By Peter Bergman (MoneyAmped.com)
In Egypt, an upcoming presidential election is scheduled for December 10th to 12th. During this election, Abdel Fattah al-Sisi is expected to obtain a third term as the leader. This event takes place amidst a challenging economic situation characterized by the devaluation of the Egyptian currency, a scarcity of foreign currency, and a significant rise in inflation.
What Factors Led to Egypt’s Economic Difficulties?
Several causes can be traced back to many decades ago, including unsuccessful industrial growth caused by inadequate planning and excessive bureaucracy and export strategies that resulted in an ongoing trade imbalance.
A currency that is excessively valued, property rights and institutions that are weak, and a state and military that are overly dominant have discouraged investment and competition.
During Sisi’s tenure, Egypt has engaged in an extensive borrowing binge, resulting in a significant accumulation of foreign debt. Egyptian debt has been losing favor with international lenders, causing the government in Cairo to rely more on domestic borrowing to cover its growing deficit. Even though interest rates are rising, this is happening, leading to even more significant deficits.
This, along with an increase in the money supply, has resulted in a devaluation of the currency and an uptick in inflation.
The authorities have managed their budget shortfall by increasing the cost of subsidized products and services. Still, unfortunately, a significant portion of the progress has been eroded by inflation.
Investment from overseas in sectors other than oil and gas has been relatively meager. In the fiscal year of 2022-23, there was a significant decline of 30% in remittances, amounting to $22 billion. This decrease occurred as individuals working overseas opted to refrain from making transfers due to the inflated official exchange rate.
The crucial role played by the increase in Suez Canal transit fees and tourism revenue is evident. However, there is a potential threat to tourism growth due to the ongoing Israel-Hamas conflict in the nearby Gaza Strip.
Sisi frequently attributes Egypt’s economic challenges to the unrest that ensued after the uprising in 2011, along with the swift expansion of the population – according to the World Bank, the yearly population growth in 2021 was estimated at 1.7%. Authorities have additionally highlighted external disruptions such as the ongoing COVID-19 pandemic and the conflict in Ukraine.
To What Extent Have Things Declined?
The economy has been steadily expanding, albeit at a decelerating rate. According to the central bank, there was a decrease in the growth rate from 6.7% in fiscal 2021-22 to 3.9% annually in both the last quarter of 2022 and the first quarter of 2023. The growth of the population has dulled the progress, and numerous Egyptians express that their quality of life has deteriorated.
A sudden scarcity of dollars hindered the arrival of imported goods and led to a buildup of products at ports due to limitations on credit letters. This, in turn, had an impact on the nearby businesses. The prices of numerous essential food items have experienced a significantly swifter increase compared to the overall inflation rate, which reached an unprecedented 38% in September.
Since March 2022, the British currency, known as the pound, has experienced a significant decline of 50% compared to the United States dollar. Despite numerous depreciations, a single dollar can acquire approximately 49 Egyptian pounds on the underground exchange, in contrast to an authorized rate of 31 pounds.
The payment plan for overseas obligations is burdensome. A staggering amount of no less than $42.26 billion is set to be paid in the year 2024 alone, which encompasses a substantial sum of $4.89 billion that is earmarked for the esteemed International Monetary Fund (IMF).
The increasing interest rates and the diminishing currency have elevated debt management expenses. In the year ending in June, a significant portion of the revenue, exceeding 45%, was consumed by interest payments, as per the data provided by the finance ministry.
According to the official statistics, approximately 30% of the population was categorized as impoverished before the COVID-19 pandemic. Experts suggest that these figures have experienced an increase in the aftermath of the pandemic. It has been estimated that a significant proportion, approximately 60%, of the total population of Egypt, which amounts to 104 million individuals, find themselves in a situation where they are either below or near the poverty line.
The rate of joblessness has decreased to slightly above 7%; however, engagement in the workforce has also experienced a continuous decline throughout the period leading up to 2020. Certain aspects of the public education system are experiencing a significant decline. Many individuals who have completed their studies often aspire to pursue employment in foreign countries.
What Exactly Has Been Done With the Money?
In addition to expenditures on customary expenses, Egypt has invested significantly in infrastructure during the tenure of President Sisi. This encompasses accommodation, many fresh urban areas, and expeditious highway construction. One of the most notable colossal undertakings is a brand-new capital worth a staggering $58 billion in the arid expanse east of Cairo.
Over the last decade, Egypt has experienced a significant increase in its arms imports, resulting in its position as the third-largest global importer, as the Stockholm International Peace Research Institute reported.
As reported by authorities, there has been an increase in the allocation of funds towards social initiatives to assist individuals with lower incomes. This includes implementing a monetary assistance program encompassing approximately five million households. However, some individuals who oppose this approach argue that the support provided is inadequate in safeguarding overall quality of life.
In What Ways Is Egypt Able to Get Support?
Western and Gulf countries generally consider Egypt under Sisi a crucial cornerstone of stability in an unpredictable area.
Cairo was fortunate to receive substantial amounts of deposits and investments from its Gulf allies, notably Saudi Arabia and the United Arab Emirates, following the unexpected events triggered by Russia’s invasion of Ukraine.
However, Gulf Arab nations have recently strengthened requirements for infusing fresh capital, progressively pursuing profitable investments. Despite their show of support for Egypt during the Gaza conflict, there has yet to be any additional assistance being offered.
The International Monetary Fund (IMF) is currently engaged in discussions with Egypt regarding the augmentation of a $3 billion financial assistance plan that was agreed upon in December 2022. This support package is set to span over four years. The disbursements were stopped due to Egypt’s failure to fulfill its commitments regarding implementing an adaptable currency exchange rate and reducing the state and military’s involvement in the economy.
