When it became clear that Egypt would not escape the economic fallout from the Russian invasion of Ukraine, its reaction followed the pattern of previous crises. On the one hand, the Government sent messages of calm affirming that the duties carried out in recent years would allow the storm to be navigated without major setbacks. And on the other, he hastened to go to his main allies, the Gulf monarchies, to ask them to inject billions of dollars to stabilize his fragile economy. Only now, forced by extremely adverse conditions, does Cairo seem to have accepted that the economic model pursued for more than five years was never sustainable or sincere. But the extent of the script change he is willing to make remains to be seen.
The Gulf countries have played a central role in Egypt’s economy for decades, but it was above all in 2013, after the current president, Abdelfatá Al Sisi, took power that their assistance, with billions destined to prop up a Allied regime, entered a new dimension. The weight of this support only diminished after an agreement in 2016 between Egypt and the International Monetary Fund, which included a loan of 11,000 million euros in exchange for reforms, and with the entry of large bond investors.
After completing the reform program in 2019, the IMF and Egypt celebrated having eliminated the country’s macroeconomic imbalances and returned to the path of growth. But the improvement was largely a mirage caused by the accumulation of debt, especially short-term: from 2016 to 2022, its external debt has multiplied almost threefold, and today its payment consumes more than half of its annual budget. .
This commitment to growth supported by debt has been widely questioned for its unsustainability and because it creates a false sense of development that can distract from necessary economic reforms. Furthermore, in the case of Cairo, the use of a significant portion of this debt to finance one of the largest military expenditures in the world and macro-projects of dubious value has generated criticism.
Along these lines, Egypt continues to be governed today by an authoritarian, opaque government system with largely rent-seeking economic policies that prioritize control of the economy by the ruling class. And the country still lacks a powerful industrial sector. For this reason, its growth in recent years has not been inclusive, the private sector beyond oil and gas has shrunk almost every month since 2019, the workforce has fallen, especially among women, and unemployment rates poverty have increased.
change of course
The fragility of this model began to be exposed already at the end of last year, and especially from the moment in which the repercussions of the war in Ukraine and the changes in the financial markets were added to the disturbances of the pandemic. The flight of capital, key to importing basic products such as wheat and energy, whose prices have skyrocketed, has been vertiginous: 5,000 million dollars in the last four months of 2021, and 20,000 million more so far this year.
The pressure caused by this leak led the Central Bank of Egypt (ECB) in March to raise interest rates, which were already among the highest in the world, and to devalue the local currency, which depreciated 17% in one day , to stem the bleeding and keep your debt attractive. In addition, Cairo has been negotiating another assistance plan with the IMF for months, which according to the government could be of the same type as in 2016.
But, in parallel, the Government has also recognized the unsustainability of its model and has announced that it wants to promote foreign investment and exports to reduce its dependence on debt. The first to respond to his call were Saudi Arabia, Qatar and the United Arab Emirates, who have already pledged $22 billion
“The situation in general has not been good, and it has been manifested in indicators such as capital flight, the need to resort to the IMF, the negotiation with Gulf countries, either to receive deposits in the ECB or to agree on massive investment plans. , above all by acquiring assets that have become cheaper with the depreciation of the pound, and inflation,” says economist Amr Adly, a professor at the American University in Cairo.
As part of its new strategy, the Government announced in May an aggressive privatization program through which it hopes to withdraw from dozens of sectors of the economy in order to attract some 40,000 million dollars in investment in four years and increase the sector’s contribution in three years. private from the current 30% to 65%. But its chances of success and the suitability of its new proposal are also far from being guaranteed.
“Egypt’s trading partners have traditionally been from the European Union, which now does not [el aumento de exportaciones] very promising,” says Adly. Regarding foreign investments, the economist considers that they are more likely, especially because of how the Gulf is benefiting from the increase in energy prices. But its impact, Adly warns, remains to be seen. “If they are short-term loans in the form of deposits at the ECB, it is not necessarily good. And if it is through the acquisition of assets, it is also something that we have to think about, ”he slides.
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