Since the beginning of the Russian invasion of Ukraine, in February, the Egyptian economy has been weathering a significant amount of pressure, that poses a serious threat to the hard-earned gains of the economic reform program, that was launched seven years ago. The sharp decline in eastern European tourist turnout to the Red Sea resorts, the disruption of the food supply chain, especially in relation to wheat imports, the soaring energy prices as a result of the Western economic sanctions on Russia, and the spike in the exchange rate of the Egyptian pound against the U.S. dollar after international policies were made to contain unprecedented inflation rates; are some of the features defining the current economic crisis that Egypt has fallen into because of a war happening in a far-off geography.
Over the past few weeks, urgent changes to monetary policy by the Central Bank of Egypt (CBE), crucial government interventions to suppress surging prices of basic commodities, and generous investments poured into the Egyptian market by the Arab Gulf countries, have effectively participated in protecting the Egyptian economy against the shockwaves of the ongoing global standoff. But they are not enough! Such temporary actions are crucial for mitigating the influence of the crisis on the microeconomic level, in the short term. However, they are not doing any good to the advancement of the macroeconomic system, in the long-term. Rather than pushing the Egyptian economy outside of the bottle’s neck, where it has been stuck for seven decades, they are keeping it comfortably stable in its miserable shape and context.
ROOTS OF THE CHRONIC ECONOMIC CRISIS
Economic crises are not new to Egypt. We could comfortably claim that Egypt has been living in a prolonged economic crisis that started with the fall of the monarchy and the establishment of the republic, in the early 1950s. To be honest, the Free Officers coup (July 1952) was unavoidable. Egyptians had been suffering under the corruption of the latest royals of the Muhammad Ali dynasty (1805-1952) and the British occupation. That, perhaps, explains why the Free Officers movement was widely supported by the vast majority of the grassroots citizens, especially the youth, at that time.
However, the lack of planning to the day after removing the king made the new republic start on the wrong foot, in both political and economic terms. The core theme of the 1952 coup’s propaganda was to empower the poor against the capitalist rich, who had enslaved them to magnify their own wealth. In doing so, a “revolution leadership committee” was formed to seize the finances and the properties of the wealthy and reallocate them into the state budget to serve the poor.
Four years later, when Gamal Abdel Nasser became president, he took the country several steps further away from capitalism towards his dearly embraced ideology of socialism/communism. He started by distributing the farms seized earlier from the capitalists to the poor farmers, who used to work in them during the capitalistic era. In parallel, he started a campaign to nationalize major industries and services that defined the pillars of the Egyptian economy at that time; starting from food and beverages factories, and cinema production companies, up to international trade corporations, and the multinational authority that was responsible for managing the Suez Canal.
Sadly, neither the farmers were able to appropriately manage the farms given to them, nor the state was successful in running the nationalized facilities and businesses. Eventually, that led to a severe economic regression, that magnified after the Egyptian military found itself involved in a cluster of wars against the Western superpowers of that time, either in defense of its own territory or in defense of other Arab countries under the umbrella of Arab nationalism, which was, also, another ideology dearly embraced by Nasser and his counterparts in most Arab states.
When former President, Anwar Al-Sadat, took power after Nasser’s death, in 1970, Egypt was already going through severe political and societal transformations, that had a negative impact on his ambitious project to substitute Nasser’s failing socialist system with a liberal open market economy. As a result, a hybrid economic system that constitutes an odd combination of the distorted socialist project of Nasser and the incomplete liberalist project of Al-Sadat had to be born. Such a flawed system kept the Egyptian economy running but dramatically hindered its potential to grow and prosper, or even adapt to constant changes in the international economy, over the years.
When Mubarak came into power after Sadat’s assassination, in 1981, he did not make an effort to reform the economy or change the system as long as it was working to his advantage. Mubarak made the best use of this hybrid economic system to hypnotize the citizens against the ordeal of his rule and thus kept himself in power for thirty years.
Mubarak depended mainly on the high revenues of tourism and the Suez Canal, as well as the annual military aid from the United States (US$ 1.3 billion), and the under-the-table inducements by corrupt businessmen, to feed the state budget. Meanwhile, he avoided applying taxation on a wide scale or firming tax collection policies in a way that may stir the anger of the middle class and make himself accountable to them. At the same time, he exaggerated subsidizing basic food commodities, especially bread, and made regular annual raises, labeled as “almenha” (the president’s giveaway), to blue-collar labor and civil servants who resemble the majority of grassroots citizens.
