For the past several decades, successive Egyptian governments have practised the economic equivalent of riding a skateboard without a helmet; risky but manageable in the short run as long as one doesn’t encounter any obstacles. However, the inevitable has happened. Egypt’s economy smashed into not one, but two, major obstacles; a pandemic, which it just managed to stagger away from (World Bank, 2021), followed by the full-scale Russian invasion of Ukraine.
Both of these developments have had devastating and far-reaching global ramifications that are in no way unique to Egypt, but the country’s economy has inherent weaknesses that have long made it particularly vulnerable to external shocks. Those weaknesses include a long-standing and risky reliance on foreign debt, particularly short-term loans, coupled with massive food and fuel imports. Put simply, Egypt spends more than it makes and it has borrowed heavily to feed this habit. A staggering 56% of the current fiscal year’s budget is being allocated to debt servicing (Kassab, 2023). The Russian war on Ukraine disrupted global supply chains and sent prices soaring, making the cost of Egypt’s imports prohibitive and dramatically reducing available foreign currency deposits. Those dwindling deposits have in turn crippled imports across every sector of society; medicines and medical supplies, machinery and agricultural fodder, which has, in turn, affected the price and availability of livestock, causing food prices to soar. A devaluation of the Egyptian Pound, mandated by the latest loan from the International Monetary Fund (IMF, 2022) in December 2022, has seen the local currency lose almost half its value against the dollar since the beginning of the year. Another of the IMF’s conditions was that the State (and by direct implication the military) relinquish its outsize role in the economy and allow the private sector to become the engine of growth that it normally would be.
The country is currently mired in an economic crisis unlike any it has ever seen, one that might possibly have the potential to trigger social and political unrest in the Middle East’s most populous country
As a result, the country is currently mired in an economic crisis unlike any it has ever seen, one that might possibly have the potential to trigger social and political unrest in the Middle East’s most populous country.
How Did We Get Here?
Egypt’s economic history over the past several decades can read like a litany of missed opportunities, with successive governments unwilling, or possibly unable, to make the difficult decisions to tackle basic structural and institutional reforms.
After having to reschedule its public debt twice, in 1987 and 1991, the government launched the Economic Restructuring and Adjustment Programme (ERSAP) with a $100-million loan from the African Development Bank (AfDB), although the programme was multi-donor supported, under the leadership of the World Bank. Among the overall goals were “the stabilization of the economy in order to restore balance and reduce inflation … and gradually pave the way for the emergence of a virile private sector.” The privatization programme that followed was largely deemed successful (so much so that the Egyptian government actually refused the second half of the loan,) and the resulting AfDB report (AfBD, 2000) concluded that “the programme goals were largely achieved and socioeconomic conditions improved during and after implementation.” However, the report also warned that “to sustain the achievements made during the programme, the government needs to address the structural challenges that still face the economy.” Among those challenges were to “reduce reliance on external resources … promote non-traditional exports [and] address poverty and social sector issues.” Six IMF loans later,one opportunity after another to tackle those same issues has been missed.
As the war and the blockades drove prices up, Egypt found that it had to pay ever-climbing prices from depleting foreign currency reserves. The situation spiralled downwards from there
It isn’t that there hasn’t been any reform – there have been a raft of reforms, by one government after another. However, they haven’t appropriately tackled the structural faults that have formed a patchwork of cracks in the economy’s resilience to external threats, cracks that the Ukraine war finally split wide open. There was an ambitious reform programme in 2016, on the back of a $12-billion IMF loan, aimed at rectifying the country’s deficits, mostly by slashing subsidies on fuel and food. That tactic had a disproportionate effect on Egyptians, particularly middle and lower socioeconomic classes who watched their spending power become steadily depleted. National savings accrued thanks to subsidy slashing could have been funnelled into social security nets, education and health. Instead, they were directed into infrastructure, national megaprojects and one massive highway and bridge after another. All that infrastructure managed to bring down unemployment temporarily and certainly improved traffic but it was another wasted opportunity. Any attempts to expand exports took a back seat to construction, infrastructure and real estate – sectors where the State play an outsize role. However, the reforms – economically vital but politically difficult – ignored the gaping trapdoor of foreign debt, particularly the short-term kind. The Ukraine war illustrated those dangers. Hot capital tends to follow a pattern; at the first sign of trouble, it invariably leaves emerging economies for developed ones. In the first quarter of 2022, $20 billion,almost half of Egypt’s foreign currency reserves, fled the country’s coffers. Egypt is the world’s largest wheat importer, with around 80% of its imports coming from Russia and Ukraine. As the war and the blockades drove prices up, Egypt found that it had to pay ever-climbing prices from depleting foreign currency reserves. The situation spiralled downwards from there.
