IInformation system all Anyone can discuss. For the poor, a trip to the market is now a torment: the shopping bags get lighter but the bills get bigger. The middle class has to choose between paying for cars, school and groceries. Business owners are grappling with supply chain issues as a shortage of hard currency leaves billions of dollars of cargo stranded at ports.
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The past few weeks have been a reckoning for Egypt’s unsustainable economy. Since Abdel-Fattah al-Sisi took power in a coup in 2013, it has been characterized by a dying private sector, large twin deficits and debt-driven state spending on infrastructure projects , some of which are of dubious value. Egypt has posted impressive growth figures, but they are a mirage: For most of its 104 million people, life is getting worse.
Last year’s fiscal deficit was 6.2% gross domestic product The current account gap is 3.6 percent (see Figure 1). Government Debt –gross domestic product The ratio hovers around 90%, while external debt has more than doubled since 2013 to 34%. Debt servicing consumes 45% of government revenue.
Well-meaning Egyptians have been warning for years that the country is falling into a debt trap. Mr Sisi ignored them, foreign investors, lured by some of the world’s highest interest rates, eager to help him maintain his illusions. Buying Egypt’s short-term debt appears to be a profitable and risk-free proposition: the largest Arab state must be too big to fail.
Failure is still unlikely — but no longer impossible. The pound is the world’s worst-performing currency this year, fueling inflation. Soaring interest rates will be a drag on private companies. The public sector, the main driver of recent growth, has been told to cut spending. After years of short-sighted policies, there are no easy solutions to Egypt’s plight.
The collapse, which began with Russia’s invasion of Ukraine, caused jittery investors to pull $22 billion of their portfolio investments out of Egypt within a few months. This exacerbates the shortage of hard money.Government restricts imports to reduce trade deficit and return to International Monetary Fund For another loan, this is the fourth since 2016 (it finally received $3 billion last December). In June, Finance Minister Muhammad Maait said his country must focus on building less volatile inflows, such as foreign direct investment and export earnings. “Lessons we have learned [is that] You can’t rely on “hot money,” he said.
This lesson is quickly forgotten. In December, the government announced $9.5 billion worth of cargo was stranded at ports: Businesses couldn’t find the money they needed to clear cargo. A black market in currency emerged, with sterling trading at a significant discount to the official exchange rate. Egyptians traveling abroad over Christmas have received word from their banks that withdrawal limits are as low as $100 a month.
That leaves little choice. The pound, which is supposed to float but is informally backed by the central bank, has depreciated twice in 2022. January 5 It was allowed to slip again and eventually stabilized around $30/$1, down 20%. It has lost 50% of its value over the past year (see Figure 2). Analysts at several banks believe it is still overvalued.
The depreciation brought an inflow of hundreds of millions of dollars, which helped ease the backlog of imports. But it would also trigger already high inflation, which hit 21% in December (37% for food). Data for January will be worse. Inflation in Egypt remained above 20% for 13 months after its first major devaluation in 2016.
These figures are disastrous for the poor. Fatima is a housewife looking through her reduced shopping list. Eggs are now an occasional luxury. The price of a box of 30 has doubled to £100. Her family’s favorite brand of cheese is 80% more expensive than it was a year ago. Meat? forget it. Some butchers fear they will have to close because few of their customers can afford to buy their wares. A kilogram of chicken breast that sold for 90 pounds last year is now selling for almost 200 pounds.
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The government puts the poverty rate at 30%, but the official figures have not kept pace with high inflation and a repeatedly battered currency. In 2016, the national poverty line was fixed at the equivalent of US$55 per month. Today it is $29. The middle class is falling into poverty.
Even in a pandemic year 2020, Egypt is growing at a respectable growth rate of 3.6%. But appearances can be misleading. Public spending and a booming natural gas industry drove growth. The latter creates few jobs. The state can no longer afford the mega-projects that define Mr Sisi’s tenure. He expanded the Suez Canal, started building a new capital and built thousands of kilometers of roads. But in January, the cabinet said it would stop projects requiring hard currency.
As for the private sector, it is anemic. The purchasing managers’ index, which measures business activity, has contracted for 25 straight months and in 75 of the past 84 months. Businessmen cite many ills. The domestic market is huge but poor. Public schools suck, so the workforce is undertrained. The government has taken a scattershot approach to industrial policy: If you want every industry to be the national leader, no industry will be number one.
High interest rates are another hurdle. In early January, two state-owned banks briefly offered one-year certificates of deposit at 25 percent. The program brings needed liquidity to the financial system. That can be a drag on investment: it’s easier to earn interest from the bank than to open a factory.
Then there’s the military, which runs a vast economic empire that includes everything from spaghetti to cement. It grabs an increasing share of private enterprise: it has a hard time competing with entities that don’t pay taxes or duties, enjoy preferential access to land and can lock out rivals. The founder of giant food company Juhayna could serve two years in prison without charge for refusing the army’s demand for a controlling stake (he was released on January 21).
The government said it would sell stakes in a number of state-owned companies, including military-industrial firms such as Wataniya, which operates petrol stations, and Safi, the bottled water company. Similar promises have not been made before.in its latest agreement International Monetary Fund It also pledged to end tax breaks and other special treatment for military-run companies. Whether Mr Sisi has the will and ability to deliver is unclear.
When he took power, many Egyptians were grateful for the respite they had from the post-revolutionary chaos. There are no reliable polls in such an authoritarian country, but anecdotal evidence suggests many Egyptians have lost faith in his leadership. It is increasingly common to hear criticism of the president in markets, taxis and cafes. Some well-connected Egyptians are quietly urging him not to run in next year’s presidential election.
He cannot expect much help from abroad. A decade ago, with their economies in turmoil following the al-Sisi coup, the Gulf countries poured $25 billion to help stabilize their economies. This time they are unlikely to be so generous. Instead of aid, the Gulf states are buying Egypt’s lucrative assets on the cheap. There are even rumors that Mr Sisi might sell or lease the rights to operate the Suez Canal, possibly to a Gulf company, which would be politically explosive: control of the canal is a totemic issue in Egypt’s modern history.
In some ways, Egypt finds itself back in 2016, when it struck a $12 billion deal with the US International Monetary Fund. It implemented some fiscal reforms, such as cutting subsidies, but ignored various structural reforms that would improve the competitiveness of the economy. Since then, the crisis in the country has continued unabated. ■