However, as the flawed economic system became the norm, under Mubarak, corruption found its way to both the public and private sectors. That further complicated Egypt’s chronic economic crisis, which got even worse after a popular revolution, supported by the military, overthrew Mubarak in 2011, followed by another uprising in 2013 against the short rule of the Muslim Brotherhood regime, and a state of unbearable instability and lack of security that lasted until the end of 2015.
Nevertheless, the economic reform program (2016-2020) that was launched by the current President Abdel Fattah Al-Sisi, with the support of the International Monetary Fund (IMF), brought hope that the chronic problems of the Egyptian economy could be fixed, before it got thwarted, once again, by unexpected global troubles.
THE UNPAVED PATH TO ECONOMIC REFORM
In January 2022, the majority of Egyptian citizens started to report tangible improvements in their living conditions and greater flexibility in their microeconomic decision-making in general. That was the first sign that finally Egypt started to harvest the fruit of the tough, but successful, economic reform program, which the government launched in 2016 with a loan and technical support from the International Monetary Fund (IMF). Around the same dates, Egypt was reaffirmed by the three Credit Rating agencies (Fitch, Moody’s, and S&P Global) at B and B+ with a stable outlook.
In December 2021, an IMF report expected that Egypt, by the end of 2022, will become the second largest economy in Africa, after Nigeria, and the second largest economy in all Arab countries, after Saudi Arabia, with a record Growth Domestic Product (GDP) that exceeds US$438 billion. A great part of this success has to do with how the government handled the consequences of the COVID-19 pandemic on its emerging market.
Even during the hard hit of the COVID-19 pandemic in 2020, Egypt was able to make progress on the economic reform program. By the beginning of 2021, Egypt was among a handful number of countries, worldwide, to see a growth rate in their economy. According to data made available by the World Bank and IMF, Egypt as an emerging market achieved a growth rate of 3.6% during the fiscal year 2019/2020. Compare this to developed countries with advanced economies, which suffered sharp contractions under the stress of the pandemic.
One reason for the Egyptian economy’s resilience during the COVID-19 crisis, and the relative affluence that Egyptians enjoyed in the year after, is the unprecedented success of the government’s macroeconomic policies in targeting poverty and unemployment rates, on a wide scale. National programs, like “Hayah Karima” (A Decent Life), participated effectively in giving the poor access to better housing conditions and health services. Meanwhile, the national infrastructure development program, which targets the urban as well as the long-ignored rural cities, has successfully created tens of thousands of jobs that eventually lowered the unemployment rate to 7.4% compared to 13.05% in 2015, before the comprehensive economic reform program had started.
In addition, the successful foreign policy, adopted by the Egyptian leadership, towards Egypt’s immediate neighbors in the Mediterranean and the Red Sea, has opened new doors of resourcefulness to enhance the Egyptian economy. Egypt is not one of the lucky countries when it comes to natural resources. Therefore, exploring untrodden areas was the only option for the current leadership to create new sources of income. Between 2015 and 2017, the Egyptian President, El-Sisi, worked extensively on signing maritime treaties with Egypt’s neighbors in the Mediterranean and the Red Sea to clearly identify Egypt’s exclusive economic zones (EEZ), so Egypt could use the wealth of seabed resources.
Thanks to this effort, by the year 2018, Egypt had emerged as a hub for Liquified Natural Gas (LNG) in the Mediterranean. Since the last quarter of 2021, Egypt started to export regular shipments of LNG to Turkey and southern Europe. In January 2022, for the first time ever, Egypt started shipping LNG to countries as far as the Netherlands, in northwestern Europe. Meanwhile, in the Red Sea, Egypt partnered with giant European and Gulf companies to manage its newly established fields of crude oil.
In June 2021, the Egyptian government announced that the Egyptian oil trade balance achieved a surplus estimated at US$174.9 million, during the first half of the fiscal year 2020/2021, compared to a deficit of US$773.3 million during the same period of the fiscal year 2019/2020. That is in addition to the fact that the hydrocarbon resources from the sea have been used to increase Egypt’s production of electricity to 54 Giga Watts creating a surplus after decades of domestic consumption suffering severe deficit in electric power.
