Crisis of confidence in Egypt

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meT IS all anyone can speak. For the poor, trips to the market are now difficult: shopping bags are getting lighter, but bills are getting bigger. The middle class has to choose between car payments, school tuition and groceries. Business owners are stuck in a supply chain mess caused by a shortage of hard currency that has left billions of dollars worth of goods stuck at ports.

The past few weeks have been a reckoning for Egypt’s unstable economy. Since 2013, when Abdel-Fattah al-Sisi seized power in a coup, it has been characterized by a beleaguered private sector, twin huge deficits and debt-ridden state spending on infrastructure projects, some of dubious value. Egypt posted decent growth numbers, but they were a mirage: for most of its 104m people, life was getting worse.

Last year the fiscal deficit was 6.2% of GDP and the current account deficit was 3.6% (see table 1). The government owes itGDP the ratio hovers around 90%, and external debt has more than doubled since 2013, to 34%. Debt servicing consumes 45% of government revenue.

Well-meaning Egyptians have warned for years that the country was falling into a debt trap. Mr. Sisi ignored them, and foreign investors, attracted by some of the highest interest rates in the world, were eager to help him maintain his illusion. Buying Egyptian short-term debt seemed like a lucrative and risk-free proposition: the largest Arab country was surely too big to fail.

Failure is still unlikely – but no longer impossible. The worst performing currency in the world this year is the pound, which is fueling inflation. Rising interest rates will be a drag on private industry. The public sector, a key driver of recent growth, is being asked to cut back. After years of short-sighted policy, there are no easy answers to Egypt’s woes.

The disaster began when Russia invaded Ukraine, which forced savvy investors to withdraw around $22bn of portfolio investments from Egypt in a few months. This exacerbated the shortage of hard currency. The government banned imports to cut the trade deficit and went back to the IMF for another loan, the fourth since 2016 (in December it last received $3bn). In June Muhammad Maait, the finance minister, said his country needed to focus on building less robust forms of inflows, such as foreign direct investment and export earnings. “The lesson we learned [is that] you can’t rely on hot money, he said.

The lesson was soon forgotten. In December the government announced that $9.5bn worth of goods were stuck at ports: businesses could not find the dollars they needed to clear their loads. A black money market emerged, with dollars trading well below the official rate. Egyptians abroad over Christmas received messages from their banks imposing withdrawal limits as low as $100 a month.

That left very few options. The note, which was supposed to float but was unofficially held up by the central bank, had already been depreciated twice in 2022. On January 5 it was allowed to slide again, eventually settling at around 30 to the dollar, a 20% drop. It has lost 50% of its value in the past year (see table 2). Analysts at several banks believe it is still overvalued.

The devaluation brought hundreds of millions of dollars worth of inflows, which helped reduce the import backlog. But it will also add to already high inflation, which hit 21% in December (and 37% for food). Figures for January get worse. After the first major depression in Egypt, in 2016, inflation remained above 20% for 13 months.

These numbers are terrible for the poor. Fatima, a housewife, runs through her reduced shopping list. Eggs are now an occasional luxury. The price of a box of 30 has doubled to 100 pounds. Her family’s favorite brand of cheese is 80% more expensive than a year ago. Meat? Forget it. Some butchers fear they will have to close because so few of their customers can afford their products. A kilo of chicken breast sold last year for 90 pounds is now fetching almost 200.

The government puts the poverty rate at 30%, but official figures have not kept pace with bouts of high inflation and constant currency shocks. In 2016 the national poverty line was set at the equivalent of $55 a month. today stands at 29 $. The middle class is heading towards poverty.

Even in the pandemic year of 2020, Egypt grew at a reasonable rate of 3.6%. But looks can be deceiving. Growth was fueled by public spending and a growing natural gas sector. The latter produces very few jobs. And the state can no longer pay for the megaprojects that defined Mr. Sisi’s tenure. He widened the Suez canal, started work on a new capital city and built thousands of kilometers of roads. But in January the cabinet said it would stop work on projects that require hard money.

As for the private sector, it is anaemic. The purchasing managers’ index, a measure of business activity, has declined for 25 months in a row and for 75 of the past 84 months. Businessmen refer to many illnesses. The domestic market is large but poor. State schools are terrible, which means that the staff is not trained enough. The government has taken a fragmented approach to business policy: if you want every sector to be a national champion, none will be.

High interest rates are another obstacle. In early January two state-owned banks issued one-year certificates of deposit with 25% interest. The scheme brought much needed liquidity into the financial system. It can be a drag on investment: it’s easier to get interest from your bank than opening a factory.

Then there is the army, which runs a huge economic empire that produces everything from pasta to cement. It captures an ever-increasing share of private business: it is difficult to compete with an entity that does not pay taxes or customs duties, that has preferential access to land – and can lock out its competitors. The founder of Juhayna, a large food company, was imprisoned without charge for two years because he refused the army’s demands for control (he was released on January 21).

Speak like an Egyptian

The government says it will sell stakes in several state-owned companies, including military companies such as Wataniya, which runs petrol stations, and Safi, a bottled water company. Similar promises have gone unfulfilled before. In his latest agreement with the IMF he also promised to end tax breaks and other special treatment for companies run by the military. It is unclear whether Mr. Sisi has the will and ability to deliver.

When he took power, many Egyptians were grateful for relief from the post-revolutionary chaos. Opinion polls are not reliable in such a brutal country, but news reports suggest that 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 urging him not to run in next year’s presidential election.

He cannot count on much help from abroad. A decade ago, with the economy in turmoil after Mr Sisi’s coup, the Gulf states poured in $25bn to stabilize it. It is unlikely that they will be so generous this time. Instead of offering aid, the Gulf states are buying lucrative Egyptian assets on the cheap. There is even talk that Mr. Sisi could privatize the management of the Suez canal, perhaps to a company in the Gulf, which would be politically explosive: control of the canal is a totemic issue in modern Egyptian history.

In some ways, Egypt finds itself back where it was in 2016, when it reached a deal for $12bn with the IMF. He implemented some fiscal reforms, such as subsidy cuts, but he ignored the structural changes that would make his economy more competitive. Since then the crisis has only deepened.

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