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Egypt's Economic Bleeding



Egyptian citizens from all social and professional backgrounds are deeply affected by the economic crisis. The wealthy, the poor, and the middle class are all struggling to adjust to the new reality, to varying degrees, and for different reasons.


Egyptian officials insist that the current economic crisis is not their fault, but rather the predictable consequence of global crises that have hit the world in the last two years, such as the COVID-19 pandemic and the global recession caused by the ongoing war in Eastern Europe. Although part of this statement is undeniably true, many Egyptians refute it by holding the government accountable for its inability to implement a macroeconomic reform program capable of effectively healing Egypt's chronic economic crisis, which has plagued the country since the 1950s. In this debate, the bitter truth remains that Egyptians are deeply depressed as a result of a severe economic crisis, and the government must act.



The Challenge


The Egyptian government is grappling with the limited options available to resolve the renewed economic crisis and reassure the concerned citizens about their financial security and economic prospects. The flotation of the Egyptian pound in pursuit of a small loan from the International Monetary Fund (IMF) has created a shockwave that has severely impacted the already troubled macroeconomic system. Furthermore, premature policies to disrupt importation to preserve dollar reserves have contributed to price increases in food and basic commodities. Despite the Central Bank of Egypt's (CBE) extreme monetary policies, which have pushed interest rates to unprecedented levels, inflation rates have skyrocketed to above 20% in the last two months.


Since the beginning of the Russian invasion of Ukraine, in February 2022, the Egyptian economy has been weathering significant pressures, blowing away the hard-earned gains of the national economic reform program that the government launched seven years ago. Over the past year, the hot money investors withdrew from the Egyptian market causing a sharp decline in foreign investment rates. As a result, the dollar reserves in the CBE started to deplete, especially since the tourism sector, too, has become unable to generate appropriate revenues because of the sharp fall in Russian and Eastern European tourist turnout.


Between the end of November and early December, the dollar scarcity issue got more complicated as more citizens started to purchase dollars to hedge against inflation. In December, the CBE announced that official inflation rates reached slightly over 21%, adding huge pressure on the purchasing power of the Egyptian Pound. In the unofficial market, the dollar exchange rates spiked to 32-40 EGP compared to 28-31 EGP in official banks.


“The influence of the war in eastern Europe on the global supply chains of food and energy is burdening the Egyptian economy with 130 billion Egyptian pounds in direct cost, in addition to 335 billion Egyptian pounds to handle the indirect consequences;” the Egyptian Prime Minister, Mustafa Madbouly noted earlier.


The Egyptian president, Abdel Fattah El-Sisi, made three speeches in the past three weeks at three carefully selected strategic platforms: the Coptic Orthodox Cathedral, the Military Academy, and the Police Day Ceremony. The president’s choice to deliver his message via these particular venues was not an accident, but a means to put a political frame around his economic message to the general public and international allies and stakeholders. The message of the president could be summarized as follows: “The economy is doing well, no need to panic or worry, we will survive the economic crisis the same way we survived previous political and security crises.” In response, the most skeptical Egyptians have decided to wait and see what the government can do to keep the Egyptian economy boat afloat.



The Uncertainty


The Egyptian public's opposing views on the current and previous IMF loans are particularly intriguing. When the Egyptian government announced its intention to seek an IMF loan in 2016, most Egyptians applauded the decision and pledged to support the political leadership in completing the comprehensive economic reform plan attached to the loan. In contrast, the Egyptian public is skeptical of the new IMF loan approved last month.


Egypt is the second largest lender of the IMF, despite having a rocky history with IMF loans. Since the 1960s, these loans have both kept governments from collapsing amidst economic crises, but they always caused hardships to middle-class citizens. The only exception was the 2016 IMF loan overseen by Christine Lagarde, which transformed Egypt's socio-economic circumstances and brought hope to the hearts of the poor. However, these gains are now in jeopardy due to the Egyptian government's attempts to fulfill the requirements of a much smaller and more restrictive loan.


