By Eleni Vasiliki Bampaliouta
Three times its national currency was devalued within a year…. What is happening with the economic situation of the country?
The pharaonic projects of President al-Sisi, the war in Ukraine and the rise of precision and poverty. The economic situation has deteriorated so much in Egypt that many compare it to that of Lebanon. Although the economic figures of the two countries are not comparable, the most populous country in the Arab world is indeed facing enormous economic and social challenges today.
The Egyptian pound has lost half its value since last March. Since mid-January, it has depreciated a further 13% against the US dollar, to a record low. The result is skyrocketing food and commodity prices in a country where the 60% of the population now lives close to the poverty line.
A third of Egypt’s 109 million inhabitants are forced to live on less than one euro a day. Many families cannot afford more than one meal a day. Households struggle daily with the monster of “inflation”, which officially hovers just over 21%.
It is predicted that it may even reach 25% within the first quarter of 2023. According to some economists it is actually as high as 101% if one takes into account the huge underground economy.
The result is that many staple foods have become unaffordable as their price has doubled, while already low wages are depleted.
“Looking for protein-rich food alternatives that will lighten your budget?” the National Institute for Nutrition wrote in a Facebook post, recommending that the hungry eat cheaper types of meat, such as chicken or beef legs, as a solution. But even in this species the price doubled, reaching 20 Egyptian pounds per kilo (just over 0.60 euros).
This was compounded by the restrictions imposed by the Cairo government on imports, in the absence of foreign exchange. For the same reason, capital controls have been imposed on banks. Faced with a “mountain” of debt, the country is constantly resorting to the International Monetary Fund.
Rising energy and raw material prices in general, commodity inflation and the wider economic crisis have raised fears that other countries will follow suit. While a few months ago, Egypt was characterized as one of the fastest growing economies in the world, it is now becoming the first country to turn to the IMF to cope with the effects of the Ukrainian crisis.
Although Egypt had sought refuge in the International Monetary Fund after the global shock of the coronavirus, Cairo had managed to cope with the economic fallout. The IMF had even praised Egypt’s ability to overcome the negative effects of the pandemic and become one of the fastest growing economies in the world, improving all indicators of its economy.
However, the war in Ukraine led Egypt to request assistance from the IMF. Although Egypt had started talks with the IMF before the outbreak of the war in Ukraine, due to the regime’s structural problems, in Cairo they expected a gradual recovery from the restart of tourism and the implementation of some major investment projects. The crisis in Ukraine belied Egyptian expectations.
The food crisis was a key issue for the appeal to the IMF, as Egypt is possibly the world’s largest importer of wheat. Sanctions on Russian wheat exports led to an increase in food prices, which hit Egypt.
In addition, a large percentage of tourists heading to Egypt came from Ukraine and Russia. Consequently, the scenario of the precautionary IMF liquidity line is now at hand, in view of the financial pressures on the Egyptian economy, while the financial reinforcement of Egypt is considered necessary to support the population.
A breath from the door of the IMF
Inflation, debts to the IMF and the restriction of lending by the countries of the Persian Gulf compose a negative scenario for the Egyptian economy.
In an effort to prevent the economy from collapsing completely, the president has begun introducing reforms such as doubling the private sector from 30% to 65% by 2025, selling off dozens of state-controlled companies, banks and energy firms and cutting public spending . In this way, the requirements of the International Monetary Fund (IMF), with which a loan of 3 billion was agreed upon, are also served. dollars last December.
For the Gulf countries and Saudi Arabia, which have supported Egypt’s economy for the past 10 years with around $100 billion unconditionally, the announcement is particularly attractive: first, a stronger Egyptian economy will be less dependent on foreign aid and the new investments will have a better chance of seeing their money back at some point.
News agencies reported that Gulf countries such as Saudi Arabia, Kuwait and Qatar, which are seeking to diversify their economic model so that they are not solely dependent on oil and natural gas, are looking to buy assets in Egypt, as the situation seems beneficial for investors: on the one hand, the Egyptian pound has lost half of its value against the dollar in eleven months, and on the other hand, inflation rose to 26.5% in January.
Dimension of opinions regarding the utility of projects
President al-Sissi is seeking to lead Egypt’s economy to recovery. However, a large part of the Egyptian economy is not suitable for privatization as it is in the hands of the military, which scares off international investors. This directly affects a number of the president’s very expensive projects, such as the new capital that is supposed to replace Cairo and has been under construction since 2015, as well as the Cairo Monorail, which, when completed, will be the longest train line without guide to the world.
However, al-Sisi defended his plans. He insisted that these are necessary to attract foreign investment and would help rebuild the country’s crumbling infrastructure. In addition, supporters of al-Sisi’s mega projects have always argued that they will help boost Egypt’s economy by creating new jobs, addressing infrastructure shortfalls and solving the problematic traffic situation in Cairo, home to 20 million people. .
Critics question the sustainability of these mega projects at a time when the country is struggling to repay its debts. “The New Administrative Capital, which is estimated to cost $50 billion, began shortly before Egypt turned to the WTO. for an emergency bailout, which is reckless,” says Timothy Kaldas, a research fellow at the Tahrir Institute for Middle East Policy, adding that “emergency spending on mega projects contributed to Egypt’s debt crisis.” It is obvious that D.N.T. agrees with this view, as the loan program requires the government to justify future spending on major projects.
Bad economic prospects
Some observers say the projects had an initial positive impact on the economy, but this was not sustained. The problem was that most of these projects are in non-trade sectors, such as construction. That is, sectors that do not directly contribute to either increasing exports or reducing imports, so as to improve the trade balance.
So far al-Sisi has not indicated whether or to what extent he would be willing to cut costs when the projects are completed. Meanwhile, Egypt’s need to deal with the economic crisis by attracting foreign investors may increase even more. The economic outlook for the near future of the Middle East does not look promising, with a projected decline of 3.2% in 2023 and only modest growth in 2024, according to D.N.T. director general Kristalina Georgieva.