When things are going well, Egypt frequently dominates the Middle East and North Africa (MENA) region regarding politics and economy. However, in 2022, the country has fallen into a severe economic crisis that decreased its stability and importance in the region.
Egyptians have remained largely subdued despite widespread suffering, growing inequality, and increasing poverty due to reported administrative failures, especially on the economic front, by President Abdel Fattah El Sisi’s government.
According to Timothy Kaldas, Policy Fellow at the US-based Tahrir Institute for Middle East Policy, President Abdel Fattah El Sisi seeks absolute authority but refuses to accept responsibility for the economic crisis. He has continued by saying that poor management has led to the weakening of Egypt’s economic fundamentals for a long time. Even though it is impossible to minimise the effects of Russia’s invasion of Ukraine on the country’s economic collapse, they have only highlighted the underlying problems. Timothy Kaldas adds that Egypt needs “significant economic reform and a sharp decline in opportunistic political interference.”
Tarek Amer is the biggest victim of the necessity to alter how the economy is managed so far. In August 2022, the former governor of the Central Bank of Egypt abruptly resigned from his chair, sparking chaos in the financial world. Tarek Amer had a terrible year despite receiving high praise for its prudent monetary policy. Most of his attempts to stop the economy’s difficulties from worsening, including monetary policy tightening, were unsuccessful. As a result, Hassan Abdalla took over as interim presidential advisor in place of Tarek Amer, who had been appointed to that position. According to Timothy Kaldas, Tarek Amer’s replacement was intended to signal to the International Monetary Fund (IMF) and other international market participants that Egypt’s government was ready to stop the covert manipulation of the Egyptian pound that Tarek Amer oversaw throughout his term. He also said that Tarek Amer “for years insisted the Egyptian pound was freely floating while everyone knew it wasn’t.”
Harmful dependencies
By all accounts, the most populous country in MENA is going through a difficult time. Nevertheless, the government insists that the crisis has not severely damaged the economy.
According to its figures, the gross domestic product (GDP) increased by 6.2% in the fiscal year 2021–2022 and is anticipated to increase by 5.5% in 2022-23. However, after lowering its projection from an earlier expectation of 5%, the IMF now projects a lower growth of 4.8%. The fiscal year for Egypt runs from July to June.
However, the figures still need to convey Egypt’s economic woes fully. The nation has been one of the primary victims of the armed conflict between Russia and Ukraine. In 2020, it was also among the few to avoid recession because of the COVID outbreak. Due to its heavy reliance on visitors from Eastern Europe and its net importation of food and fuel, the nation has been forced to bear the brunt of the conflict.
Egypt imports 62% of its wheat requirements overall. Of them, both Russia and Ukraine account for 82%. According to government statistics, half of Egypt’s eight million visitors in 2021 came from Eastern Europe, contributing the most tourists overall. The invasion-related increase, along with the sanction warfare between Russia and the West, has hit Egypt’s crude prices hard. With an average yearly import of 120 million barrels of petroleum, the import bill has increased more than twofold to USD 15 billion. The spike has eliminated the gains from natural gas and LNG exports, failing to close the substantial payment gap. For 2021–2022, the nation received USD 8 billion from petrol exports.
“Given that Egypt is a net importer of commodities, its economy is one of the most susceptible to the conflict in Ukraine,” according to James Swanston, MENA Economist at UK-based Capital Economics, who also said that the Ukraine crisis has increased Egypt’s vulnerability against sharp fluctuations in commodity prices and worsened balance of payments problems.
Egypt is devastated by the upheavals caused by what is turning out to be Russian President Vladimir Putin’s “forever war.” Aside from a food crisis, the nation has faced several other difficulties in the form of growing inflation, currency free fall, widening trade and budget deficits, declining foreign reserves, a worsening debt burden, rising poverty and declining private sector competitiveness.
Annual inflation in August 2022 was 15.3% compared to 6% in 2021’s corresponding month. The Egyptian pound was devalued by 50% in 2016, and since then, authorities have tightened their control over the national currency. However, the Egyptian pound has lost roughly 20% of its value since March 2022. James Swanston claims that Egypt has long needed to implement a flexible currency rate system to absorb external pressures and prevent the rebuilding of external imbalances.
Widespread poverty
Aside from the consequences of a declining currency, poverty is increasing. A third or so of Egypt’s 104 million people are considered poor. The financial situation is becoming worse by debt, a significant portion of which, according to Timothy Kaldas, was accumulated by borrowing to fund vanity projects and arms imports. He adds that “the government needs to be much more careful about its spending priorities and subject any new project to a credible and in-depth cost-benefit analysis that demonstrates such spending is worthwhile.”
With a current foreign debt of USD 157.8 billion, Egypt spends over half of all state income on debt servicing. The low tax-to-GDP ratio worsens the issue, and the lower currency raises the cost of repaying the debt in foreign currency. According to capital economists, the local currency’s depreciation has increased the debt-to-GDP ratio by 3 to 4% of GDP. The pressure will only increase if the pound continues to lose strength.
A troubled private sector has made things worse. According to polls using the Purchasing Manager Index (PMI), Egypt’s non-oil and private gas sectors have been shrinking for 63 of the last 72 months. The S&P Global Egypt PMI was 47.6 in September 2022, remaining constant from its seven-month high in August of the same year. Nevertheless, it was the 22nd month in a row that the non-oil private sector shrank.
Egypt can handle a weak private sector, especially when the birth rate is experiencing an unprecedented rise. The nation’s population surpassed 100 million people in February 2020. Since then, Egypt has been growing its population by a million people every 240 days on average. The government, including President Abdel Fattah El Sisi, has acknowledged that the population boom quickly burdens the nation’s economy. Family planning assistance is one of the strategies used to slow the growth rate. However, in a predominantly Islamic country, some measures are being criticised.
Looking for a way out
Egypt must recover from its current economic crisis. Based on what was seen a decade ago, the present forbearance might quickly turn into a civilian revolt. Because of this, the administration is developing and putting into action plans to help the nation emerge from its predicament. The pursuit of an IMF bailout is at the top of the agenda. Egypt believes the IMF will quickly approve a credit package worth USD 5 to 6 billion. IMF Managing Director Kristalina Georgieva’s guarantee that an agreement was close to being reached in early October has increased the hope.
Egypt would have preferred more, given that the package only provides about 10% of the funding it will require in the upcoming year. However, prior finance deals indicate that Egypt borrowed 223% of its allotment from the IMF.
The IMF caps a country’s borrowing at 435% of its quota. Therefore, any amount would be appreciated in the current circumstance. An agreement with the IMF would be highly beneficial in restoring investor confidence and reaffirming the government’s support, in addition to temporarily alleviating the country’s financial demands.
Additionally, it would improve the nation’s creditworthiness and quell concerns of a near-term default, particularly in light of the rating agency Moody’s May 2022 decision to change its outlook from stable to negative on Egypt’s credit rating.
Privatisation is another tactic the government is using to rescue the struggling economy. Over the next four years, the nation plans to sell interests in government-owned businesses to raise USD 10 billion. The programme has been launched thanks to investments from MENA partners. For example, the Public Investment Fund of Saudi Arabia invested USD 1.3 billion in August to buy shares in four state-owned businesses.
Egypt is likewise eager to draw sizable foreign direct investment (FDI) inflows during the following four years, with a target of attracting USD 10 billion yearly. The nation thinks FDIs can be a crucial engine for economic recovery as net FDI increased by 183% in the first quarter of 2022 to reach USD 4.1 billion, up from USD 1.4 billion in 2021.