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Explaining the Chronic Crisis of the Egyptian Economy



Since the beginning of the Russian invasion of Ukraine, in February, the Egyptian economy has been weathering a significant amount of pressure, that poses a serious threat to the hard-earned gains of the economic reform program, that was launched seven years ago. The sharp decline in eastern European tourists turnout to the Red Sea resorts, the disruption of food supply chain, especially in relation to wheat imports, the soaring energy prices as a result of the western economic sanctions on Russia, and the spike in the exchange rate of the Egyptian pound against the U.S. dollar after international policies were made to contain unprecedented inflation rates; are some of the features defining the current economic crisis that Egypt has fallen into because of a war happening in a far-off geography.


Over the past few weeks, urgent changes to monetary policy by the Central Bank of Egypt (CBE), crucial government interventions to suppress surging prices of basic commodities, and generous investments poured into the Egyptian market by the Arab Gulf countries, have effectively participated in protecting the Egyptian economy against the shockwaves of the ongoing global standoff. But they are not enough! Such temporary actions are crucial for mitigating the influence of the crisis on the microeconomic level, on the short-term. However, they are not doing any good to the advancement of the macroeconomic system, on the long-term. Rather than pushing the Egyptian economy outside of the bottle’s neck, where it has been stuck for seven decades, they are keeping it comfortably stable in its miserable shape and context.



ROOTS OF THE CHRONIC ECONOMIC CRISIS


Economic crises are not new to Egypt. In fact, we could comfortably claim that Egypt has been living in a prolonged economic crisis that started with the fall of the monarchy and the establishment of the republic, in early 1950s. To be honest, the Free Officers coup (July 1952) was unavoidable. Egyptians had been suffering under the corruption of the latest royals of the Muhammad Ali dynasty (1805-1952) and the British occupation. That, perhaps, explains why the Free Officers movement was widely supported by the vast majority of the grassroots citizens, especially the youth, at that time.


However, the lack of planning to the day after removing the king made the new republic start on the wrong foot, in both political and economic terms. The core theme of the 1952 coup’s propaganda was to empower the poor against the capitalist rich, who had enslaved them to magnify their own wealth. In doing so, a “revolution leadership committee” was formed to seize the finances and the properties of the wealthy and reallocate them into state budget to serve the poor.


Four years later, when Gamal Abdel Nasser became a president, he took the country several steps further away from capitalism towards his dearly embraced ideology of socialism/communism. He started by distributing the farms seized earlier from the capitalists on the poor farmers, who used to work in them under the capitalistic era. In parallel, he started a campaign to nationalize major industries and services that defined the pillars of the Egyptian economy at that time; starting from food and beverages factories, and cinema production companies, up to international trade corporations, and the multinational authority that was responsible for managing the Suez Canal.


Sadly, neither the farmers were able to appropriately manage the farms given to them, nor the state was successful in running the nationalized facilities and businesses. Eventually, that led to a severe economic regression, that magnified after the Egyptian military found itself involved in a cluster of wars against the western super powers of that time, either in defense of its own territory or in defense of other Arab countries under the umbrella of Arab nationalism, which was, also, another ideology dearly embraced by Nasser and his counterparts in most Arab states.


When former President, Anwar Al-Sadat, took power after Nasser’s death, in 1970, Egypt was already going through severe political and societal transformations, that had a negative impact on his ambitious project to substitute Nasser’s failing socialist system with a liberal open market economy. As a result, a hybrid economic system that constitutes an odd combination of the distorted socialist project of Nasser and the incomplete liberalist project of Al-Sadat, had to be born. Such a flawed system kept the Egyptian economy running, but dramatically hindered its potential to grow and prosper, or even adapt to constant changes in the international economy, over the years.


When Mubarak came in power after Sadat’s assassination, in 1981, he did not make an effort to reform the economy or change the system as long as it was working for his advantage. Mubarak made the best use of this hybrid economic system to hypnotize the citizens against the ordeal of his rule, and thus kept himself in power for thirty years.


Mubarak depended mainly on the high revenues of tourism and the Suez Canal, as well as the annual military aid from the United States (US$ 1.3 billion), and the under-the-table inducements by corrupt businessmen, to feed the state budget. Meanwhile, he avoided applying taxation on a wide scale or firming tax collection policies in a way that may stir the anger of the middle class and make himself accountable to them. At the same time, he exaggerated in subsidizing basic food commodities, especially the bread, and made regular annual raises, labeled as “almenha” (the president’s give away), to blue-collar labor and civil servants who resemble the majority of grassroots citizens.


However, as the flawed economic system became the norm, under Mubarak, corruption found its way to both public and private sectors. That further complicated Egypt’s chronic economic crisis, which got even worse after a popular revolution, supported by the military, overthrew Mubarak in 2011, followed by another uprising in 2013 against the short rule of the Muslim Brotherhood regime, and a state of unbearable instability and lack of security that lasted until the end of 2015.