Inflation began to climb despite the Central Bank of Egypt’s attempts to stem it by raising interest rates. While it hit an all-time high of 36.8% in June 2023, the figure for food and beverages was a staggering 64.9%, in a country where around 30% of the population lives below the poverty line. A black market in hard currency has seen its strongest resurgence in decades; as of mid-July, the decline in dollars, coupled with speculation on further devaluations, has led to EGP 10 difference between the official price of the pound to the dollar and the one on the black market. People began hoarding hard currency and, today, even large transactions are being conducted in cash, leading to a parallel system. That parallel system has also chipped away at a major source of hard currency revenues for Egypt; remittances. In the first six months of this year, remittances dropped from $15.6 billion during the same period in the previous year to $12 billion, a decline of 23% and also attributed by the World Bank to people holding onto their currency in anticipation of further devaluations.
Another of the IMF’s conditions was that the State and military reduce their outsize role in the market by, among other things, selling state assets and military-owned companies. As of 12 July, the government had largely failed to meet those goals. The ambitious goal of $2 billion in sales by the end of June (in a privatization programme that kicked off in February) came nowhere near to materializing and the government didn’t appear keen on quite as flexible an exchange rate as the IMF demanded. The IMF delayed its first review – initially planned for March of this year – along with the second tranche of the loan.
In truth, regardless of IMF stipulations, the foreign currency reserves have depleted to the extent that a further devaluation would simply not be safe.
Egypt’s differences with the IMF were illustrated in mid-June when Egyptian President Abdel Fattah El-Sisi ruled out the possibility of another devaluation in the recent future, only to have the Managing Director of the IMF, Kristalina Georgieva, compare propping up the pound against the dollar to “pouring water into a broken vessel.”
It is essential to Egypt to have the IMF remain publicly supportive – the value of the Fund’s loans are never in their size (this latest one was for $3 billion, with a promise to help find another $9 billion from external, probably Gulf, investors), but rather the mark of approval that they confer. Without it, investor confidence will be damaged and rating agencies are likely to be much harsher in their estimations. Both Moodys and Fitch have already downgraded Egypt.
On 12 July, Egypt’s Prime Minister Mostafa Madbouly announced the sale of $1.9 billion worth of state-owned assets, a mix of strategic sales to investors and stock market offerings. These sales were supposed to provide much-needed hard currency and relieve some of the pressure on the beleaguered pound. The Prime Minister was keen to stress that sales were part of a homegrown programme that the government was “committed to implementing” and “not part of any crisis.” If the government was concerned about national sentiment in a nation that has traditionally taken a dim view of privatization, it needn’t have worried. Even for Egyptians who had originally questioned selling state assets, the hardships of the current economic situation had swept aside former concerns. Market watchers breathed a sigh of relief; to many, “state-owned asset” is synonymous with inflated budget, unnecessary bonuses and management unaccountably haemorrhaging cash.
However, only $1.65 billion of the sales were in hard currency, the rest being in Egyptian pounds. Some sources have said that the deals have not yet been finalized (Kassab & al-Saadany, 2023), lessening the chances of an injection of hard currency in the immediate future. And to further complicate matters Egypt has ceased importing Liquified Natural Gas until October, since most of its gas is consumed domestically in the summer when energy demand is high.
