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Understanding Egypt’s Economic Troubles

In 2016, the IMF gave Egypt its first bailout loan, $12 billion, and in return the country’s leadership was asked to take two main measures: implement long sought-after austerity measures; and encourage the development of an inclusive economy driven by the private sector, needed in order to create jobs to pull people out of poverty. The former was implemented but the latter was not.

The line at the cashier check-out of a discount department store was long, with restless customers standing in line. A lady was holding up the queue: money in hand, she was trying to match the grocery bill. “This has to go, this, and this,” she told the cashier as her little boy stared in dismay at the items he had picked being tossed aside. “I want the pants,” he objected. “I don’t have enough,” she replied.

I witnessed the above incident while buying some bed sheets from the store. This is a recurring story around the world, as people are feeling the crunch of the current economic situation. The crisis hit particularly strongly Egypt’s poorer population, as human rights worker Gamal Eid described an encounter he witnessed between a lady and a ful and falafel street vendor. Ful, fava beans, is considered to be a low-cost staple ingredient in the diet of many Egyptians. The lady wanted to evenly split 6 Egyptian pounds ($0.32) between ful and falafel, but the vendor told her that 3 pounds could only buy her falafel, not ful. The argument that erupted between the two was ironically against the backdrop of a radio announcer praising “Egypt’s economic development.”

Egypt has always been a majority poor country. The above two stories are not unreal even in bygone eras. However, from financial data and anecdotal evidence, such stories of Egyptians trying to make ends meet are on the rise as more and more descend the socioeconomic ladder and join the poorer class. The Egyptian government reported a small decline in poverty rates from 32.5 percent in the fiscal year 2017-2018 to 29.7 percent in 2019-2020. The Egyptian government might frame this as a miniature improvement but there are a lot of nuances involved in these figures. First, almost a third of the population lives under the state-constructed poverty line, far below the international line of $2 per day. Second, observers have debated and criticized the official numbers citing that they do not really reflect the reality in Egypt. Third, the World Bank estimated in 2019 that 60 percent of Egyptians are either very poor or vulnerable. Lastly, the official poverty rate in 2015 was 27.8 percent, it jumped to 32.5% after the sharp currency devaluation in late 2016, therefore we can confidently deduce that latest poverty rate which was measured last year has increased following the second devaluation of the Egyptian pound that occurred last March.

The state of poverty was not what was promised to Egyptians when the current leadership took power almost nine years ago. In 2014, President Abdel-Fattah El Sisi asked Egyptians to “be patient with [him] for two years and hold [him] accountable.” In 2015 he promised “two more years, and you will be surprised by how Egypt turned out to be.” This article discusses what went wrong and why these promises never materialized.

In 2016, the IMF gave Egypt its first bailout loan, $12 billion, and in return the country’s leadership was asked to take two main measures: implement long sought-after austerity measures; and encourage the development of an inclusive economy driven by the private sector, needed in order to create jobs to pull people out of poverty. The former was implemented but the latter was not.

Egypt stuck to the agreement when it came to the painful austerity measures. Subsidies on most energy products were removed by 2019, and the electricity bill paid by the poor and middle-class increased cumulatively by 271 percent between 2011 and 2017-2018. To maintain the price of a loaf of bread at the subsidized level of 5 piasters ($0.0027), while at the same time surreptitiously reducing the subsidy cost, the government decreased the weight per loaf from 110 grams in 2016 to 90 grams in 2020. Before that, the loaf of bread weight remained at 130 grams from 1988 till 2013.

To help mitigate the effect of the IMF-stipulated austerity measures on Egypt’s poor, the government launched a safety net program called Takaful we Karamah, Solidarity and Dignity. The plan entails the transfer of cash directly to people in need instead of having subsidized products. The plan’s main goal was to provide a safety net for those who were harshly hit by the reduction in subsidies and to try to minimize the squandering that happens within the subsidies system in Egypt—buying subsidized products and selling them at higher prices. While ambitious, the plan’s coverage is still narrow and will take years for it to cover the most vulnerable in Egypt if that is indeed possible. As a result of the pressure placed on them, some have resorted to trade-offs such as the above to help make ends meet. Another sign of Egypt’s growing poverty is the increase in demand for chicken carcasses and bones by those who cannot afford other sources of protein.

As for the 2016 IMF program’s second stipulation, the development of an inclusive private sector-driven economy, the Egyptian government failed miserably. In addition, IMF officials clearly called for the austerity measures to be taken, but realpolitik prevented the same officials from putting their foot down on army generals staying out of the economy.

Military-owned enterprises are crowding out the private sector in a manner not seen before since the 1952 military takeover. It was quite telling to see the civilian government try to enact laws to encourage investments while the military torpedoed those same efforts with the unfair competition its companies posed to the same investors the government was trying to lure. Military-owned companies have a number of advantages that other companies do not have; they do not pay taxes, have unlimited privileges in land ownership, and some employ conscripts as labor.

This unorthodox environment of doing business in addition to other factors—such as weak commercial justice system, lack of information, and the still existing red-tape in establishing and operating businesses—has reflected negatively on the economy. Labor force participation decreased steadily from 47 percent in 2015 to 41 percent in 2021. The non-energy private sector was in contraction for the vast majority of the past five years, and foreign direct investment outside the energy sector has been unimpressive and definitely not to the levels the IMF had in mind when it started the reform program with Egypt in 2016.

The IMF program and the austerity measures it entailed freed up capital and enabled the Egyptian government to tap into the international debt market. What did the government do? It used the freed-up money in taking massive debts, both at home and abroad, to finance vanity projects that had unsound feasibility studies, and purchased a colossal number of conventional weapons. Egypt acted as if it was an oil rich Gulf state or a mercantile state such as China. Egypt’s external debt nearly quadrupled from $36.775 billion in 2010 to $137.8 billion in June 2021. On paper, Egypt’s debts are still manageable since the debt to GDP ratio is a little below 100 but the burden of financing the ballooning debt falls on the impoverished population. Repaying the foreign and domestic debt is expected to consume over 50 percent of the new state budget. Taxes have increased while the constitutional thresholds on spending on education and healthcare have not been met. Egyptians are paying more and getting less.

The country’s dire economic situation has a political dimension as well. For years, successive Egyptian regimes maintained a social contract with the people that entailed the following: we rule indefinitely, and in exchange we give you subsidized products that help in meeting your most basic needs. The Sisi government breached this decades-old social contract by greatly reducing subsidies, opening Egypt to the possibility of political instability.

After nine years in power, Sisi’s legacy rests solely on the 2013 popularly backed coup that ended the one-year rule of the Muslim Brotherhood, bringing political stability after some chaotic years. This legacy that was cherished nine years ago is mostly forgotten today under the burden of the economic perils.

Egypt had a golden opportunity to build a robust private sector-driven economy following the first IMF bailout in 2016. However, unsound economic policies, unneeded vanity projects, rapaciousness of the country’s rulers, and the inability or unwillingness of the IMF to insist on good governance blew this opportunity away. The pandemic and the war in Ukraine affected all economies; however, mitigating the repercussions of these two events would have been easier if Egypt’s rulers decided to share the economy even if they retained the power seat. There are signs and talks of the regime taking some corrective actions which include a bigger participation of the private sector in the economy and the withdrawal of the state from a number of sectors in the economy. Let us hope these signs are translated into actions and that it is not too late.

The Big Pharaoh is a blogger who writes on Egypt and the Middle East.


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