As President Mohamed Morsi faces mounting challenges on several fronts, the state of Egypt’s national security and its ailing economy are the most pressing issues requiring his attention if he is to deliver on his electoral promises. The economic situation cannot be analyzed in isolation, directly influenced by the nation’s politics and security, as Egypt attempts to emerge from a transitional period weighed down by unrest. Sunday’s deadly attack in Sinai adds to a long list of setbacks plaguing the country’s hopes for a swift economic recovery, and places Morsi under additional pressure, which should prompt him to reevaluate his priorities.

Since Hosni Mubarak’s 2011 ouster, the security situation throughout Egypt has continued to deteriorate, compounded by increased tourist kidnappings and attacks on the armed forces in Sinai. As a result of continued turmoil, Sinai investments have taken a hard hit, with estimates of preliminary losses amounting to billions of Egyptian Pounds. A hit on Sinai affects the entire nation, with tourism investments in the region contributing to 11% of the nation’s GDP, 40% of its non-commodity exports, and 19.3% of its foreign currency reserves.

As the country continues to hemorrhage money in Sinai and beyond, Morsi has yet to take a clear stance on the future of Egypt’s banking sector, tourism, or the Suez Canal mortgage, and has not presented a clear vision on how to bring the country out of its current economic crisis.

Egypt’s stability depends on whether the economy can generate enough jobs which provide good working conditions and an opportunity for average citizens to improve their quality of life. Egypt’s current unemployment rate stands at 12.4% and official estimates suggest that the youth unemployment rate is 25%. GDP growth has plunged from a robust 5.1% in 2010 to 1.8% last year, while the IMF expects it to reach 1.5% this year. In reality, both figures underestimate the actual scale of joblessness. Additionally, market indicators can be misleading for many who believe that Morsi holds an elixir to remedy Egypt’s crippled economy and elevated unemployment rates. The jump in Egypt’s stock indexes immediately after Morsi’s victory was a signal that investors are looking for the return of a stable political environment. That said Morsi’s biggest challenge is finding a way to restore growth and market confidence, and coax investors into financing projects once again.

Morsi needs to consider the three following points when addressing the serious economic downturn Egypt is facing:

1. Rekindle Regional Relations with Gulf States

Egypt must move toward a more cooperative relationship with the Gulf States in the coming months in order to stimulate the country’s lagging economy. The new cabinet needs to engage with their regional counterparts if it is to restore trust and clear the way for new investments in Egypt’s markets.

Restrictions on the business community should be lifted, especially those relating to market exit strategies and financial distress, while obstacles that previously hindered foreign investors must be removed. In the case of Saudi Arabia in particular, pending arbitration cases involving Saudi investors must be resolved if Saudi confidence in the Egyptian market is to be restored. Saudi investments in Egypt are estimated at $27 billion.

2. Improve the Internal Investment Climate

While ramping up security on Egypt’s borders, Morsi also needs to focus on national reconciliation and find a way to curb protests in order to improve Egypt’s image. The persistence of protests creates an unfavorable impression of the investment climate in Egypt.

The trend in the next period will tend towards tapping the economic potential of the country’s provinces, utilizing their natural wealth. Agriculture must be rehabilitated to remedy its declining productivity brought on by inefficient policies adopted by the previous regime. Agriculture and its related industries will be able to absorb a large number of workers. The manufacturing sector, considered Egypt’s main source of employment, requires similar treatment.

In addition to the above, immediate attention should be given to SMEs, which are the biggest source contributing to the nation’s GDP (80% of Egypt’s GDP and 75% of total private sector employment.) This will consequently create employment opportunities and provide the state treasury with a source of liquidity.

3. Mobilize Investment Initiatives

Mustafa Aziz, an economic advisor and researcher at the studies centre of the Ministry of Industry and Foreign Trade, believes that economic recovery will not come "through wage and salary increases, but rather through economic and investment packages developed by previous cabinets, which will be unveiled in succession."

He adds that Egyptian, Arab and foreign businessmen can mobilize the private sector: “Partial solutions exacerbate the economic situation, so the result will be impressive if the investment plan is implemented with precision and through a process that is free from political pressure.”

Lastly, the Egyptian cabinet recently announced that it has resumed negotiations with the International Monetary Fund (IMF) for a $3.2 billion loan. It is unclear, however, how Morsi will handle the situation in the event that Egypt is unable to secure the long-dormant loan, given the tenuous conditions attached to it. With Morsi’s new cabinet in place, there is at least an environment conducive to begin reforms before the IMF releases any funds in September.

Will Morsi Rise to the Challenge?

Morsi is locked in a power struggle with the generals who ruled Egypt after Mubarak’s ouster. The Supreme Council of the Armed Forces handed power to Morsi in June, but not before stripping his office of some of its authority and assuming new powers for itself. Egypt’s economy cannot be fixed unless Egypt’s political structure has already been addressed. Conversely, in something of a Catch 22, Morsi’s political fate depends on whether or not he can turn around the economy.

A number of difficult economic challenges are on Morsi’s agenda. With a year and a half passing since the 2011 uprising, the Egyptian economy is continuing to suffer, a trajectory which could lead to a severe crisis, with social and political repercussions. Morsi must reboot Egypt’s economy by doing away with bureaucratic red tape and improving the business climate. During his electoral campaign, Morsi, and the Freedom and Justice Party, introduced an all-inclusive ‘Renaissance Project’ with plans to implement a developmental economy with the aim of increasing Egypt’s GDP at an annual growth rate of 6.5 to 7%.The project also calls for the reformation of the banking system and the creation of a program to support SMEs. The key question is will he be able to ensure its implementation, while embroiled in an internal power struggle? Morsi needs to begin by rallying supporters in a large-scale infrastructure, transportation and logistical development projects in Egypt.

Merit Al-Sayed is a Projects Manager in the field of Strategic Planning and Performance Analysis at the Arab African International Bank based in Cairo. She is a founding member of two of Egypt’s post-revolutionary parties, El Adl and the Free Egyptians Party.

Photo Credit:AP / Reuters