from From the Potomac to the Euphrates and Middle East Program

Egypt’s Economic Reform: The Good and the Bad

Egyptians gather to buy subsidised sugar and oil from a government truck, after goods shortage in retail stores across the country and after the central bank floated the pound currency, in downtown Cairo, Egypt (Mohamed Abd El Ghany/Reuters).

Tough economic times are likely to be Egypt’s reality for a while, despite the announcement that Egypt and the International Monetary Fund have agreed to a much-needed $12 billion loan.

November 14, 2016

Egyptians gather to buy subsidised sugar and oil from a government truck, after goods shortage in retail stores across the country and after the central bank floated the pound currency, in downtown Cairo, Egypt (Mohamed Abd El Ghany/Reuters).
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I wrote this piece with my friend Imran Riffat, who has served in senior management positions with a major international bank and has experience in Cairo that includes a five-year stint as country head of the Egyptian operation. 

Last Friday, many Egyptians and more than a few Egypt watchers in Washington, DC, held their collective breath. November 11 was to be the “Revolution of the Poor,” but the 22 million who live in poverty did not show up in Tahrir Square to demand change. It might have been the large number of riot police and armored vehicles in the streets that kept people away. It also might have been the sheer exhaustion of the last six years and the fear of what might come next should another “revolution” erupt. The era of former President Hosni Mubarak may be perceived as an era of stagnation, but thus far it looks good along a number of economic, social, and even political dimensions in comparison to what has followed it. Still, Friday was a big win for Egyptian President Abdel Fattah al-Sisi (and a setback for the Muslim Brotherhood, whose spokesman, Hassan Saleh, seemed to be foaming at the mouth in his official statement on behalf of the group encouraging protests). Not long after it became clear that Egyptians were not mobilizing came the announcement that Egypt and the International Monetary Fund (IMF) had agreed to a much-needed $12 billion loan. Then, on Sunday, the Egyptian stock market did well. To cap off the weekend, Egypt’s national soccer team beat Ghana 2-0, vaulting the team to the top spot in its World Cup qualifying group.

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The last three days have probably been the best for Sisi since the fall of 2013 when he was still riding high in the afterglow of the July 3 coup d’état that ended Mohammed Morsi’s presidency. No protests, an IMF deal, and success on the soccer pitch is a trifecta. It no doubt has Egyptians hoping that better days are just ahead, but they should not get carried away. Tough economic times are likely to be Egypt’s reality for a while. Here is why:

  • Losing subsidies and control? Give Sisi credit where credit is due. He didn’t lose his nerve when it came to undertaking the changes the IMF demanded as a condition of its loan—a VAT tax, reduction in subsidies, and free floating the currency. Predictions that an uprising along the lines of the January 1977 Bread Riots were wrong. It seems that Egyptians have been willing to grit their teeth and bear the pain. Even though last Friday’s protests fizzled, significant risks remain. After all, Egyptian leaders are—more out of necessity than vision—fundamentally altering the terms of the government’s relationship with the people. Despite the uprising in 1977, subsidies remained an important means of political control. Reducing or eliminating them makes it more difficult to bind people to the regime, which can threaten social stability. If people are not getting subsidized bread, fuel, and other basic goods—essentially a payoff from the government—it will be harder to elicit their quiescence. Sisi could resolve this problem if two things happen: if he offers an appealing vision of Egypt’s future, and if Egyptians actually experience progress toward achieving that vision. Perhaps the changes underway represent the first steps toward the prosperity Sisi promised after he assumed power. If so, he can easily reduce or eliminate subsidies. If not, he will lose his grip. There is another problem with the kind of changes underway in the economy: it is not entirely clear that Egyptians want it. In Egypt (and Tunisia as well) citizens have not clamored for the neoliberal reforms that are at the heart of IMF programs. Rather, they seem to want to a better functioning version of the social safety net that the leaders of the old order promised. Elites in Cairo and the West know that Egypt’s economy needs to be reformed and rationalized in order for the country to grow. It is risky to assume that average Egyptians look to view the situation in the same way even if, for the moment, they have been willing to bear economic hardship.
  • Making Egypt competitive again? One of the great advantages of the currency devaluation that the Egyptians carried out on November 3 is the potential gain in competitiveness that helps both exporters and domestic manufacturers of goods that would otherwise be imported. A cheaper pound makes Egypt’s exports less expensive and thus more competitive in global markets. A pricey pound also makes imports more expensive, which gives domestic manufacturers of substitute goods an advantage. The combination leads to more employment opportunities and greater aggregate demand of good and services, leading to more economic growth. That is all very good news, but so far exists only in the abstract. With a few exceptions, Egypt actually has to import the intermediate components of the few goods it exports. The high price of intermediate goods may actually erase the export advantages of devaluation. This problem highlights another problem: Egypt does not actually manufacture substitutes for the components it imports. The net effect on economic growth could actually be quite limited.
  • How much is that koshary in the window? There are few things more quintessentially Egyptian than the mountains of pasta and chickpeas in the windows of koshary joints that dot the Cairo landscape. Add dried fried onions, some hot sauce, and/or garlic sauce to this national dish and you’ve got a meal that can hold you for the following three. Here is the best part: A large bowl of koshary is about five Egyptian pounds (currently 30 cents). With the devaluation and reduction or elimination of subsidies that the IMF demanded, that bowl of koshary and everything else an Egyptian might want is now a lot more expensive. The purchasing power of an Egyptian’s salary fell by almost 50 percent on November 3. If economic output does not increase and growth lags (see the bullet just above), all of this suffering will be for naught.
  • Cheap pound, more debt. Anyone in Egypt who has debt denominated in a foreign currency has just experienced the sticker shock of a precipitous rise in the cost of servicing that debt. As far as Egypt’s external debt is concerned, it just doubled.
  • From Sharm el-Sheikh with love. It seems like an opportune moment to head to Sharm el-Sheikh in southern Sinai to enjoy the beautiful beaches and terrific diving. The cheap pound makes Egypt a great destination for anyone with U.S. dollars or euros, but will the tourists come back? Tourism has long been a pillar of Egypt’s economy given not just the great Sinai beaches but also Egypt’s Pharaonic, Coptic, and Islamic civilizational heritage. In 2010, Egypt welcomed 15 million foreign visitors. The January 25, 2011, uprising and the turmoil that followed have devastated the industry. A cheap pound has the potential to reverse the slide, yet it does not seem likely tourism will rebound even if the cost of an Egypt vacation is lower. There is still an ongoing insurgency in northern Sinai, which no doubt gives people jitters. More importantly, Egypt’s foreign partners have no confidence that their nationals will be safe on an Egyptian holiday. Neither the Russian nor the British air carriers have yet to resume flights to Sharm el-Sheikh (though the charter airline company Thomas Cook may do so soon) because they do not believe the Egyptians are capable of providing adequate airport security. This has everything to do with both the fact that a bomb is believed to have brought down a plane full of Russian tourists over Sinai a year ago and the fact that the Egyptian response to the tragedy was subpar.

Let’s hope Egypt’s step toward economic rationality succeeds, but the IMF agreement and the devaluation are hardly elixirs. The IMF’s conditions get at aspects of the Egyptian economy whose rationales had less to do with economics than political and social cohesion. Adding to these potential pressures are the downside effects of the government’s currency devaluation. It needed to be done, but it may have possibly come too late to capture the full benefits of a cheaper pound. The Egyptians will no doubt underscore these changes as evidence that the country has finally righted itself, but they have come to this point because they had no choice, not out of wisdom.

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