Opinion |

Egypt Got the Economics Right, and Will Pay Dearly for It

IMF reforms are doing the trick but are causing ordinary Egyptians immense suffering that Donald Trump's policies aren't likely to alleviate.

David Rosenberg
David Rosenberg
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Musicians in pharaonic dress stand beside a section of the New Suez Canal, during preparations for the inauguration ceremony in Ismailia, Egypt, on Wednesday, Aug. 5, 2015.
Musicians stand by a section of the New Suez Canal, during preparations for the inauguration ceremony in Ismailia, Egypt, on Wednesday, Aug. 5, 2015. Credit: Shawn Baldwin, Bloomberg
David Rosenberg
David Rosenberg

President Abdel-Fattah al-Sissi’s first three years at the helm of Egypt’s economy were one big waste.

He squandered billions of dollars in aid from Gulf countries, led useless showcase projects like expanding the Suez Canal, and allowed the country to run up massive budget deficits while draining its foreign currency reserves.

In recent months the president has been getting down to business, but the result has been soaring prices for consumers. That is a dangerous development for a regime with only the barest political legitimacy. Al-Sissi risks going down in history as the second Hosni Mubarak, a president vilified and ultimately jailed.

Al-Sissi's inherited a mess when he ousted the Islamist president Mohammed Morsi, whose brief regime was characterized by economic turmoil and shortages. But instead of using the honeymoon he had with the Egyptian people to fix the economy, al-Sissi chose to wage war on Islamists, and crack down on the liberal opposition. His economic policy boiled down to inspiration rather than action.

Hosni Mubarak and his two sons Alaa (R) and Gamal stand behind bars during their trial at the Police Academy on September 14, 2013 in Cairo. Credit: Ahmed el-Malky, AFP

Doubling the Suez

Doubling the width of the Suez Canal was an act of national pride: after the pyramids, its’s both the country’s great claim to fame and earner of foreign currency. But as it turned out, there was no demand for the extra capacity and the canal authority is losing money.

A $300 billion new capital, just east of Cairo, looked sexy on paper, but it never got off the ground and two giant contractors who were supposed to build big parts of it have quit. Even the campaign against Islamic terrorists, which, had it been successful, could have revived Egypt’s flagging tourism industry, has been a flop: Tourists have been repeatedly killed by terrorists and, in at least two cases, by the army itself.

Grin and bear the IMF

By last summer, the economic situation had grown so grim that the president little choice but to grin and bear the conditions the International Monetary Fund demanded in exchange for a $12 billion loan.

The Egyptian pound was allowed to float last November, which meant it lost half of its value. Subsidies on bread and other essentials were cut and a 13% value-added tax was imposed. Other reforms are on the way, including an end to capital controls.

If you are part of Egypt’s 1%, or a policy wonk, this has been an unmitigated success. Foreign currency reserves have grown 50% in the space of a few months. Remittances from millions of Egyptians working abroad have increased, too, and local businesses have seen sales rise as the prices of imported products have risen quickly. Foreign investors were confident enough to buy $4 billion in bonds last month and have snapped up Egyptian shares in such numbers that the EGX 30 index has climbed 55% since November.

For the other 99%, however, it’s a different story. Core inflation climbed to more than 30% in January. Food and beverage prices were up even more. Even though the business environment is more favorable, high interest rates and Egypt’s infamous red tape make it difficult for businesses to expand and take on employees.

Time on their hands

The IMF medicine was probably the only course al-Sissi could take under the circumstances, but tell that to a housewife who can’t feed her children or, worse yet, the 40% of Egyptian youth who are unemployed -- just the kind of people who have the time and energy to cause trouble.

They don’t understand economics, and if they did, they have good reason to doubt the long-term benefits to Egypt of IMF policies. Similar ones imposed on Egypt in the 1990s and early 2000s brought impressive rates of top-line growth but did little to benefit ordinary Egyptians.

Egypt’s big problem is something the IMF policies don’t address – poor schools and universities, decrepit infrastructure and a heavy government hand that makes Egypt one of the worst places in the world to do business (it takes 78 approvals to clear a new investment, according to a World Bank estimates).

Egypt’s precarious political situation doesn’t add to its allure, and Donald Trump’s war on world trade and investment can only hurt an Egypt desperately in need of foreign capital and knowhow.

Recent gas finds will offer Egypt some economic relief by saving it the huge costs of importing energy and generating foreign currency from exports. But energy riches are not the kind that bring broad employment or benefit the rest of the economy’s competitiveness. Quite the contrary, they could leave you with an overvalued currency –the infamous Dutch disease – that undermines other industries that do employ lots of people, by deterring exports and making imports cheaper.

Egypt may not have all the ingredients for unrest to break out, but it has a lot of them, including the especially flammable ones of inflation and unemployment. The first may eventually recede as the effect of the pound’s devaluation plays itself out, but the second is here to stay.



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