Storm Warning in Egypt

In line with an agreement with the International Monetary Fund (IMF), the Egyptian Central Bank has stopped supporting the Egyptian pound since the beginning of the year. The local currency is now trading at a little under EGP30 to the dollar. In a single year, it has lost 70% of its value. When President Abdel Fattah al-Sisi seized power in 2013, it was worth seven to the dollar. Galloping inflation, rationing, shortages and debt gouging are fuelling unprecedented criticism of the military government.

An aficionado of grandiose projects and triumphalist speeches, Abdel Fattah El-Sisi is clearly struggling to relaunch Egypt in the family of nations and to settle the national future on an expanding economy. Ten years after he took power in July 2013, doubt is taking root. Diplomatically and financially the Gulf has eclipsed Cairo, and the country is facing a failure reminiscent of the disasters in the time of the khedives and pashas. How did it come to this?

A product of military intelligence, the Egyptian president was lifted to power by the 2011 revolution. First promoted to Field Marshal by the Supreme Council of the Armed Forces (SCAF) which took over after the fall of Mubarak, he then found himself appointed Minister of Defence by the short-lived president from the Muslim Brotherhood, Mohammad Morsi. A poorly advised strategist, to put it mildly, the latter thought he could make up with the army until it overthrew him with the coup in the summer of 2013. The military retained a very bad memory of the end of Mubarak’s era and the promotion of oligarchs close to the President’s son, Gamal Mubarak, who had been making free with the economy at the army’s expense and who did not disguise their political ambitions. After champing at the bit for several years, the military believed, rightly, that their hour had come. Jobs and fortunes should be theirs.

The property mirage

The game was to be played and lost in three phases. Fascinated by the model of the Gulf states, Sisi dreamt of modernising Egypt through property and finance. He promoted grandiose projects like the widening of the Suez Canal or the construction of a new capital in the middle of the desert, announced a flurry of other new towns, and planned to build the world’s biggest museum, the Grand Egyptian Museum, at the foot of the pyramids. The largesse of the Gulf rulers and Chinese credits would pay for all this, to the greater profit of the military enterprises carrying out the grand works. At the same time, those same military enterprises would get their hands on some juicy private businesses and expand their empire by all possible means. Exempted from taxation, they paid their workforce (often conscripts) poorly, used the state banks which could refuse them nothing, and fell back on the endlessly obliging public treasury, not to mention police operations to intimidate the less understanding bosses.

It is true that the army lacks a solid pension system capable of providing a standard of life appropriate to the generals and colonels who leave the military every year. So they had to be found retirement jobs and sinecures, to avoid attracting the displeasure of an apparatus that can swiftly turn threatening. But the grandiose construction gambit had evident flaws. The remittances of millions of Egyptian workers in the Gulf and Europe, the Suez Canal revenues, and tourism were no longer enough to keep Egypt alive. Something else had to be found. But what?

The private sector, bled white by the unfair competition of the military, lacked dynamism. The prospect of gas riches held out by the discovery in 2015 of an important field in the eastern Mediterranean (the Al-Zhor field with estimated reserves of 850 bn cubic metres) would only come good in the long term because of extraction difficulties, and the country had to make energy savings at home in order to maximise profits from exports. Foreign investors remained wary, and the Gulf states, which had already paid heavily to ensure the final ouster of the Muslim Brotherhood, were now demanding a return on their investment. With the productive sector long neglected because of rentier logic (hydrocarbons, tourism, the Canal revenues), exports were weak, barely more than those of neighbouring Tunis. So, the Egyptian pound was already slumping against the strong currencies, thus compromising the financing of the economy. It was a vicious circle.

In December 2016, the IMF offered a way out: $12 bn in loans, in exchange for a drastic cut in subsidies for fuel and foodstuffs, and a raft of structural reforms, sometimes already announced as done and dusted but in fact left unimplemented for fear of their destabilising social impact. Above all, the agreements opened the way for fresh money. Some very short-term treasury bonds (from one to six months, or exceptionally one year) offered a limited risk to Arab, European, and American savers, given their extremely short duration and interest rates among the highest in the world (15–17%). Sisi seized this dangerous opportunity with both hands. Within a few months, $20–30 bn flooded into the system, while the daily life of the Egyptians, especially the middle class, deteriorated under the combined effect of a spike in the price of imported products and whittled-down subsidies. But for about two and a half years, Egypt kept up the illusion and posted a respectable growth rate of 5%. Then in 2021 the Covid-19 pandemic dealt the first blow to two of its main sources of liquidity: the tourists disappeared, and use of the Suez Canal dropped greatly. But the worst was still to come.

IMF reticence

February 2022: Russia invades Ukraine. Within a few days, the “hot money” fled Egypt and took refuge in the dollar. The gap in reserves and the balance of payments became unsustainable. In March, the Central Bank rationed supplies of the greenback: having Egyptian pounds in your hand was no longer enough to buy dollars, you also needed a green light from the monetary authorities. Cargoes awaiting settlement stacked up in the ports, amounting to $10 bn worth of frozen goods. Cairo turned to the IMF, which proved tougher than in 2013. The Egyptians asked for $9 bn, the IMF offered $3 bn (barely more than it did for Tunisia, with a tenth of the population) and demanded even more drastic reforms than before, including an end to Central Bank intervention in the money markets to prop up the Egyptian pound. Moreover it also continued to demand the privatisation of the public sector, to cover “all sectors, including the military enterprises,” as the IMF had signalled in the spring of 2021.

For Sisi, it became a political issue. How to satisfy the IMF without alienating his military backers? How to persuade military-run enterprises which might be put on the market, to provide potential purchasers with transparent accounts? How to ensure that the Gulf states, further enriched by the impact of the war in Ukraine on oil and gas prices, would not exploit the country at the expense of a sovereignty of which the military pose as the chief guardians? Faced with this squaring of the circle, the President shifted ground and in December 2021 criticised the management (“inefficient for the past 40 years”) of the 943 public enterprises and the 52 regulatory authorities and called on all Egyptians to play their part in the impending reform process. On 4 January 2023, implementing the IMF agreement, the Central Bank stopped supporting the Egyptian pound, which fell heavily in the ensuing days. Rates came close to those on the black market (EGP30-31 to the dollar), and the lack of confidence in the authorities threatened to push the national currency over the precipice.

Increasingly overt criticism

The crisis unleashed criticisms all the more striking because they have become unusual in a country where all forms of opposition have been harshly repressed. After the expectations raised by the euphoric discourse surrounding the COP27 conference held at Sharm el-Sheikh last November, which according to official messaging was meant to consecrate Egypt’s apotheosis and attract a flood of capital, the country woke up with a hangover. Abdel Fattah el-Sisi has markedly changed his tune. After all the triumphalism, his outpourings have become very defensive: the difficulties the country is facing are just the result of external factors, the Covid crisis and the war in Ukraine. The easy-going president got tough and warned that the Egyptians had to stop “babbling,” an expression that went down badly because it is regarded by Egyptians as offensive. Similarly unappreciated and largely lambasted on social media was his exhortation that people should eat chicken feet, whose nutritional properties had supposedly been long underestimated. In other words, Egyptians should keep their expectations low.

After ten years in power, the Field-Marshal President seems to be confronted by the reality of his regime, and on the ropes. It is impossible to continue fattening the military hierarchy while trying to get the economy back on the rails to even modest development. A choice must be made, one which could cost him dear.