Rock the vote: Egyptian economy hangs on election results

Tunisia did it. Now Egypt is banking on smooth, timely elections.

The finances of the post-revolution economy may no longer be on the brink, thanks to the billions of financial support pledged by Gulf countries. But a rapid transition to democracy is vital to help Egypt finance its ballooning fiscal deficit, kick start the flagging economy, and deal with rising unemployment.

The euro zone crisis has reduced expectations that the G8 will deliver on its aid promises. But Qatar, Saudi Arabia and the UAE have reiterated their commitments of around $7 billion of aid, through an unspecified mixture of direct budgetary support, government bonds purchases, and central bank deposits.

The speed of the decline of foreign reserves — $24 billion at the end of August, down by a third since the uprising — should slow or even begin to reverse as aid is collected.

Fears over a dramatic widening of the current account deficit have also eased. Tourism has collapsed. But new data shows that imports have also fallen sharply and were flat in July in dollar terms compared to the previous year, according to HSBC.

The International Monetary Fund now reckons the current account deficit will fall to 1.9 percent of GDP or $4.4 billion in the fiscal year ending in June. It was previously forecast to rise to 2.7 percent.

But Egypt still needs to lure back foreign investors to alleviate pressure on domestic banks and help finance its fiscal deficit, forecast at 10 percent of GDP in 2011. That is unlikely to happen until the central bank abandons its informal policy of defending the pound to avoid triggering a second major capital flight this year. Egypt’s currency has barely moved over the past three months making it, bizarrely, one the strongest performing of the emerging markets.

Investors expect a gradual decline of the pound of between five and 10 percent once the political environment stabilises and Egypt has proved that it can stage peaceful parliamentary elections, due to start at the end of November and run until early March.

This makes it difficult for Egypt to sell its short-term bonds. But without a return of tourists — which a gradual devaluation would help — the country will find it hard to achieve the 6 percent growth, instead of the current 1.2 percent, that it needs to just keep unemployment steady.

Even with the promise of Gulf aid, Egypt’s fortunes hang on its upcoming elections.