Friends Like Israel and the IMF Can’t Fix a Broken Egypt

Israel is reportedly helping in Sinai and the IMF is helping with the economy, but the fact is that Egypt looks little different than it did under Mubarak – and we know how that ended

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U.S. Vice President Mike Pence meets with Egyptian President Abdel-Fattah el-Sissi, right, at the Presidential Palace in Cairo, Egypt, Saturday, Jan. 20, 2018.
U.S. Vice President Mike Pence, left, and Egyptian President Abdel-Fattah el-Sissi, rightCredit: Khaled Desouki / AP
David Rosenberg
David Rosenberg

Egypt is fortunate to have two friends helping it through difficult times.

As The New York Times revealed this week, Israel has been helping the country’s fight against ISIS by quietly carrying out air strikes. More publicly, in 2016, the International Monetary Fund has given Egypt $12 billion in aid.

Still, there’s a limit to how much friends can do for a country that remains politically and economically dysfunctional. None of the gyrations over the last seven years  – a revolution, a brief experiment in Islamic government and a return to strongman rule under Abdel Fattah al-Sissi, not to mention billions of dollars of aid from Gulf countries – has fundamentally changed Egypt, or addressed its underlying problems.

Thus, as Haaretz’s Anshel Pfeffer noted this week, citing the Times' report, Israeli fighter jets and drones can’t single-handedly put down the insurgency in Sinai. The same goes for the IMF’s assistance. Neither do anything to solve the problems of corruption, mismanagement, bureaucracy and repression that keep the country down.Magic trick, or illusion

On one level, the agreement Cairo struck with the IMF in November 2016 has done the trick for the economy. Egypt's foreign currency reserveshad fallen so such dangerous levels that factories were shutting down for lack of imported inputs, but have recovered to a comfortable $37 billion. Foreign investment has been growing.

Egypt got the badly needed $12 billion from the IMF, but the price it had to pay was to devalue its currency, free up its forex regulations, cut subsidies on domestic fuel and raise the value-added  tax.

These conditions come from the IMF bag of tricks and are a perfectly reasonable way, from a bean-counter point of view, for fixing a broken economy. But they don’t get to the heart of Egypt’s problems.

As the pound drops

The devaluation of the Egyptian pound caused inflation to surge beyond 30% for most of last year. It's trending lower now, but household expenses are still going to rise in the double digits for the foreseeable future. The hike in VAT ordered up by the IMF is consigning more Egyptian families into poverty.

Egyptian unemployment has been falling since 2014 but as of the third quarter of 2017, it was still 11.9%, a rate that would normally be associated with an economy in recession. Youth unemployment – a particular dangerous phenomenon for dictators like Sissi who want to keep their jobs – is triple that.

True, these figures don’t capture the many Egyptians who work in the informal economy, but by nature these jobs are low-paying and offer little room for advancement or better pay in the future.

Egypt remains an extraordinarily difficult place to do business. If it’s not the meters of red-tape, then it’s the growing role of the army in business, which under Sissi is roping off more and more of the economy from real competition. Also, the schools and universities are poor in quality, violence continues to wrack the Sinai and political repression grows. The government remains addicted to big showcase projects, like a new capital city, widening the Suez Canal or promising $5 billion for construction in the Sinai, that offer more headlines than help.

Those foreign investors who are putting their money into Egypt aren’t investing in business, except the lucrative energy sector. They'replaying it safe by investing in short-term treasury bills and the like where they can get their money out easily.

Like the IMF package from 2016, this foreign investment offers some quick financial relief but not the kind of investment that will generate economic growth and create badly needed jobs.

Egypt has not only returned to Mubarak-like strongman rule: its economy has returned to Mubarak-like parameters.

The numbers look good if you are in the 1%, or an IMF economist (although to give it credit, the organization is always in favor of more inclusive growth). But if you’re a recent university graduate looking for a job, the owner of a small business or a housewife trying to feed her family, the IMF hasn’t turned anything around.

Clearly Sissi knows he is ruling on thin ice.

Censorship of the media and social media has escalated, NGOs have been shut down, activists have been arrested and all but one of Sissi’s six rivals for the March presidential election have dropped out under pressure.

Sissi’s political strategy is akin to the IMF’s and Israel’s: short-term fixes that put off real problem-solving.

An economy that fails to support most of the people need not necessarily lead to revolution, as happened to Egypt in 2011. But Sissi’s growing repression increases the odds of revolt, by not giving the disaffected anywhere to vent their grievances, except through violence.

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