The current IMF leadership is way more rigid than the previous IMF leadership of Christine Lagarde in terms of applying the loan-attached conditions of state policy and structural reform. From a compassionate and understanding position, Lagarde gave priority to directing the Egyptian government to make tangible progress on the social development agenda. However, the current IMF leadership is giving the ultimate priority to fast-forwarding the market liberation process even if it happens at the expense of slowing down the national development projects and crushing the middle class.


In 2016, the Egyptian government received an IMF loan of $12 billion over three years through the IMF's Extended Fund Facility. The loan and the linked technical support program provided a tremendous buffer for the Egyptian economy against the challenges of the reform program, especially those related to the first shocks of inflation and the floating of local currency. When the COVID-19 pandemic broke out in 2020, the IMF intervened with two additional financial support instruments to support the Egyptian economy against the consequences of the pandemic. In May 2020, Egypt received US$2.8 billion in emergency financial assistance through the IMF’s Rapid Financing Instrument. Then, in June 2020, the IMF’s Standby Arrangement availed US$5.4 billion for Egypt to withdraw over a period of twelve months.


Thanks to the success of the IMF’s technical support program, Egyptians started to report tangible improvements in their living conditions and greater flexibility in their microeconomic decision-making in the first months of 2022. Around the same dates, Egypt was reaffirmed by the three Credit Rating agencies (Fitch, Moody’s, and S&P Global) at B and B+ with a stable outlook. In December 2021, an IMF report expected that Egypt, by the end of 2022, will become the second largest economy in Africa, after Nigeria, and the second largest economy in all Arab countries, after Saudi Arabia, with a record Growth Domestic Product (GDP) that exceeds US$438 billion. And, then, Russia’s President Putin decided to invade Ukraine!


When the effects of the Russia-Ukraine war started to reflect on the Egyptian economy, the first instinct of the Egyptian government was to knock on the doors of the IMF once more. After almost a year of negotiations between Egyptian government officials and IMF executives, a sudden cabinet reshuffle, and a change in the leadership of the Central Bank of Egypt, the IMF finally approved a small loan of three billion dollars to Egypt in mid-December. The small loan will be paid to the Egyptian government in installments over a long period of 46 months and may be frozen or completely withdrawn if the Egyptian government does not show steadfast progress on the list of harsh conditions.


The list of macroeconomic reform policies that the Egyptian government approved and committed itself to, to receive the $3 billion IMF loan include but are not limited to floating the Egyptian pound against the US dollar, removing subsidies on oil and gas to match international prices, slowing down the mega infrastructure and social development projects, accelerating and widening the process of collecting taxes, selling state-owned assets to private investors, and listing military-owned enterprises at the stocks market (The Egyptian Exchange).


The middle class is the citizen group most concerned about the consequences of the IMF loan conditions on their lifestyle and standard of living. Such conditions are expected to downgrade their purchasing power and thus curtail their ability to provide for themselves the basic services that the government is not offering them, such as quality education, health care, and unsubsidized food and energy products.



Survival Plan


The government policy to survive the current economic crisis and avoid future crises is happening through three timebound phases: immediate, medium-term, and future.


In the short term, the government’s top priority is to control inflation and stabilize the market. That is mainly through restoring depleted dollar reserves to a level that allows the resumption of imports and thus mitigates the soaring prices of basic commodities. Such a step is crucial for both economic and political reasons. It may participate in improving citizen satisfaction with the performance of the government and mitigate public stress. To achieve this, the government worked on two parallel tracks.


The first track is where the government, with the help of military-owned enterprises, is focused on keeping the basic commodities, such as food and energy products, abundantly available in local shops. Since the beginning of the crisis in March, the Egyptian government has been exerting a huge effort to keep food products, especially bread and oil, available to most consumers at affordable prices. In the process, the government had to postpone its plans to remove the subsidies on bread, fuel consumption, and electricity subscriptions until the current crisis is resolved.


The second track is where the CBE has been taking radical fiscal measures to close the gap between the dollar exchange rate in the official and non-official (or the black) market. Floating the Egyptian pound against the dollar in conjunction with raising interest rates encouraged most Egyptians to invest in high-rate EGP certificate deposits rather than hedging against inflation by purchasing and saving dollars or gold. In December, the CBE’s Policy Committee decided in its last routine meeting of 2022 to raise the interest rate by 3% to control inflation and strengthen the Egyptian pound before allowing it to float per IMF instructions. Since March, the CBE gradually raised the interest by 8%.