In February, only one week before the eruption of the Russia-Ukraine war, the Egyptian Minister of Planning celebrated, in a press conference, the news that Egypt successfully achieved a growth rate of 8.3% during the second quarter of the current fiscal year 2021/2022, compared to a growth rate of only 2% during the second quarter of last year. Meanwhile, the foreign reserves in the Central Bank of Egypt (CBE) exceeded the benchmark of US$40 billion and the inflation rate remained stable roughly between 5% and 7%. Yet, unfortunately, the burdens of the Russia-Ukraine war on the Egyptian economy are quickly swallowing this hard-won progress.
BENDING IN THE WIND OF WAR
Despite being geographically distant, the ongoing war between Russia and Ukraine is leveling huge pressure on the Egyptian economy, especially with the looming uncertainty about when this war is expected to end. The so-called “military operation,” which the Russian President, Vladimir Putin, unjustifiably launched in Ukraine, on February 24th, with the hope of seizing Kiev over one or two nights, is now extending to weeks of field combat that invited unprecedented global standoff between the western superpowers and Russia. The defining component of this standoff was using the weapon of economic sanctions, which ultimately forced the whole world to share the cost of the war, including the countries that applied the sanctions on Russia.
Hence, the fragile Egyptian economy, which is hardly trying to stand tall, found itself obliged to bend in the wind of the war happening on another continent. The Russia-Ukraine war is directly hitting two of the most important economic sectors in Egypt; food and tourism. Some Western analysts expected that the stress of the Russia-Ukraine war on the Egyptian economy may re-invent the Arab Spring revolutions or lead to public riots and outrage similar to what happened during the last years of Mubarak’s rule. In 2008, Egyptians went to the streets in massive rallies to protest the shortage in bread production. The event was a shock for the Mubarak regime which had to seek help from the military, which autonomously runs a parallel economy to the civilian government, to fill in the gap.
Egypt has been among the top three importers of wheat, in the past few years. The Egyptian population of more than one hundred million citizens consumes an average of four million tons of wheat per year. In 2021, Egypt produced only 20% of its needs and had to import the remaining 80% from Russia (50%) and Ukraine (30%). According to government statements, current reserves of wheat can only cover the demand of the market for the coming three months. Therefore, the government is allocating 36 billion Egyptian pounds (about US$ 2 billion) to purchase six million tons of the local harvest, this Summer. Meanwhile, the General Authority for Supply Commodities (GASC) is reaching out to European suppliers, such as France, Germany, Lithuania, and Bulgaria, to secure purchases from their future wheat harvests. In early March, the Egyptian Minister of Finance said that Egypt would need about fifteen billion dollars above its stipulated annual budget to handle this quick surge in prices.
In parallel, the Egyptian tourism sector, which is barely recovering from the consequences of the COVID-19 pandemic and the Arab Spring aftermath, is also terribly affected. A large percentage of the tourists pouring into Egypt, every year, come from Russia, Ukraine, and Belarus during the winter season. When the flights between Russia and Egypt were suspended in the period between 2015 and 2021, the Red Sea resorts had been suffering to keep their business. The Egyptian economy also suffered, as tourism accounts for 9% of Egypt’s GDP and is the only resource for foreign currency besides bank transfers by Egyptians living abroad. Given the uncertainty of when and how this war is expected to end, the Egyptian tourism sector is doomed to go through a similar period of sluggishness, that will eventually echo in other sectors of the Egyptian economy.
Towards the end of March, after the United States Federal Reserve had to raise the interest rates to help the central bank deal with the soaring inflation rates, the inflation rates inside Egypt jumped above 10%, all of a sudden. As a result, the Central Bank of Egypt (CBE) had to make some urgent monetary policies to mitigate the effects of such quick change. CBE decisions included floating the currency, allowing the Egyptian pound (EGP) to retreat by 15% against the dollar, and raising interest rates by 1% (100 points). At the same time, the CBE allowed national banks to sell medium-term investment certificates in EGP with an annual interest rate of 18%.
Magically, the three parallel decisions effectively controlled inflation and preserved the value of the Egyptian pound by stabilizing its exchange rate against the US dollar; as most citizens became logically more inclined to invest in the high-rate EGP certificates, rather than buying and saving US dollars.
Besides the brave financial decisions taken by the CBE, the Egyptian government took unprecedented measures to control potential mishaps on the microeconomic level. The Egyptian government continued to sell wheat to bakeries at the pre-war prices, in order to prevent them from raising the prices of the subsidized and non-subsidized bread for the final consumer. In parallel, the government allowed the Armed Forces to open temporary food shopping marquees at central locations in several governorates, where citizens can buy basic food products for fair prices, especially during the holy month of Ramadan.