Nevertheless, the economic reform program (2016-2020) that was launched by the current President Abdel Fattah Al-Sisi, with the support of the International Monetary Fund (IMF), brought hope that the chronic problems of the Egyptian economy could be fixed, before it got thwarted, once again, by unexpected global troubles.



THE UNPAVED PATH TO ECONOMIC REFORM


In January 2022, the majority of the Egyptian citizens started to report tangible improvements in their living conditions, and greater flexibility in their microeconomic decision-making in general. That was the first sign that finally Egypt started to harvest the fruit of the tough, but successful, economic reform program, which the government launched in 2016 with a loan and technical support from the International Monetary Fund (IMF). 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. A great part of this success has to do with how the government handled the consequences of the COVID-19 pandemic on its emerging market.


Even during the hard hit of the COVID-19 pandemic in 2020, Egypt was able to make progress on the economic reform program. By the beginning of 2021, Egypt was among a handful number of countries, worldwide, to see a growth rate in their economy. According to data made available by the World Bank and IMF, Egypt as an emerging market achieved a growth rate of 3.6% during the fiscal year 2019/2020. Compare this to developed countries with advanced economies, which suffered sharp contractions under the stress of the pandemic.


One reason for the Egyptian economy’s resilience during the COVID-19 crisis, and the relative affluence that Egyptians enjoyed in the year after, is the unprecedented success of the government’s macroeconomic policies in targeting poverty and unemployment rates, on a wide scale. National programs, like “Hayah Karima” (A Decent Life), participated effectively in giving the poor access to better housing conditions and health services. Meanwhile, the national infrastructure development program, which targets the urban as well as the long-ignored rural cities, has successfully created tens of thousands of jobs that eventually lowered unemployment rate to 7.4% compared to 13.05% in 2015, before the comprehensive economic reform program had started.


In addition, the successful foreign policy, adopted by the Egyptian leadership, towards Egypt’s immediate neighbors in the Mediterranean and the Red Sea, has opened new doors of resourcefulness to enhance the Egyptian economy. Egypt is not one of the lucky countries when it comes to natural resources. Therefore, exploring untrodden areas was the only option for the current leadership to create new sources of income. Between 2015-2017, the Egyptian President, El-Sisi, worked extensively on signing maritime treaties with Egypt’s neighbors in the Mediterranean and the Red Sea to clearly identify Egypt’s exclusive economic zones (EEZ), so Egypt can use the wealth of seabed resources.


Thanks to this effort, by the year 2018, Egypt has emerged as a hub for Liquified Natural Gas (LNG) in the Mediterranean. Since the last quarter of 2021, Egypt started to export regular shipments of LNG to Turkey and southern Europe. In January 2022, for the first time ever, Egypt started shipping LNG to countries as far as Netherlands, in northwestern Europe. Meanwhile, in the Red Sea, Egypt partnered with giant European and Gulf companies on managing its newly established fields of crude oil.


In June 2021, the Egyptian government announced that the Egyptian oil trade balance achieved a surplus estimated at US$174.9 million, during the first half of the fiscal year 2020/2021, compared to a deficit of US$773.3 million during the same period of the fiscal year 2019/2020. That is in addition to the fact that the hydrocarbon resources from the sea have been used to increase Egypt’s production of electricity to 54 Giga Watts creating a surplus after decades of domestic consumption suffering severe deficit in electric power.


In February, only one week before the eruption of the Russia-Ukraine war, the Egyptian Minister of Planning celebrated, in a press conference, the news that Egypt successfully achieved a growth rate of 8.3% during the second quarter of the current fiscal year 2021/2022, compared to a growth rate of only 2% during the second quarter of last year. Meanwhile, the foreign reserves in the Central Bank of Egypt (CBE) exceeded the benchmark of US$40 billion and the inflation rate remained stable roughly between 5% and 7%. Yet, unfortunately, the burdens of the Russia-Ukraine war on the Egyptian economy are quickly swallowing this hard-won progress.



BENDING IN THE WIND OF WAR


Despite being geographically distant, the ongoing war between Russia and Ukraine is leveling a huge pressure on the Egyptian economy, especially with the looming uncertainty about when this war is expected to end. The so-called “military operation,” which the Russian President, Vladimir Putin, unjustifiably launched in Ukraine, on February 24th, with the hope to seize Kiev over one or two nights, is now extending to weeks of field combat that invited unprecedent global standoff between the western superpowers and Russia. The defining component of this standoff is using the weapon of economic sanctions, that ultimately forced the whole world to share the cost of the war, including the countries that applied the sanctions on Russia.


Hence, the fragile Egyptian economy, which is hardly trying to stand tall, found itself obliged to bend in the wind of the war happening in another continent. The Russia-Ukraine war is directly hitting two of the most important economic sectors in Egypt; food and tourism. Some western analysts expected that the stress of the Russia-Ukraine war on the Egyptian economy