The country?s first full post-revolutionary year has seen the first free presidential elections in Egypt?s long history, and signs of a recovery in GDP growth, but also the teething problems of a young democracy with serious economic challenges ahead. As a large and growing market, strategically located, with some important natural resources, and a tradition of economic liberalisation stretching back several decades, Egypt is an enticing prospect for many investors. However, some are still holding off, waiting for greater political stability and a return to the high growth rates needed to generate real income rises and jobs for ordinary Egyptians.

The IMF forecast 2% growth for Egypt in 2012, according to its assessment in October, which upgraded its expectation from 1.5%. The rate is respectable, given the recent political turmoil and the difficult global economic situation, particularly the crisis in the eurozone, a major trading partner, and rising prices of oil imports, which have put a squeeze on the economy. The average growth rate for all net oil importing countries in the region is expected to be lower. Nonetheless, after several years of 5%-plus growth, the past two years have seen a significant slowdown and are still below what is needed to improve performance on socioeconomic indicators.

In 2013, the IMF expects growth to pick up to 3%, in part due to improved political stability. The Egyptian government is somewhat more optimistic. On November 13, Prime Minister Hisham Kandil said that he expected 3.5% growth in the 2012-13 fiscal year (which runs from July 2012 to the end of June 2013), and 4.5% in 2013-14. The 2012-13 budget had foreseen 4%-4.5% growth, which was regarded as on the high side by economists, the international press reported. However, Kandil said he is confident that growth can be ramped up to 7% in the next four years.

In an interview with press, Kandil fleshed out economic plans being drawn up by the government and President Mohammed Morsy, which include reducing the fiscal deficit, currently running at around 8% of GDP, through fewer subsidies and broadening the tax base, which is quite narrow due to Egypt?s large informal economy.

A long-awaited $4.8bn loan deal with the IMF, now expected to be negotiated in January due to a delay over recent unrest, is widely expected to be vital to underpinning investor confidence in the country, bridging the fiscal gap, and incentivising further reform.

A restoration of political stability is key to making this happen. The revolution of early 2011 was followed by more than one year of uncertain transition, awaiting the election of a government and president with a popular mandate and economic policies to implement. However, the period since Morsy?s election has been punctuated by outbreaks of unrest, and, more recently, protests against the recent constitutional referendum, which remains hotly-disputed.

The country will also need to improve performance in crucial revenue-earning industries, such as tourism. Visitor arrivals dropped after the revolution, but have since risen. Some 8.8m visitors came to Egypt in the first nine months of 2012, according to Hisham Zaazou, the minister of tourism, who was targeting 11.5m-12m arrivals by the end of 2012. Over the longer term, the government aims to more than double tourist arrivals to 30m, with revenues of $25bn, by 2020.

Yet, while tourism has seen a gradual recovery from the initial drop in 2011, other major sectors have shown a more rapid and marked improvement, such as telecoms. Network outages imposed by the Mubarak regime caused losses in revenue during the uprising but a shift towards data activity in the mobile segment and an increase in new IT-based services such as Fawry, an online bill payment targeted towards the unbanked population, have helped improve the overall outlook.

Competition in the sector is intense, as mobile penetration now tops 100%. Average revenue per user has fallen well below LE30 ($5) per month. However, as a result, the three existing mobile operators are all aiming to bolster revenues by encouraging greater take-up of value-added services, particularly mobile internet. The GSM firms are bracing themselves for the likely entry of a fourth competitor, with Telecom Egypt the favourite to win the licence.

A growing population, and the rise of a range of manufacturing industries, are?increasing the country?s energy demand. In order to meet its rising needs, and to temper the need for imported oil, extensive exploration for gas is being undertaken. In 2012, finds were announced by Germany-based RWE and BP Egypt, while bid rounds for further exploration blocks were announced by Egyptian Natural Gas Holding Company, Egypt?s parastatal and regulator.

The past two years have been tumultuous for Egypt. Now that a democratically elected government is in place, Egyptians, the country?s international partners, and investors alike will be hoping for the restoration of political stability, without ructions caused by constitutional squabbles or power struggles at the top. Egypt?s democracy is clearly still fragile, and needs to put down stronger roots if it is to help underpin the economic growth that is needed ? and that the country has the potential to achieve.

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