This seemingly extremely liberal policy succeeded in attracting massive investments from Egyptians, local and living abroad, in the high-profit Egyptian pound certificates of deposits offered at Egyptian national banks. In the medium term, this policy seems to be able to control the inflation rates and bring the exchange rates to a reasonable range. Official statements show that Egyptians poured more than three hundred billion EGP into these certificates of deposit, within only two weeks. This policy has also encouraged Egyptians abroad to pour money into the Egyptian banking system in a way that partially compensated for the fleeing hot money investors.


In the past few years, Egyptians abroad made financial contributions to the Egyptian sovereign fund to support the state-led comprehensive development plan. The size of Egyptians living and working worldwide is roughly estimated at 14 million people. They have the financial muscle to make a real difference in the future of the Egyptian economy. In August, the CBE highlighted a record increase of 1.6% in the remittance inflow by Egyptians abroad, reaching 31.9 billion dollars for the first time.


In the near future, the government’s main goal is to encourage foreign investors to return to the lucrative Egyptian market, which includes hot money investors and foreign direct investments that would bring much-needed money and employment opportunities to the Egyptian macroeconomic system. In the past two weeks, the Egyptian Prime Minister held several meetings with local business owners and foreign investors to discuss ways to facilitate their operations and increase their volumes of production.


This goes hand in hand with improving the tourism sector and opening the door for new tourists from eastern Asia to compensate for the shortage of traditional Russian and European tourists, who are curtailed by the effects of the Russia-Ukraine war. Egyptian tourism companies have already started to arrange trips for tourist groups coming from China, the first of which arrived in Cairo and visited the Red Sea resorts earlier this month. In his meeting with the Indian Prime Minister this week, President El-Sisi made sure to assert that Egypt would welcome an increase in Indian tourists interested in visiting Egypt. Tourism is one of two frontiers of foreign currency, besides the revenues of the Suez Canal.


In the long term, the policy documents that the government is currently proposing to regulate taxation rules and the military role in the economy are also believed to contribute to lasting reforms. Over the coming four years, the government plans to list state-owned stocks with a value of 10 billion dollars every year, ultimately compounding to 40 billion dollars by the end of the period, for foreign and local investors to buy. At the same time, the government plans to increase the participation of Egyptian private sector businesses in state-run national projects to 65%, compared to the current rate of 30%. That is expected to offer a golden opportunity to the growing community of entrepreneurs and startups that resembles one of the strongest pillars of support to the future of the Egyptian economy.


In that regard, the government is currently working on a taxation policy document that will regulate the process of collecting taxes from businesses and individuals. The proposed policies have already been met with objections from a wide range of business owners and individual professionals. Meanwhile, the government has recently issued the state ownership policy document which outlines the key principles governing the scope of state and military interventions in the market. However, the complete withdrawal of the military institution from the market does not seem realistic or even possible any time soon. Military enterprises have always been the backbone of the Egyptian economy and the safety net for Egyptian people in times of crisis. Therefore, the taxation and state ownership policy documents should be implemented at a slow pace and continued revisions to avoid any setbacks or backfiring.



The Hope


There are always hidden opportunities in every crisis. In the case of Egypt’s current economic crisis, the hidden opportunity could be accelerating the process of establishing a modern macroeconomic system in place of the old and barren structure that kept the Egyptian economy struggling for seven decades.


Despite the painful pressures on the spending power of most Egyptian citizens, especially from the middle class, there are some promising indicators on the state / governmental level. For example, Egypt’s GDP has grown by 4.4% at the end of 2022 compared to the 3.3% growth rate in 2021. Egypt's non-oil exports rose during the period extending from January to October by about 12% to reach $30.4 billion compared to $27.1 billion during a similar period last year. Meanwhile, the government has not given up on its mega national projects targeting to improve the infrastructure and protect the poor.


That being said, we have to keep in mind that all the efforts exerted by the government to contain the current economic crisis are only going to provide a temporary fix to a chronic disease that has been dragging Egypt for seven decades.


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