The Egyptian economy is going through a critical period as the country transitions to democracy. While the shift from authoritarianism is certainly welcome, it has inevitably incited instability unknown to Egypt for the past thirty years. The implementation of economic reform amid this uncertainty is particularly challenging as political demands take precedence. The state attempted several times to revive the Egyptian economy since the Infitah, or “open door,” policy initiated by President Anwar Sadat in the mid-1970s. Successive, though unsuccessful, reform programs during the 1990s contributed to the pervasive poverty that served as a central driver of the 2011 Egyptian revolution and persists today. Past experiences can provide useful lessons for what to avoid in the future, even if they are unable to impart what exactly should be done.

A successful transition to democracy can be facilitated by a sound economy and the economic well-being of citizens. Indeed, the transitional government led by the Supreme Council of the Armed Forces (SCAF) that is managing the country until the parliamentary and presidential elections are held is facing tremendous challenges. Yet it has unwisely rushed to fulfill the populist demands of the revolution with little consideration of their long-term effects. While perhaps politically expedient, reactive measures—such as the government’s recent increase in the public-sector minimum wage and the extension of fixed contracts to 450,000 public employees—are nonetheless placing added pressure on an already unsustainable budget deficit. Combined with the maintenance of economically inefficient subsidies, the long-term implications of continued poor economic policymaking will be severe.

The Egyptian economy has been in decline since Hosni Mubarak stepped down in February 2011, in part because of the instability inherent in transitioning states, which in this case was amplified by the global downturn. The effects of the current slowdown are most visible in terms of domestic consumption, direct private investment, and tourism. To reverse these recent trends and to move the economy forward as a whole, the transitional government must prioritize the following in the short term:

  • Restore security

  • Acknowledge and respond to the reticence of the public sector—both domestic and foreign—with a clear road map that will guarantee investment during this period of volatility

  • Stop demonizing the private sector and establish new partnerships with independent entrepreneurs

  • Adopt a more participatory and transparent approach in the decision- making process

  • Ensure the availability of funds for small and medium enterprises by providing guarantees to commercial banks for a limited period of time

  • Channel foreign grants and loans for infrastructure and housing projects to the poor and other public utilities

In the medium term after the parliamentary and presidential elections, the government needs to:

  • Bolster weak institutions

  • Address low levels of investment and limited financial resources

  • Correct imbalances between producers and consumers

  • Broaden the now limited trickle-down effects of growth that widen the income gap between rich and poor

Addressing these problems and implementing the short- and medium-term measures outlined above will help put the economy back on track and avert the expansion of public expenditure to even further unsustainable levels. Until now, the transitional government has failed to take bold steps in the right direction and has not paid adequate attention to the economic aspects of the transition. Egypt has historically fared poorly in governance indicators such as rule of law, quality of business regulations, and corruption associated with ineffective social spending. The result of the poor ratings is misallocation of resources. Consequently, the government could face the worst-case scenario of continued economic decline and a reversion to authoritarianism.