With Egypt’s ongoing economic crisis as the backdrop, and after months of directionless economic speculation and uncertainty, the Egyptian Economic Conference (EEC) finally took place in October. The EEC was the economic equivalent of the National Dialogue Initiative: an assembly of all local experts and stakeholders, organized and sponsored by the government of Abdel Fattah Al Sisi at the New Administrative Capital, to address the current challenges and provide policy recommendations for government reforms.
Sisi, an obstinate monocratic military ruler, has exercised complete control of the economic choices and direction of Egypt for the past eight years. Economically speaking, his reign has been mostly a disaster for Egyptians, but this year takes the cake. Egypt suddenly suffered a dollar shortage crisis, a currency devaluation that accomplished nothing, economic stagflation, over $22 billion in debt due, while suffering unprecedentedly high external debts. For the first time in eight years, the Egyptian presidency seems rather nervous, uncertain of its own survival.
Surely this begs the question: how did we get here?
The perils of hot money
In 2016, Egypt had a very successful devaluation that ended decades of wasting billions of dollars to maintain the country’s currency peg and stabilized the Egyptian pound (EGP). According to economic theory, once you devalue and float your currency you should not suffer another currency crisis anytime soon, because the price of the currency gets set by the market. Supply meets demand at a price. The bad news is that the new price would depreciate the local currency’s immediate value. The good news is it ensures the dollars’ availability in the banking system, eliminates the black market that thrives when the official value does not match the street value, and removes the need to waste dollars to prop up the value of currency artificially.
This is how economists know that the 2016 devaluation was serious, because those three eventualities took place once the currency devalued. The dollar price stabilized, became available through the official channels, and the black market effectively disappeared. While Egyptians suffered from the sudden and steep loss of value for the Egyptian pound, it was the “bitter medicine” needed to have a healthy and eventually stronger currency. Those days when billions got wasted propping up the EGP were behind Egypt, and seeing an attractive interest rate and a possibly rising currency revaluation, investors started giving Egypt a second look, especially “hot money” investors, who poured in billions in buying Egyptian debt.
“Hot money” investors are external or non-resident investors seeking to buy short-term high-yield debt instruments, like a one-year local currency treasury bill with a one-year interest of 13.25 percent that the Central Bank of Egypt put to auction in 2021. In addition to this high interest rate, central bank’s governor Tarek Amer assured those investors that their Egyptian pound dominated returns would get converted back to dollars when they mature, earning them substantial returns, as long as the local currency remains stable or appreciates in value. Everything was looking up the first few years of the devaluation, until COVID hit in 2020 and the pound plummeted.
While no one can verify if Amer took the decision as the central bank governor or if these were forced on him politically by the political leadership, what can be verified is that the central bank went back to propping up the Egyptian pound’s value artificially using its dollars again, starting June 2020. At the time, facing an unprecedented global economic crisis with no clear end in sight, most international institutions turned a blind eye to the central bank’s currency peg, believing it to be a temporary or short-term emergency measure that would be reversed after a couple of months, or half a year tops. The central bank kept it for 20 months.
The central bank kept propping up the Egyptian pound from June 2020 up until March 2022, repeating the same mistakes that led to the 2016 devaluation and borrowing billions of dollars to maintain the illusion that the currency was stable. In turn, this allowed the central bank to continue borrowing even more billions of dollars from external “hot money” investors.
Given their high-yield short-term nature, hot money’s financing costs are both costly and recurring, and carry the risk of capital flight at the first sign of economic trouble. The higher the percentage those non-resident short-term investments make up of a country’s local bond market, the more vulnerable that country is to have its foreign currency reserves depleted in the case of capital flight. During the final quarter of 2021, non-resident investment in Egypt’s local bond market stood at $28.8 billion, approximately 56 percent of the central bank’s foreign currency reserves at the time. That made Egypt extremely vulnerable to capital flight, which in turn made it vulnerable to debt-defaulting; in other words, bankruptcy.
By the end of 2021, because of the central bank’s strategy, Egypt found itself with over $138 billion in external debt, with $22 billion of debts scheduled to be repaid over the course of 2022. This added more pressure on existing reserves which were at approximately $41 billion by the end of December 2021, $12 billion of which were deposits belonging to Gulf countries. As a result, $29 billion were left to cover those scheduled debts, as well as Egypt’s import needs. That was the precarious financial position Egypt was in: it needed to borrow even more to secure its short-term needs, meanwhile being extremely vulnerable to capital flight triggered by the first sign of financial trouble, or any sudden external economic crisis.