Nevertheless, it seems that the Egyptian government is having difficulty controlling the consequences of the crisis on foreign trade. In early April, Egypt's Ministry of Finance, Investment Authority, and the Union of the Chambers of Commerce announced that they are considering the feasibility of forcing local and foreign shipping agencies to deal in Egyptian pounds (rather than US dollars) for all transactions related to shipping and customs inside Egypt. The goal is to keep the US dollar reserves in the Egyptian banks for as long as possible, and also to raise the value of the Egyptian pound by increasing the demand for it.
Meanwhile, the Chairman of the Egyptian Businessmen Association (EBA) said that the Egyptian exporters who trade with Russia are keen to keep their business running, despite the Western sanctions on the Russian economy. Therefore, they are asking the Egyptian government to allow them to open bank accounts in Ruble (the Russian currency) to receive payments for their goods. In order not to affect the Egyptian economy further, the EBA Chairman suggested using the earned Rubles to pay for imports from Russia. Although such a proposal sounds unrealistic and inapplicable at the time being, the Egyptian government might be obliged to look into it if the Russia-Ukraine war, and the global standoff around it, prolongs.
On the bright side, the current standoff between Europe and Russia may enhance Egypt’s gas industry in impressive ways. There is a catch, though. For Egypt to hunt this ripe opportunity, it has to cooperate with its North African neighbors, Libya and Algeria, on liquifying and selling their hydrocarbon extracts in the Egyptian offshore plants, the same way it is currently cooperating with Israel. Yet, that is almost impossible in light of the ongoing conflicts and the security situation in both countries. In Libya, the extreme divisions among the political are delaying the government funds needed to operate natural gas facilities and keep reserves and production at stable levels. In Algeria, the renewed conflict with its neighbor Morocco over the Western Sahara led to the abrupt termination, in November 2021, of the contracts governing their use of the Maghreb-Europe pipeline, and thus affected the volumes of gas flow from Algeria to Europe.
FOREIGN PILLARS OF DOMESTIC SUCCESS
The success of the Egyptian government, over the past seven years, in applying the comprehensive economic reform program (2016-2020), and then in managing the consequences of the COVID-19 pandemic (2020-2021) was strictly dependent on two foreign pillars of support. One of them is the support of the West, including individual countries and international organizations, such as the International Monetary Fund (IMF). The other more important pillar of support is the generous long-term investments in the Egyptian market and US dollar deposits in the Central Bank by the Arab Gulf countries.
In 2016, Egypt received an IMF loan of US$12 billion, over three years, through the IMF's Extended Fund Facility (EFF). The loan and the technical support attached to it provided a tremendous buffer for the Egyptian economy against the challenges of the reform program, especially those related to the first shocks of inflation and currency floating. When the COVID-19 pandemic broke, out in 2020, the IMF intervened with two financial support instruments to support the Egyptian economy against the consequences of the pandemic. In May 2020, Egypt received US$2.8 billion in emergency financial assistance through the IMF’s Rapid Financing Instrument (IRF). Then, in June 2020, the IMF’s Standby Arrangement (SBA) availed US$5.4 billion for Egypt to withdraw over 12 months.
The initial loan and the subsequent interventions by the IMF participated effectively in ensuring the success of the comprehensive reform program, as well as keeping the economy resilient to the shockwaves of the pandemic. Therefore, when the effects of the Russia-Ukraine war started to reflect on the Egyptian economy, the first instinct of the Egyptian government was to knock on the doors of the IMF once more. Some financial experts said that Egypt has already exhausted all the loans and financial assistance opportunities it could get from the IMF, over the past five years. However, a press statement by the IMF, on March 23rd, showed that the IMF is willing to help Egypt get out of the current crisis, too.
“[IMF] Staff is working closely with the [Egyptian] authorities to prepare for program discussions with a view to supporting our shared goals of economic stability and sustainable, job-rich, and inclusive medium-term growth for Egypt;” the IMF Press Statement noted. Knowing that this is going to be a long process that comes with a load of conditions that the domestic political system and the monetary policymaker would need to adapt to first, the Egyptian leadership gave priority to activating the second pillar of support; the Arab Gulf countries.