Asset sales are not the trickiest variable in the equation, however. That would be the stipulation that the State and military privatize non-strategic firms, increase transparency (currently a very low bar) and end tax exemptions for firms still owned by the State and military, thus increasing the role of the private sector and encouraging foreign direct investment (FDI).
There are two major drawbacks to this line of thinking. The first is the obvious one; the military is the President’s main constituency and it will be extremely difficult to change the status quo, and even more difficult to do it in the time required. The second is that, while it is generally accepted that the military has a huge role in the economy, it isn’t obvious how it maintains that role. In some cases, rather than taking over from the private sector, it has merely co-opted it. For example, construction and real estate, particularly housing, are major sectors of the economy. As Amr Adly notes (2023), the private sector’s share in the housing market between 2015 and 2020 was a staggering 96.9%. In construction it was 81.33%. Essentially, the military sells desert land to developers, enabling the developers to finance their projects and the State to finance projects without resorting to official state budgets. Changing this system will not be easy. In a sign of just how difficult it might be, in February, the President signed a decree awarding tracts of land to the Armed Forces, which may be used as a hedge against forthcoming privatizations.
The View from Abroad
While other foreign investors are currently waiting nervously on the sideline, to date, from one economic crisis to another, Egypt has been able to count on support from the Gulf nations. The countries are inextricably linked; by culture, business and mutual security concerns. Egypt, with its enviable geostrategic location straddling two seas, a gateway to Africa, the Suez Canal, and the largest standing army in the region, is a vital regional ally, and the Gulf nations have always been on hand to offer financial support, often unconditionally.
That has changed for myriad reasons. Firstly, Gulf nations are reassessing their own wealth in light of the inevitable reduction in their revenue streams due to an eventual phasing out of fossil fuels. It’s hardly an immediate concern but Kuwait, Qatar, Saudi Arabia and the UAE have not achieved eye-watering levels of development by being behind the curve. Secondly, there are no exact estimates of how much money the Gulf has provided, but by April of this year they had pledged $22 billion (Español, 2022) to fish Egypt out of hot water. However, it’s no longer unconditional. Possibly with an eye on their own financial bottom line, possibly frustrated by decades of pouring money into a seemingly bottomless pit and possibly feeling that their support has been taken for granted, Gulf nations, particularly Qatar, Saudi Arabia and the UAE, want to see returns on their investment. Trickier still, for the Egyptians, they want to see reforms.
At the World Economic Forum in Davos, Switzerland in January, Mohammed Al-Jadaan, the Finance Minister of Saudi Arabia laid out the new policy clearly:
Where formerly they had given direct grants and deposits “without strings attached,” he said, “we’re changing that, as we’re working with multilateral institutions, to actually say we want to see reforms.”
What he didn’t mention was that, over the years, there has been a divergence between the Gulf nations and Egypt on a number of political and foreign policy issues. Egypt has always maintained a stubbornly independent foreign policy, sometimes to the frustration of its Gulf neighbours (its refusal to join the war in Yemen is one obvious example), who might naturally have felt that their financial support entitled them to some predictability on their allies’ part. In turn, Egypt has been frustrated by the positions taken by some of its Gulf allies; the perceived lack of support on the issue of the Grand Ethiopian Renaissance Dam, for example.
The Gulf nations have recalibrated their financial involvement. Qatar, Saudi Arabia and the UAE have extended the terms of their deposits in Egypt’s Central Bank, but have renegotiated higher interest rates
As a result, the Gulf nations have recalibrated their financial involvement. Qatar, Saudi Arabia and the UAE have extended the terms of their deposits (Salem & al-Saadany, 2022) in Egypt’s Central Bank, but have renegotiated higher interest rates. They’re also the main investors in line for Egyptian assets. While other foreign investors have been waiting on the sidelines to see how matters play out, the Gulf nations are intimately familiar with Egypt and its array of diverse and worthwhile assets and are prepared to wait for further devaluations to achieve the best possible price.
Is There a Way forward?