Making matters worse, since every other currency in the world fluctuated in 2021 due to the supply-chain crisis, analysts started noticing that the Egyptian pound simply did not fluctuate at all, even though it should have. In turn, Egypt’s non-resident investors started getting skeptical about its financial position, leading to a capital flight of $5 billion worth of hot money net-outflows between September and December 2021. Everybody started watching the rising tensions between Russia and Ukraine nervously.
A slow-motion apocalypse
As 2022 began, the prospect of a war in Europe between Russia and Ukraine seemed more likely with every passing day. Given that those two countries were the main source of Egypt’s wheat supply, as well its top two source of tourism dollars, the central bank started getting nervous. Sensing both internal financial challenges, as well as a looming external economic crisis, the US dollar-denominated “hot money” investors got cold feet, triggering a capital flight of $25 billion dollars of outflows from Egypt in February 2022, on the onset of the war on Ukraine.
Facing dwindling dollar prospects, central bank governor Amer decided to solve this crisis-of-his-own-making, by punishing the Egyptian private sector. Highly dependent on imports for almost every strategic economic sector, the Egyptian private sector needed to pay their various suppliers in dollars, taking precious dollars out of Egypt’s banks. For Amer, losing those dollars as well was unacceptable, so he created further restrictions on local importers’ ability to import goods. Under the new rules, for an importer to get a bank letter of credit, importers would have to deposit in advance the full cost of the import transaction, plus interest, in the required foreign currency in a credit line opened by the bank to get one. Having one does not guarantee the transfer though, for the bank must receive the central bank’s approval for the transaction, with an unclear approval criteria and unspecified processing time.
The decision caused wide ripples of anger and panic in the Egyptian private sector, with importers becoming suspicious that the central bank was suffering from a form of undefined foreign currency shortage. Their suspicions were confirmed on March 21, when the central bank removed its currency peg, sending the Egyptian pound/dollar exchange rate plummeting to EGP 18.5/$1 from EGP 15.6/$1 in a span of few days, and the importers into a state of panic, since the devaluation did not lead to dollar availability like in 2016. Analysts then started wondering if the government was pegging the exchange rate of the pound once more, which would cost Egypt billions of dollars it could not afford to waste, all the while denying their private sector and population of the dollars needed for any imported good, strategic or otherwise.
That same week in March, Egypt submitted an official request for another $15 billion IMF loan—its third in seven years—and announced securing around $22 billion from the Gulf countries, but unlike last time, none of them were grants or favorable loans. Gulf countries toughened the conditions this time, as most of their money was used to buy lucrative assets and/or shares owned by the Egyptian state at a discounted price, with the rest in the form of central bank deposits that have to be serviced and paid back. By the end of March, Egypt’s foreign currency reserves were at $37 billion, while the estimated debt that Egypt has to repay by March of 2023 was around $33.6 billion, and external debt reached an unprecedented $157.8 billion. Still feeling the crunch, the central bank squeezed the business sector further by announcing on April 21 that banks were banned from opening credit lines for importers whose submitted foreign currency was obtained from “unknown sources, or exchange offices.”
Two months later, the ramifications of those decisions arrived with a vengeance.
By June, it broke out that the Egyptian agricultural sector was unable to import crop seeds for months, which gravely threatened the sector, given that 98 percent of the seeds used nationwide in agriculture are imported. The real estate sector started facing massive losses, as building material costs skyrocketed due to currency uncertainty. The poultry industry, unable to secure the release over 2 million tons of chicken feed that already arrived in Egyptian customs for months, led to the collapse of the industry and millions of chicklets getting killed by producers. By then, Moody lowering Egypt’s rating from stable to negative in May felt as an afterthought, since investors tools had already predicted that Egyptian bonds came with a 55 percent chance of default.
As the summer rolled on, the consequences of the imports freeze started affecting almost every sector, from the mundane to the unthinkable: Cellphone price jumps due to shortages caused traders to stop selling their stock; fashion brands stores had no new clothes; pet food disappeared from supermarkets; car dealerships started over-pricing the remaining cars with some demanding more money or they would sell the cars to other customers willing to pay more; prices of food commodities kept increasing and locally produced rice effectively disappeared from local markets while rumored to appear in international ones to secure dollars; pharmacies suffered medicine shortages and some were caught selling fake medicine; dentists complained about not being able to procure anesthetics for their patients; and cancer patients started scrambling to secure their treatments.
Meanwhile, the Egyptian state was acting as if the crisis was in a parallel universe—the presidency bought a half a billion-dollar new presidential plane for Sisi and the government continued signing multi-billion dollar “Sisi infrastructure projects” contracts with foreign companies, including an $8.7 billion agreement with Siemens to build the internal railways system of the new administrative capital. Meanwhile, instead of showing contrition for his ruinous economic decisions, Tarek Amer published a letter on August 6 in the state-run Al-Ahram newspaper decrying the government’s policy of not restricting importing for the private sector, which he blamed for the current crisis and draining Egypt’s foreign currency reserves. Two days later he resigned his post as governor.
