Egypt Opens the Debt Tap as Wide as It Will Go

Over the past few months, the IMF and several other international financial institutions have lent huge sums to Marshal Sisi’s regime. But the expected reforms are slow in coming and the resumption of the tourist trade is half-hearted. For the population at large, austerity is still the order of the day.

Egyptian protesters hold bread along with a flyer reading in Arabic “Danger, no to loans that lead to poverty” during a rally in downtown Cairo against the visit of a delegation from the IMF on April 3, 2013
Khaled Desouki/AFP

President Abdel Fatah Al-Sisi is certainly the African sweetheart of international financial institutions. Between the autumn of 2020 and the spring of 2021 Egypt wangled out of the IMF alone nearly 8 billion dollars. These were in addition to the loans of 12 billion dollars already granted by the same IMF in 2016, a total of 20 billion in less than five years’time. If we add on the credits granted at rates more favourable than the market by the World Bank, the African Development Bank (AfDB), plus European and Arab financial bodies, the total amount must be at least twice that. As a result, Egypt’s foreign debt, even before this latest boost from the IMF, amounted to 125.3 billion dollars during the first quarter (June-September 2020) of the Egyptian fiscal year (1 July-30 June).

According to the IMF, the national debt strictly speaking will represent 92% of the GDP in 2021, an increase of 35 billion dollars over 2019, before the outbreak of the Covid-19 pandemic, which greatly perturbed the Egyptian economy after two successive years of 5% growth. The government is not alone in going into debt, the Central Bank (ECB) is borrowing as well on the international financial markets at much higher and dangerously costly rates. In February 2021, Finance Minister Mohamed Maait set himself the goal of collecting 3 billion dollars (interest payments amounted to 2.46% of GDP, or almost $10 billion per year). The operation reveals exorbitant interest rates; 4.2% at 5 years, 6.2% at 10 years and 7.8% at 40 years, as against 1% for the IMF. Four hundred foreign investors, mostly European and American, offered 18 billion dollars and a slightly lower interest rate. To which must be added, of course, the exposure to foreign exchange risks to be borne by Egypt and which weighs heavily on the national budget (2.6% of the GDP in 2020–2021). The country has a painful memory of 2018 when, in a single night, the value of the dollar dropped from 8 to 16 Egyptian pounds (EP). And the stability of Egyptian currency is certainly not guaranteed for 5 or 10 years, let alone 40.

The fall in foreign exchange earnings

Nor is there any certainty that this avalanche of dollars will suffice to kick-start an economy which has been seriously starved of foreign currency by the pandemic. According to the Financial Times of 6 June 2021, 13 billion dollars had fled Egypt in just a few days. The external current account deficit was doubled during the second quarter of 2020, at 7.6 billion dollars. One after the other, the country’s sources of income were hit. In 2010, the last normal year for tourism before the revolution of 2011, 14.7 million foreigners visited the country, where they spent 14.5 billion dollars, i.e., 11% of the GDP, and provided jobs for 11% of the workforce. Today, the Minister of Tourism and Antiquities, Khaled El-Enany, foresees from 6 to 9 million visitors this year and the IMF predicts a scant 6 million dollars revenue. In reality, however, on the basis of 500,000 arrivals per month, the first of these figures is the more likely to be reached, mostly made up of Eastern Europeans and Russians whose purchasing power is not nearly as great as that of the tourists of yesteryear, from Western Europe and North America.

The delay in the opening of the Great Egyptian Museum (GEM), inaugurated with elaborate ceremony by President Sisi in the Spring, has deprived the tourist trade of a powerful attraction. With half the number of foreign visitors—and those that do come poorer than their predecessors—the Nile felucca crews and the pyramid camel drivers will not be coming back to work very soon. The Suez Canal, another source of revenue, though not so massive (5 to 6 billion dollars per year), is less affected. However; the bargains are back and the management has cut in half the right of way costs for “very large crude carriers” (VLCC) from Europe on their way to Asia. Sales of natural gas are also falling off (by 3 to 4 billion dollars according to the IMF); foreign investments in hydrocarbons have been divided by ten during the same period. In all, service revenues (transport, tourism…) have fallen by 70% during the second quarter of 2020. The only strong point, remittances, the cash sent home by expatriates to support their families, which is close to 30 billion dollars, now play a crucial role in the national balance of payments. The sweat of those migrants bring more foreign currency into Egypt than all its exports other than petroleum.

Purchasing power in jeopardy

All told, the IMF predicts a modest return of growth this year (+2.5%) provided the Covid-19 does not strike again in the autumn. At the end of 2021, the real GDP will be less than it was at the end of 2019 and inflation, which was down to 5.4% in 2020, will be up again in 2021/22 to 8%. Egyptians are bound to lose several points of buying power. Largely on account of the reduction of the subsidies on basic necessities. The price of vegetable oil went up by 25% and so did fuel oil due to the rise in the price of crude. Other similar measures are sure to follow. In reality, the recent deal with the IMF has one main objective: to boost the primary surplus, i.e., the positive difference between the State’s income and its expenditures to somewhere between 0.5% and 2% of the GDB, or some 8 billion dollars. On the budgetary plane, all the rest will follow. The idea is to compress expenses and increase revenue as much as possible. The most recent measure was the closing of the Helwan steelworks, nationalised in 1959 and the pride of the Nasser years. Seven thousand workers were made redundant and are still waiting for their severance pay.

In May, the government adopted a National Structural Reform Program of which Céline Allard of the IMF, who negotiated the final phase with Cairo, has said with wry humour that it would be a good idea to put a little more flesh on it. “In the months to come, it would be important for the government to define the measures planned in support of its objectives, in particular by making more room for the private sector to operate in a more favourable environment.” (Al-Ahram, 25 May 2021). In the coded language typical of the IMF, that says it all. The economic wing of the Egyptian army, which has been all-powerful since the July 2013 coup, has no scruples about trampling underfoot the local bourgeoisie or what is left of it. What with the country’s energy sources in the hands of the multinationals and with real estate/public works the private preserve of the army, private enterprise has a hard time finding any space at all. The job market is in the doldrums while the birth-rate remains high (five babies per woman on the average.). In April 2021, I.H.S. Markit, an international organisation which monitors 400 small and medium-sized industries outside the petroleum market, announced a rating for Egypt which was at its lowest since June 2020. It has gone up a little in May, but buyers are rare because of Covid-19 and the private sector is having great difficulty obtaining financing, while the first phase of the new administrative capital, a gigantic project launched by President Sisi with uncertain economic spin-offs, has benefited from a credit of 25 billion dollars. “The private sector must leverage its investments into government projects” Prime Minister Mustapha Madbouli has urged, obviously a champion of the khaki economy.

For any holdouts, intimidation is the order of the day. Safwan Thabet, founder and managing director until 2015 of Juyana Food Industry, the country’s largest fruit juice firm, is in prison for having “financed the Muslim Brotherhood” and his son Seif has been held for four months without being charged. The company was confiscated in 2015. What is probably held against him is having dutifully paid his taxes, unlike so many wheeler dealers, during the time one of the Brotherhood, Mohamed Morsi, was President of the Republic. Did some general have his eye on the business? The timid observations by IMF experts in favour of the private sector and the improvement of the business climate have not made much difference. Behind every obstacle confronting the free competition much vaunted by its specialists, there is an army officer who means to preserve the privileges his cast enjoys and is determined to pass them on to his offspring.