The global fallout from the Ukraine war aside, much of the responsibility for the current economic crisis lies with successive Egyptian governments over the past several decades. The fallout from any collapse, however, will not be confined within Egypt’s borders. The phrase “too big to fail” is often used in connection with Egypt. There are no countries that are too big to fail, only those where the consequences of failure are monumentally disruptive. The reasons that make Egypt an important regional ally – its population, location and regional connections – are the same ones that would give its failure regional impact. Economic collapse is not likely, but the current situation is already extremely delicate. Economic and political stability are inextricably linked, and if matters degenerate much further, even for a nation with little appetite for it, political upheaval is not out of the question. This is probably one of the main reasons the IMF has been firm but cautious, and a reason why Gulf investors will probably step in at the last moment; there is nothing to be gained by pushing Egypt beyond its limits, and much to lose.
Egypt’s leadership will have to step up to the plate and be entirely convinced that there is now no alternative to the structural reforms that need to be made. As of yet, this hasn’t obviously been the case. In mid-July, Egypt’s Parliament ratified two laws; the first related to the investment law of 2017 and the second to the abolition of tax and fee exemptions for state entities (including the military). This should have been significant, considering that levelling the playing field is a major tenet of the IMF agreement. However, the article excluded “international agreements, military missions, national security and basic utility services,” all sectors the State and military are invested in. This “one step forward, two steps back” shuffle is not uncommon in Egypt’s economy, but it is a luxury the country can no longer afford. The only way out of this morass is by attracting FDI, and that won’t happen without a level playing field.
One other possible solution would be for Egypt to attempt to reschedule some of its debt. While this option would buy some time, it will further affect its credit rating.
There may be one silver lining; Egypt might finally have to make the structural reforms that governments have been pushing down the road for almost 40 years. The question is whether it can do it in time.
Adly, Amr, “Crowding Egypt’s Private Sector In, Not Out.” in Sayigh, Yezid, Assessing Egypt’s State Ownership Policy: Challenges and Requirements, Carnegie Middle East Center, 2023, https://carnegie-mec.org/2023/05/08/crowding-egypt-s-private-sector-in-not-out-pub-89640
AfDB, Egypt Economic Reform and Structural Adjustment Programme Project Performance Evaluation Report (PPER), AFDB Operations Evaluation Department, 15 May 2000, www.afdb.org/fileadmin/uploads/afdb/Documents/Evaluation-Reports-_Shared-With-OPEV_/05092259-EN-EGYPT-ECONOMIC-REFORM-AND-SAP.PDF
Español, Marc, “Gulf states give Egypt $22 billion to mitigate fallout from Ukraine war.” Al-Monitor, 11 April 2022, www.al-monitor.com/originals/2022/04/gulf-states-give-egypt-22-billion-mitigate-fallout-ukraine-war
IMF, IMF Executive Board Approves 46-month US$3 billion Extended Arrangement for Egypt, 16 December 2022, www.imf.org/en/News/Articles/2022/12/16/pr22441-egypt-imf-executive-board-approves-46-month-usd3b-extended-arrangement
Kassab, Beesan “FY 2023/24 draft budget: New debt to pay old debt.” Mada Masr, 11May 2023, www.madamasr.com/en/2023/05/11/news/u/fy-2023-24-draft-budget-new-debt-to-pay-old-debt/
Kassab, Beesanand al-Saadany, Reham “Privatization announcement premature, deals held up by negotiations navigating investors’ concerns over foreign exchange value.” Mada Masr, 16 July 2023, www.madamasr.com/en/2023/07/16/news/economy/privatization-announcement-premature-deals-held-up-by-negotiations-navigating-investors-concerns-over-foreign-exchange-value/
Salem, Aida and al-Saadany, Reham “Why is Egypt not on the IMF’s December public agenda?” Mada Masr, 5 December 2022, www.madamasr.com/en/2022/12/05/feature/politics/why-is-egypt-not-on-the-imfs-december-public-agenda/
World Bank, Egypt’s Economic Update — October 2021, www.worldbank.org/en/country/egypt/publication/economic-update-october-2021
(Header photo: Hildenbrand /MSC, CC BY 3.0 DE https://creativecommons.org/licenses/by/3.0/de/deed.en, via Wikimedia Commons)