As the bad news piled on and the IMF loan stalled, Sisi announced the need for a “national economic dialogue” to come up with recommendations to get Egypt out of its crisis, vowing to follow its recommendations. A few days later, the government announced organizing the Egyptian Economic Conference as the forum for this dialogue, to be held in late October.
For a forum created with the specific goals of drafting an “economic roadmap” as well as “developing clear policies to remedy Egypt’s current economic woes,” the EEC ended up coming up short on both fronts. What it did was provide, thanks two speeches by Sisi, clarity as to which direction he was taking the economy: more of the same. Instead of announcing expected reforms, Sisi announced his personal red lines: his continued rule is not to be questioned, neither his vision, nor will his excessive spending on current and future “national projects” no matter the cost. Additionally, the military’s involvement in the economy will continue unabated, as well his distrust and continued side-lining of the civilian-owned local private sector.
The day following Sisi’s speech, the IMF approved a new $3 billion loan to Egypt, a far cry from the $15 billion that Egypt originally asked for and needs. The reduced amount showcased both the IMF’s lack of trust in Sisi’s economic stewardship of Egypt—a sentiment shared by the Gulf countries—out of this crisis, as well as its desire to avoid Egypt’s official collapse. Concurrently, Egypt underwent yet another devaluation that sent the Egyptian pound into a state of free-fall, dropping rapidly in value in days to more than EGP 24.6/$1 officially, where it stabilized as of the time of the writing of this article.
Unfortunately, the black-market price is EGP 30/$1, and there are no dollars available in the banks still, and none of the obstacles for any of the imported strategic goods were removed. For the third time this year, the central bank has claimed publicly to devalue the Egyptian pound, while in secret it was pegging its price, with all the consequences that entails, yet again. What the central bank is doing is basically the same thing over and over and expecting different results.
The end of the road
Egypt’s external debt is expected to bypass $200 billion by early next year, an almost 400 percent increase since 2016. Most Egyptians believe that this money was either wasted on Sisi’s mega projects or into his pockets or that of his military cronies. Ironically, this belief is a comforting notion when compared to the likelier scenario, that most of that money got wasted due to the central bank’s insistence on continuing to peg the price of the Egyptian pound, and repaying those external foreign lenders back in dollars. It is unlikely that those billions have gone to Sisi’s mega projects or stolen via corruption by his regime cronies, since some of it would have trickled down in some way into the civilian economy, even in the form of property and luxury cars purchases, which it did not. All those dollars would have had some positive impact, yet there was none.
Instead, we had a central bank that turned the country’s external debt into an unsustainable late-stage Ponzi-scheme that enriched only foreign predatory investors, in order to fake economic strength when there wasn’t any, and make themselves look good. It would have been almost preferable to have the money stolen by the Sisi regime at this point, since it would have at least benefitted some Egyptians. Whether it was sociopathic malice or unbelievable ineptitude, one thing is clear: the Egyptian economy should not be run by the Egyptian Military any more, despite Sisi’s stated redlines.
In theory, a military-controlled economy is one where the ultimate beneficiary of all economic outputs is the military; in practice it has turned out to be an economy that is run with the same efficiency of the Egyptian military, which Egyptians affectionately call “organized buffoonery.” Even as military-owned companies gained prominence, high income, and market-share in various sector, there is no proof that any of those companies are actually profitable or would be without the preferential tax treatment and free labor provided by the mandatory military draft. If anything, the opposite seems to be true, if Sisi’s ultimate pet project, the new administrative capital, is any indication. Speaking of which, Sisi insisted on forcing Egyptian state ministries to pay over $200 million a year to rent their new government offices from an Egyptian military-owned company in the new capital.
Ultimately, to save and improve Egypt’s economy, all of Sisi’s red lines must be erased or redrawn. By making them all non-negotiable, Sisi is ensuring that a period of economic stagflation in Egypt’s future is a certainty, and further currency depreciation inevitable, if not endless. Additionally, the Egyptian government needs to do an encore of the 2016 devaluation and devalue the Egyptian pound for real this time, which will be even more painful given that Egypt will have $200 billion in debt and no Gulf support this time around. Nevertheless, it is doable, and the only remaining way to stop the current state of economic darkness from becoming a permanent one.
Mahmoud Salem is a Berlin-based award winning writer and analyst who covers geopolitics, economics, and information security.