By Patricio Ramos Cervero
In the Bible’s Genesis, a pharaoh has a prophetic dream in which seven skinny cows devour seven fat ones, a metaphor that urges us to prepare for hard times during easy ones. However, governments all over the world must not have gotten this memo. They have been borrowing money at record rates as if economic growth and low interest rates would make money free forever. But, it appears that the time to meet one’s Waterloo has now come to many.
Conservatives such as the UK’s Liz Truss, or leftists as important as Brazil’s Lula da Silva, Colombia´s Gustavo Petro, or Chile´s Gabriel Boric have all had to resign, retract, or recant after investors dumped, bashed, and battered their respective currencies.
Markets everywhere have shown no mercy to central banks who have lived beyond their means at the cost of boundless borrowing. But, no corrections yet have been as dramatic as Egypt’s potential institutional and economic collapse could be.
Spiraling out of control?
The country’s financial and political stability was not always in the perilous state it now finds itself in. Around 60% of its people live below or just above the poverty line. Core inflation was at 24.4 per cent in December 2022, with some economists putting the unofficial rate as high as 101% due to Egypt’s huge informal economy. The government has widened twin deficits and pays one of the highest real interest rates in the world. And the population, faced with a food inflation of 30%, is being asked to reduce their consumption of already low staples, and even being asked to switch chicken with chicken feet. To understand how the country has been trapped in a slow decline that has only recently become evident, we must look back over the past decade.
Ever since the 2013 coup d’état, the government, led by former general Al-Sisi, has been extending its power over the country’s legal and law-making institutions. This was initially done to increase cohesiveness and restore the stability lost during the 2011 Arab Spring Uprisings. But it has turned into the squashing of any opinion critical of his actions, whether it comes from within parliament or the media.
To make matters worse, Al-Sisi has thought of no better way to gain citizens wavering approval than by taking on infrastructure projects of pharaonic proportions. Some, it could be argued, might have strategic rewards— weapons acquisitions that have placed the country among the world’s top arm purchasers. Others, namely a 25 billion nuclear powerplant in a country with already a massive electricity surplus, could be seen as inappropriate uses of public funds in a country which lacks basic water and sewage infrastructure. And then there are the bizarre projects; the construction of the longest monorail line in the world, or the edification of a 58 billion new administrative capital in the middle of the dessert.
This begs the this question, where has all this money come from? Failing political institutions and increased concentration of power have both enabled Al-Sisi to conduct economic policy as if were a country that boasts incredible resources from which to obtain rents, or one which is an exports heavyweight. Lack of oversight, along with the backing of the IMF in international credit markets, has allowed the country to increase its debt almost 300% since 2012 to fund such projects. Turning the country´s economy into a delicate house of cards that could have devastating consequences for over 100 million people should it collapse.
Some experts have drawn comparisons between Egypt’s current state, and that of Lebanon prior to their economic collapse in recent years. Both suffer from problems arising from fixed exchange rates, high debt, and a liquidity crisis.
But what economists find worrisome, as it was what ultimately led to Lebanon’s demise, is the foreign currency crunch Egypt is experiencing. The country imports most of its food and inputs from industries, their lack of self-sufficiency forces them to turn to international markets for their most basic needs. And when foreign currency is in short supply, the elements necessary for their economy cannot be purchased.
This lack of self-sufficiency is seen in the country´s grain imports— the largest in the world. And with almost 110 million mouths to feed growing at around 2% annually, Egypt’s appetite for food imports will only become more voracious.
A foreign currency shortage already sparked panic when there was a 20bn outflow in the wake of the Ukraine war, as investors rushed to safe havens. Both then and now, it has created a backlog of imports from everything from food to pharmaceuticals. At the complete mercy of the markets, Al-Sisi has once more resorted to shift the blame elsewhere and cried out for help.
The IMF to the rescue… again
This is the fourth lifeline in six years Egypt has received from the IMF, this time of 3bn over four years. Bear in mind Egypt is already the second biggest borrower from the IMF after Argentina. In addition, it has borrowed a combined 900 million from the World Bank and The African Development Bank, and owes Germany 2.8 billion in outstanding loans— perhaps Greece wasn´t a strong enough lesson.
A lot more than just a much-needed cash injection is coming with this new loan. The IMF is using this lifeline to encourage much-delayed structural reforms in Cairo. Al-Sisi, who has enabled the military to increase its chokehold over the economy, is having to reel back their power and answer the IMF´s request that all state-owned enterprises open their rather opaque books.
Perhaps the most transcendent of the lifeline´s requirements are the request that Cairo moves towards a flexible exchange rate regime. This essentially means that, instead of the government, the markets determine the currency´s value instead. This shift will undoubtedly be very slow and gradual, as Egypt first must build up liquidity and stabilise inflation. But it will help restore investor confidence that has been eroded after years of abrupt devaluations by the government.
The US, Europe, Gulf States, and China all have vested interests in the country. While America’s interest is in keeping Egypt as an ally to continue conducting peacekeeping operations in the area. Arab petrostates are mainly concerned with maintaining the status quo alive as they fear the spread of democracy to neighbouring countries might trigger local instability. China is a key actor in the construction and telecommunications industries in Egypt, investing more than 7bn annually. On top of this, they have found in Al-Sisi an acolyte of their human rights abuses on Uighurs. Lastly, Europe finds itself paying what some might see as ransom. The African nation reportedly hosts around 6 million illegal migrants, and is periodically asked for money in exchange for keeping them there instead of letting them ¨flood¨ Europe.
Undoubtedly, some countries wonder why there is such a large inflow into an economic system that some see as destined to fail. Of course, no one wants to see the country suffer a famine and get plunged again into chaos barely a decade after suffering multiple revolutions, but this aid does come thanks to Egypt’s unique geostrategic position.
Egypt is on the brink of suffering a catastrophic recession. The IMF’s loan will hopefully stabilise their economy and allow the shift of focus onto the much-needed restructuring of political institutions. Failing to do this would prove ruinous to its almost 110 million residents, and bring instability and chaos to a region that, unfortunately, already has too much of it.
The views expressed in this article are the author’s own, and may not reflect the opinions of The St Andrews Economist.
Image Source: Financial Tribune