As in many parts of the world, COVID-19 has brought into sharper relief the structural problems in Egypt’s economy. In many respects, these problems are far from new. Egypt’s economy has had a current account deficit since it was a monarchy. Government efforts at regime-led industrialization and economic growth failed in the 50s and 60s under Gamal Abdel Nasser due to a combination of poor economic planning and insufficient investment, due in large part to high defense spending. Promises of liberalization to attract economic aid, international lending and foreign investment were made and broken in the 70s under President Anwar Sadat. Privatization being a cover to protect regime elites controlling the economy while undermining open competition was a feature of the presidency of Hosni Mubarak that concluded with an uprising against him in 2011. Mind you, both Sadat and Mubarak were regularly praised by foreign leaders and international financial institutions for their disingenuous “reform programs” that were used to shore up their regimes and reward their allies while failing to relieve poverty or develop Egypt’s markets.
In light of all this it is not surprising that today’s President Abdel Fattah al-Sisi has followed in their tradition with innovations of his own, allowing his regime to continue to extract revenues from foreign partners and the domestic economy while deepening regime control of the economy, leaving it on an unsustainable footing. Of course, Egyptian officials are also praised for their economic performance despite the many problems.
The fragile nature of Egypt’s economic recovery pre-Covid-19 was brought into relief during the pandemic on multiple fronts. The post-reform economy still depends on a handful of vulnerable sources of dollars that have had a history of volatility. Most of them were hit during the initial phase of the health crisis. The global tourism industry collapsed. Global trade declined, cutting slightly into revenue from the Suez Canal. The drop in oil prices has led to layoffs throughout the GCC where most of Egypt’s expatriate workers are based and remittance figures for 2020 are expected to drop significantly. Drops in energy prices have also cut into the appetite of energy companies to invest in further exploration at this time, which was one of Egypt’s main sources of foreign direct investment (FDI). Finally, Egypt had brought in a large amount of hard currency by selling short-term debt at high interest rates, becoming one of the most attractive carry trades in the world, but such investors are fickle. When the threat Covid-19 posed became apparent, $14 billion of foreign holdings exited Egypt in roughly one month this spring. That’s more than the entire value of the 2016 IMF bailout.
As was the case in the latter half of Mubarak’s tenure, despite modest GDP growth and growing hard currency reserves, poverty in Egypt has been rising throughout the economic reform period. Indeed, reforms have exacerbated the drop in standards of living for much of the population as subsidy cuts, sharp increases in transportation costs, a collapse in the Egyptian pound’s value, contributing to years of double digit inflation, all helped drive Egyptians into poverty and weaken domestic consumer demand. Weak demand has contributed to the private sector contracting nearly every month since the IMF bailout in 2016.
The World Bank estimates that as many as 60% of Egyptians live near or below the poverty line. This high level of economic vulnerability in the population made a serious lockdown untenable for most Egyptians who simply cannot afford to halt work and do not perform jobs that can be done from home. Moreover, the enormous informal workforce made cash transfers to workers extremely challenging as the government has still not developed adequate infrastructure for means-tested cash transfers to cover all those in need. Approximately 10 million Egyptians (10% of the population) receive such assistance despite the government estimating that 32.5% of Egyptians live below the state’s already low poverty line. The 2016 bailout and reform agenda were meant to expand the state’s safety net and use part of the savings from cuts to energy subsidies to mitigate the pain from austerity, but while some progress was made initially, funding is insufficient and cash assistance has failed to reach a majority of those in need.
Unsurprisingly, Egypt’s private sector’s contraction accelerated in the early months of the Covid-19 crisis and, while contraction has slowed, it persists. This, however, was a years-long reality exacerbated by pre-pandemic policies. Aside from inflation contributing to depressed domestic demand, increasingly aggressive regime interventions by companies owned by the military and other security institutions in the economy deterred both domestic and foreign private investors who feared the risks of competing directly with regime owned enterprises (ROEs). ROEs enjoy an array of (anti)competitive advantages such as not being required to pay most taxes or customs duties, or be subject to the same onerous regulations as private companies. Thus, as Covid-19 hit, the private sector, already weak and with limited access to credit, struggled to cope, which contributed to a sharp rise in unemployment.
While Egypt’s debt continues to grow, poverty rises and the private sector contracts, government spending priorities appear misaligned with the public interest. The government is building an unnecessary new capital in the desert whose construction is estimated to ultimately cost at least $58 billion. Who is paying for what remains opaque. The state initially insisted that land sales will offset costs while private investors and developers will cover the rest. That seems increasingly doubtful. China has provided financing for some projects in the new capital, but withdrawn from others, as Emirati developers did before them. Military companies that are technically private (but remain ROEs) and whose finances are secret are playing a large role and overseeing the project with a commensurate level of transparency. Egypt has, for a number of years now, been among the top 3 arms importers in the world and is working on a massive and controversial arms deal with the Italian government valued at between 9 and 10 billion euros. Meanwhile health and education spending have both consistently missed constitutionally-set spending targets, with some accounting acrobatics being used to make spending look higher. New fiscal pressure is likely to lead to further cuts to spending on already underfunded public services.
To cope with these challenges and regain access to financial markets, the Egyptian government turned once again to the IMF, securing $8 billion in additional financing. While borrowing under such historic circumstances was inevitable, such a solution is increasingly unsustainable. Before the latest crisis, the cost of servicing Egypt’s debt was already consuming 10% of GDP which, thanks to a low tax to GDP ratio of around 14%, means that over 2/3 of tax revenue was being spent on debt servicing before the latest debt was taken on.
Reform going forward must not only focus on accelerating economic growth but also ensure that the state can expand its tax base to service its debt, provide adequate services to the public and invest in infrastructure and developing the country’s human capital. The IMF has pledged, as it did in 2016, that the reform program attached to its lending will help Egypt promote inclusive private sector-led growth, vital to Egypt’s long-term success. However, thus far there is no indication that the targets of reforms will offer any such future pathway for Egypt’s economy or place it on a sustainable footing. The government appears more interested in deepening the role of ROEs as drivers of Egypt’s economic development and limiting the private sector to a role as their junior partners and subcontractors. Such a dynamic deters investments. Moreover, ROEs simply do not pay their share of taxes, further undercutting the government’s stated goal of increasing tax revenue. Eliminating tax and customs exemptions for ROEs will both help increase tax revenue and allow the private sector to compete on a more level basis with ROEs, potentially encouraging higher levels of investment and economic growth provided unofficial ROE advantages are kept in check.
When officials are questioned about the challenging circumstances Egypt today finds itself in, they reasonably point to the global crisis that has overwhelmed some of the world’s most stable economies. While this is undoubtedly important to keep in mind, much of Egypt’s economic problems pre-date the pandemic and each time a rescue package is needed the state of economic “crisis” is used to justify minimal structural change that fails to fundamentally put Egypt on a sustainable course. These temporary solutions will stabilize Egypt temporarily but guarantee it will need assistance again in the future as it has for decades prior. Meanwhile, the regime will likely continue to deepen its control of the economy, making needed structural reforms all the less probable and difficult to implement.