangement was in place whereby prominent businessmen offered political support for Gamal in exchange for certain privileges that served their business interests. Examples include allocations of land, freezing of anti-trust laws, and dubious privatization deals. Such instances of corruption have stuck in the minds of many Egyptians.¹⁸ 

Business Associations and Public Policy

In the past, both public and private sector elites were satisfied with this arrangement. This weakened the sort of demand for serious reform from powerful constituencies that could have produced a more competitive environment and encouraged new entrants to the market, not to mention expanded the economy more sustainably so as to alleviate the sense of injustice that helped spark the January 2011 revolution. But now a healthier relationship, taking account of 2011 events, needs to be predicated on transparency, wider inclusion, and a focus on promoting socioeconomic policies that encourage growth while creating jobs and boosting social justice. 

For example, a number of debates have been going on in Egypt for several years concerning the minimum wage, taxation policy, and the curtailment of subsidies. Private sector associations have not seriously engaged these issues, rarely addressing them or outlining policy alternatives. The same has been true for questions of how to support the informal economy or increase linkages between small-to-medium enterprises and large corporations. 

In terms of representation, micro- and small enterprises have been essentially invisible in the existing structure. They may have been members of associations either by law (in the case of the Federation of Egyptian Industries and the Federation of Egyptian Chambers of Commerce) or voluntarily (in the case of the business councils and investors’ associations that are spread across the country at the governorate level). However, the influence of these enterprises has been minimal in the main business associations, and their concerns have not been communicated effectively in the public sphere or the policymaking process. Moreover, the de facto informal economy, which makes up almost 30 percent of the Egyptian economy, has had no official acknowledgement or representation.

Currently, there are attempts to amend laws and regulations governing representative institutions in the private sector to limit government intervention. These laws would allow elections to be held for the boards and chairmen of industrial and trade federations, which would be a step in the right direction. 

New Private Sector Institutions 

In the wake of the revolution, Egypt witnessed the birth of new business organizations. The most visible has been the Egyptian Business Development Association,¹⁹  which represents a broad spectrum of the business community. It had almost 300 members by the end of 2012. Its board is headed by Hassan Malek, a member of the Muslim Brotherhood who enjoys good relations with President Morsi. 

Other board members include well-established corporate private businessmen such as Safwan Thabet, chief executive officer of Juhayna Group, a food production and distribution company, and other influential business associations. The board also includes Tarek Fahim, secretary general of the Salafist al-Nour Party. A number of former regime leaders have also joined the board. In addition, Malek has been trying to lure Egyptian business tycoons back to Egypt after they fled the country following the storm of arrests against Mubarak-affiliated associates. These include Yassin Mansour, an auto and banking investor, and Hamed El Chiaty, chairman of the Travco hotel and tourism company.²⁰ 

The Egyptian Business Development Association aims to act as a channel between investors and the government, claiming also to encourage the development of small and medium enterprises across Egypt and conduct vocational training. Malek argues that “business should benefit the widest possible base of society, and not just a small tier, as was the case under Mubarak.”²¹ 

According to its members, the association takes its inspiration from Turkey’s twenty-two-year-old Independent Industrialists and Businessmen’s Association and the Small and Medium Enterprise Corporation of Malaysia.²²  The Turkish association played a role in decentralizing Turkey’s economic development, particularly through the promotion of small- and medium-sized enterprises. It also contributed to cementing the political preeminence of Turkey’s Islamist Justice and Development Party. 

But not everyone is happy about the emergence of such an organization in Egypt. Several businessmen have been cited in the media expressing their dissatisfaction with the Egyptian Business Development Association, which is clearly entering the partisan fray by allying itself with the incumbent president. They are skeptical about its mandate, arguing that it is yet another business association seeking to take advantage of good relations with the governing party in order to obtain privileges for its respective industries and marginalize competitors.²³ 

Other newly founded organizations in the banking and financial sectors are attempting to promote Islamic finance, a financial model based on the principles of sharia that prohibits lending on interest, gambling, and investing in the trade of commodities forbidden by Islam, such as alcohol. For example, the Egyptian Association for Islamic Finance was created to promote new Islamic financial products, according to Mohammed Beltaji, the chairman of the board. According to the Egyptian Central Bank, fifteen conventional banks applied for licenses to open Islamic finance departments in 2011. There are currently 211 Islamic bank branches in Egypt of a total of 2,360 banks in the country.²⁴  

The small-and medium-enterprises sector is no more represented on the board of the Egyptian Business Development Association than it was on the boards of the associations that came before it.

It is difficult to draw a clear distinction between the roles of the new and old private sector associations, other than the intimacy that new institutions enjoy with the Muslim Brotherhood and Salafist movements. These institutions have paid lip service to the need to engage micro-, small, and medium enterprises, but they have so far failed to take the initiative to expand their mandates and address the concerns of this important, yet neglected, segment of the private sector. The small- and medium-enterprises sector, for example, is no more represented on the board of the Egyptian Business Development Association than it was on the boards of the associations that came before it.

Moreover, the position of these newcomers on, for example, labor unions, minimum wage, and subsidy reforms, cannot be distinguished from the positions of prerevolutionary institutions. In general, they do not represent a significant departure from the practices established by the private sector’s old guard. 

The Business Community and the New Political Parties 

Numerous new political parties have sprung up since the revolution. Most of these parties have a generally favorable position regarding the private sector and the business community. 

But, as is to be expected in a country as diverse as Egypt, the economic agendas of the political parties reflect the nation’s wide political spectrum. A number of parties were established by influential business leaders and openly advocate policies favorable to the corporate private sector. Others, like the Islamist parties, try to square the circle of support for the private sector and market economics while at the same time try to uphold principles of Islamic sharia and slogans of social justice. Finally, Nasserist and leftist parties advocate a return to nationalization and a reversal of the privatization process.

Pro-Business Parties

The Free Egyptians Party, which was established following the revolution by telecommunications mogul Naguib Sawiris, has a clearly defined economic agenda that is distinctly private sector friendly. It has joined the newly established Egyptian Conference Party led by Amr Moussa and Ayman Nour, which was announced in September 2012. The