Opinion |

Egypt, Economic Miracle or Basket Case on the Nile?

Cairo's made-to-order economy for plutocrats has done far less for ordinary Egyptians, and that’s a dangerous development

David Rosenberg
David Rosenberg
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Pedestrians pass among market stalls in Cairo, Egypt on March 31, 2018.
President Sissi's reforms aren't trickling down to the streets of Egypt, such as this Cairene market. Credit: Sima Diab/Bloomberg
David Rosenberg
David Rosenberg

Last week, Christine Lagarde, the managing director of the International Monetary Fund, emerged from a meeting with Egyptian President Abdel Fattah El Sissi with lavish praise for his economic policies. “Egypt’s economy is showing strong signs of recovery, and its economic growth is among the highest in the Middle East,” she cooed.

Depending on your political perspective, Lagarde is either a one of the responsible adults of the global financial system, ensuring that chronically mismanaged economies like Egypt don’t become disasters, or she is a sock puppet for the global plutocracy bent on capitalist profits, regardless of suffering caused to the Third World masses.

Actually, both sides have a case. The fact is that the Egyptian economy has made remarkable progress in the last three years – at least by the measures that most concern the IMF and international investors. GDP growth exceeded 5% in the fiscal year ended in June, its strongest in a decade.

Meanwhile, the government has cut its debt from 103.5% of GDP in fiscal 2017 to 86%, which is one reason why Moody’s (another grown-up or evil sock puppet) is optimistic about the country’s outlook. Egypt’s budget deficit fell below 10% for the first time since Hosni Mubarak was toppled in 2011 and the economy went into a tailspin.

This was achieved with the help of a $12 billion loan the IMF granted Egypt in 2016, which moved Sissi to undertake a series of badly needed reforms. He cut energy subsidies, raised taxes, let the pound float freely and is introducing a raft of laws to make it easier to do business -- all things designed to please global investors, who have at least until recently been ready to buy Egyptian debt. Alas, Egypt had no choice about addressing their interests, because it so desperately needs their capital.

Suffering in enforced silence

For ordinary Egyptians, though, Egypt’s turnaround hasn’t been quite as dramatic. Quite to the contrary it’s caused a lot of suffering.

The pound’s free float caused it to depreciate by some 50%, sending inflation soaring and pressuring the country’s poor and middle class. Inflation has slowed from a peak of more than 30% annually in the summer of 2017 but as of August, it was still a hefty 14.2% and looks to be heading higher again.

Just as the pound sank, subsidy cuts required by the IMF have sent transportation costs up 50% and electricity reforms introduced in July are expected to boost power costs by 25%.

Unemployment has fallen – to 9.9% in the second quarter, a level that many economies only experience at the depth of a recession. The fact is that Egypt’s economy isn’t growing fast enough to create jobs, especially for the young, among whom the jobless rate was close to 25% last year.

Egypt's economic situation today echoes the years before 2011, when high economic growth failed to trickle down. The IMF crowd has learned nothing. It calls for inclusive growth but is more concerned with balancing the books.

What rioting can't achieve

Whether Egypt’s bifurcated economy endangers Sissi’s rule is harder to say. The president has made sure that discontent gets squashed. Last March’s presidential race was a one-man show. Laws restrict the activity of nongovernmental organizations. Scores of websites have been taken down, a law on “fake news” has gone into effect, and journalists and other critics have been jailed.

If Egyptians are angry, they can’t blog about it or elect an Egyptian version of Donald Trump. The only alternative Sissi offers them is to take the streets. The bar is high for something like that, but once it’s surmounted, the probable outcomes are all horrendous. A thriving liberal, democratic, high-tech economy isn’t likely to be one of them.

Christine LagardeCredit: Andrew Harrer/Bloomberg

Worse still, even the changes lauded by Lagarde are themselves at risk.

Egypt’s debt burden remains high, and a huge chunk of its budget is eaten up repaying it. With interest rates rising globally, emerging market economies like Egypt are going to have to pay even higher rates to lure lenders to buy its debt. Too much of Egypt’s growth is reliant on government spending, including development of a new capital in the desert east of Cairo, but the government will have fewer and fewer resources to keep up the spending.

The revival of tourism, which has been another source of economy growth, could be reversed by a single high-profile terror attack, just as the bombing of a Russian plane full of tourists did in 2015. The Sinai remains a battleground between the regime and ISIS-affiliated groups.

On top of all that, Saudi Arabia’s clampdown on foreign workers will send a lot of the Egyptians there home, depriving Egypt of billions of dollars in remittances and increasing the labor supply at a time when the jobless rate is close to double digits.

Egypt’s troubles are Israel's troubles. Mubarak’s exit came dangerously close to turning Egypt into an Islamic republic and if Sissi were to meet the same fate history could easily repeat itself. Even without such an apocalyptic scenario, Israel needs a strong and stable government to keep order in Sinai and help manage Gaza.

Last week brought the gas pipeline deal: Israel will be exporting gas found in its territorial waters to Egypt.

So Israel has an economic stake in Egypt too. The pipeline deal alone is slated to generate $15 billion in exports for Israel over 10 years, but the more importantly Egypt is now emerging as the most promising conduit for exporting Israeli natural gas. This has huge economic implications for the years ahead: A popular revolution on the Egyptian street would probably tear up the paper the contract is written on while tearing down Cairo.



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