Current Affairs

Is Egypt the next economic failure in the Middle East, that seems to be the worry among the investors in Egypt. The Egyptian pound has devalued by thirty percent, black market rates are higher and international rates are forty five percent. There have been IMF loans, which should amount to US$6 billion in the past three years and further investment from the Gulf.  But there are warning signs that the ever deepening pockets of the Gulf will not invest continuously in the Egyptian economy if there are not opportunities for their investments to realise assets.

Egypt has agreed three loans with the IMF under the government of President Abdel Fattah el-Sisis. The IMF deals came after huge debts and a shortage of foreign currency. Egypts foreign debt rose from US$40 billion in 2012, to almost US$155 billion ten years later. It is believed that Egypt has received nearly US$100 billion from Gulf countries and borrowed from the World Bank and the African Development Bank. Because of the increase in borrowing, Egypt has been forced to service debt over development projects, such as health, education and economic projects  that make sense.

In January 2023, Egypt received $US3 billion in a loan from the IMF to help weather the storm caused by the war in Ukraine, however conditions were placed on the loan, which the IMF says are necessary to preserve the stability of the economy and to encourage private sector growth. However, with the Egyptian pound devaluing  there is concern for the 60 percent of Egyptians who live below the poverty line; the IMF loan unlocks investment coming from the Gulf countries, which has promised US$20 billion in deposits and investments.  

One of the factors pointed out by the IMF is the expansion of military owned enterprises, which have affected the ability of the private sector to succeed and discouraged foreign investment. The IMF argues that the military projects operate without oversight and are beyond the state budget, which has invested in the ever expensive projects that have consumed much of the short term investments.

In 2016, Egypt applied for a loan of $12 billion, by September 2017, the IMF issued a staff report which detailed that Egypt had not complied with the terms of the deal, which included the depreciation of the Egyptian pound. It was estimated that the Egyptian government had borrowed a further US$16 billion from institutions, banks and other countries.

Yezid Sayigh believes that there is no transparency in the Egyptian economy, because of the massive involvement of the military in all sectors of the economy. He further argues that the military have been undercutting the business sector and have diminished the ability of the private sector to compete or even invest. He believes that it is imperative that the business sector is given the opportunity to invest in these military companies and the military return to only investing in the defence sector, which would enable the Egyptian economy to gain transparency and enable business to be regulated by the state.

So where is the money going?

During the Covid pandemic, tourism in Egypt collapsed after the state suspended all incoming and outgoing flights, which cost the Egyptian economy US$1 billion a month in lost revenue. It further caused another squeeze on the economy with the loss of tens of thousands of jobs in a sector that contributes 12 percent to Egypts GDP and employs 27 million. The government spent billions of pounds to support the tourism, industrial and agriculture sectors and offered aid to thousands of workers. In order to finance these outlays, Egypt applied to the IMF for a $5.2 billion loan, which they approved in June 2020. The IMF said that the programme would address the immediate needs of the pandemic.

In 2022, Egypt once again applied to the IMF for a loan after the outbreak of the Russia-Ukraine war, because of soaring food and energy prices. Egypt is dependent on both Ukraine and Russia for the majority of its wheat supply and a third of the tourist industry. The terms of the loan was for a shift to a flexible exchange rate, measures to reduce inflation and the public debt and social spending to protect the most vulnerable. The Egyptian government was also required to implement structural reforms, encourage the private sector, and strengthen governance and transparency in the public sector.

According to Maged Mandour, writing in Middle East Eye, “Egypt is going through one of the most dramatic debt crisis in its modern history.” Poverty will continue because of the devaluation of the Egyptian pound and the depth and extent of the current crisis is expected to be much deeper , because of the lack of new capital inflows and a forecast that external financing need of $19 billion for the 2023 fiscal year, and $22.5 billion in 2024, meaning the pound will be stressed, which adds more pressure to the cost of living.

The Egyptian government plans to borrow $44 billion from the local markets in the coming year in order to balance the budget. If Egypt is to balance the books and stop the substantial financing gap over the next two years, they will have to curtail borrowing. But Egypt is not in a position to stop their need for capital, even in February they issued an Islamic bond, which would realise 11 percent, to pay off a Eurobond, issued at interest rate of 5.6 percent.

Hafsa Halawa, speaking  at a Carnegie event, believes that nothing will change, because of the military involvement in the economy. She argues that the Gulf states do not believe that anything will stop the haemorrhaging of the economy and that there are two economies in Egypt, a state within a state, with the military accruing assets with cheap loans and investments that undermine the private sector. She argues that “if you want to show the gulf states that you are serious, then give them the banks.” If the investment from the Gulf does dry up, then it relates to their inability to invest because of the governments refusal to release assets.  She questions whether Egypt is already a basket case with the huge amount of loans that the government has taken out, and question whether the Middle East will have another Lebanon on its hands.

But it is not necessarily a question of where Egypt goes from here, Maged Mandour argues that debt will continue to absorb the resources of the government for the foreseeable future, which makes Egypt vulnerable to world fluctuations in the finance market. Robert Springboard argues that Egypt has been hiding its debt within institutions and that ultimately the privatisation of the Egyptian economy is of paramount importance. The Egyptians have been selling 20 – 25 percent of these business, but the Gulf states are demanding sales of the Egyptians states assets in their entirety.

There are arguments that Egypt is to big to fail, but if the capital coming from state institutions dries up because they are unable to gain finance from the International Capital Markets and the government defaults on its bonds, Egypt is in the unenviable position of bankrupting the insurance and banking sectors. This itself will further put pressure on the Egyptian pound causing further devaluations and more pressure being put onto the employment market and the next generation.

Where Sisi goes from here is a question of what the economy will take to get out of its dependence on capital imports. The investments in capital projects is nearly over, so it is a question of the accrued debt being serviced and whether Egypt can move its borrowing away from dependence on inflows of borrowing and bring in investment, is the question that is most concerning. Isher Diwan argues that it is a question of how you make Egypt more dynamic. He argues that it is a political issue rather than one determined by what has happened since Nasser, where the state is all encompassing and responsible for the subsidies that have been impinged by the ongoing financial crisis, which is affecting the living standards of the Egyptians.