Since President El-Sisi took power in 2014, the wealthy countries of the Gulf, especially Saudi Arabia and the United Arab Emirates (UAE), which believe that Egypt’s political stability is central to preserving regional security and stability, have been generously supporting the Egyptian economy, either through direct investments in the market or by keeping long-term and medium-term deposits in the Central Bank (CBE).
In 2021, the UAE was declared as world’s largest foreign investor in Egypt, with direct investments exceeding US$15 billion. In 2019, the Sovereign Fund of Egypt and the Abu Dhabi Sovereign Fund (ADQ) signed a strategic cooperation agreement to use joint investments of US$20 billion to enhance crucial sectors and assets of the Egyptian economy. Currently, more than one thousand UAE companies are working in Egypt, including in vital sectors of the food industry, energy (oil and gas), and logistical services of the Suez Canal. Also, at that time, the UAE was the holder of the largest deposit by a Gulf country in the Central Bank of Egypt, amounting to US$ 5.7 billion.
According to the latest periodic External Position Report, released by CBE, in November 2021, the total of long-term deposits by Arab Gulf countries reached US$15 billion in June 2021, including US$5.7 billion by the UAE, US$4 billion by Kuwait, and US$2.2 billion by Saudi Arabia. However, in early April of this year, these figures dramatically increased as Saudi Arabia, UAE, and Qatar decided to pour tens of billions of dollars into the Egyptian economy in the form of long-term deposits and direct investments.
In the last week of March, after a visit by the Egyptian President to Riyadh, Saudi Arabia decided to push the maturity of its deposits in the CBE to 2026. In addition, Saudi Arabia announced making a new deposit of US$5 billion at the CBE to support the Egyptian economy during the current crisis. Then, on March 30th, the Saudi Public Investment Fund (PIF) signed an agreement with the Sovereign Fund of Egypt to invest US$10 billion in the Egyptian market and governmental health and educational services.
One day before that, on March 29th, senior officials from the Qatari government met with the Egyptian Prime Minister in Cairo, wherein they agreed that Qatar would invest US$ 5 billion in the Egyptian market in the next period. It is important to mention, here, that Qatar has already been one of the largest foreign investors in Egypt’s energy sector, especially after the two countries reconciled in early 2021. In December 2021, the state-owned Qatar Energy purchased 17% of Shell’s project rights for oil and gas exploration in the Egyptian exclusive economic zone in the Red Sea.
Last week, on April 12th, the Abu Dhabi Wealth Fund (ADQ) acted on a deal, that was discussed earlier with the Egyptian government, to acquire state-owned shares of five Egyptian companies. ADQ invested US$1.8 billion in buying the stakes of the Egyptian state in the following companies: Abu Kir Fertilizers and Chemical Industries (21.5%), Misr Fertilizers Production Company - MOPCO (20%), Alexandria Container and Cargo Holding Company (32%), Commercial International Bank Egypt SAE (17%), and Fawry for Banking and Payment Technology Services (12.6%). The national banks; Banque Misr (BM) and the National Bank of Egypt (NBE) acted as the sellers of these stakes.
EYEING THE CRISIS AFTER THE CRISIS
The former experience of the current Egyptian leadership in managing various types of economic crises, in a relatively short period of time, will definitely help the Egyptian economy survive the current crisis. That is even more possible thanks to the generous deposits and investments by the Arab Gulf countries, and the continued support of the International Monetary Fund. Yet, we have to keep in mind that all these efforts are only going to provide a temporary fix to a pressing issue. They will not provide a real solution to Egypt’s chronic economic crisis.
In that sense, the question that the Egyptian government and its safety network of regional and international supporters should focus on is how to avoid the crisis after the current crisis. In other words, how to get the Egyptian economy liberated from the painful roller coaster of extreme stress followed by a short recovery that has not stopped for seventy years. The continuity of the comprehensive macroeconomic reform program, that was launched in 2016, is only one step in the direction of achieving this goal, but it cannot be seen as a goal in itself.
Rather, the end goal should be to ditch the existing outdated economic system, which in its essence is a distorted hybrid of Nasser’s failed socialism and Sadat’s incomplete liberalism; in order to establish a modern economic system, that is in perfect harmony with the changing nature and priorities of the global economic system. Malaysia and Singapore are two interesting case studies to examine for that purpose. It is not going to be an easy mission, neither for the government nor for the citizens, but its prospected fruit is worth the pain.
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