The fifth anniversary of the Egyptian government’s decision to float the currency came and went on 3 November. The flotation saw the Central Bank leaving the Egyptian pound to supply and demand mechanisms without any interference. On the anniversary last month, the government published a detailed report that highlighted the so-called positive impact of the flotation decision on the economy and how it improved the currency’s performance.
The government claimed, through the publication of some economic indicators, that the Egyptian economy has been buoyant for five years, with an increase in international reserves at the Central Bank of Egypt of 108.2 per cent up to $40.8 billion at the end of September this year, compared with $19.6bn at the end of September 2016.
The official statement also claimed that remittances from Egyptians working abroad increased by 83.6 per cent, reaching $31.4bn in 2020/21, compared with $17.1bn in 2015/16. Tourism revenue is also claimed to have increased by 28.9 per cent; income from the Suez Canal increased by 13.7 per cent; and the value of Egyptian exports by 59 per cent.
To discuss the economy in Egypt, I interviewed Egyptian economist Mamdouh Al-Wali, the former Chief Executive Officer of the official newspaper Al-Ahram, and former head of the Egyptian Journalists’ Syndicate. Al-Wali worked with Reuters in Cairo from 1996 to 1999. In 2006, he was the editor-in-chief of the economic news section of the Mubashir website, which specialises in Arab financial markets, and served as a consultant for Energy and Investment magazine in 2007.
Osama Gaweesh: What is your opinion of the government report about the indicators of the improvement of the Egyptian economy in the past five years after the decision to float the Egyptian pound in 2016?
Mamdouh Al-Wali: The government statement is selective and deliberately ignores many of the problems that the Egyptian economy still suffers from despite promises of improvement after the flotation of the Egyptian pound. If we compare the exchange rate of the currency between the end of June 2016 and the beginning of November 2021, we will find that the rate of depreciation of the pound against the dollar is 79 per cent, not what the government claims.
The currency flotation was what I call a managed flotation. This means Central Bank intervention to determine the price, leaving a small margin for a movement that has nothing to do with supply and demand.
The evidence for this is the fall in the exchange rate against the dollar by only 2.4 per cent during the second quarter of 2020, which saw the peak of the negative repercussions of the pandemic on the Egyptian economy. Foreign exchange resources decreased by 12 per cent compared with the first quarter of the same year, although the resources included $7.93bn in foreign loans during the second quarter.
The expansion of external loans contributed to the possibility of the Central Bank’s intervention to maintain the desired exchange rate, which increased from $79.03bn at the end of 2017, to $137.86bn at the end of June 2021, which is the latest available data.
OG: What about the rise in Egyptian remittances from abroad? What is their relationship to the rise in foreign exchange reserves?
MW: The rise in the value of remittances from Egyptians abroad has nothing to do with the government. This is related to international economic conditions and the price of oil, given that most of these workers are in the Arab Gulf states. They are sent to and spent by the workers’ families.
The increase in the cash reserves at the Central Bank is due to the government’s expansion of external borrowing. External debt rose by nearly four times the increase in foreign exchange reserves in the same period. There are many examples of this:
- February 2021: Egypt sold external bonds worth $3.75bn, while the increase in reserves during the month was only $100m.
- September 2021: Egypt sold external bonds worth $3bn, while the increase in reserves during the month was $153m.
- October 2021: Saudi Arabia announced that it had provided Egypt with a deposit of $3bn, in addition to postponing the payment of outstanding loan instalments of $2.6bn, which means providing $5.6bn for the Egyptian administration, but the increase in cash reserves amounted to only $24m.
OG: The government statement indicated a significant increase in revenue from the Suez Canal. What is your view on that?
MW: The report on that limited increase in revenue calls into question the promises made by the Egyptian regime, with the opening of the seventh Suez Canal branch in August 2015, which have not materialised in any of the following years.
It was assumed that the revenue in 2020 would be $9.9bn, from 28,000 ships (a daily average of 77), according to what was published at the time. What was achieved in that year was much less: revenue was $5.6bn, and fewer than 19,000 ships used the canal; an average of fewer than 52 per day.
OG: What about the government’s claim that exports have increased during the current fiscal year?
MW: The official data claims an increase in exports from $21.6bn in the 2015/16 fiscal year to $34.4bn in the 2020/21 fiscal year; a growth of 59 per cent. This is incorrect, as the value of exports in 2020/21, according to Central Bank data, was only $28.7bn, and in 2015/16 it was just $18.7bn.
It is noteworthy that this figure of $28.7bn is still less than what was achieved for Egyptian merchandise exports in the fiscal year 2007/8, that is, 13 years ago, and eight years before the float of the Egyptian pound, when it amounted to $29.4bn.
The most important point is that the citizens of Egypt and the government do not benefit directly from the increase in the value of exports, as the Egyptian Minister of Planning indicated that Egyptian industrial exports have a foreign component of 60 per cent.
OG: To what extent do these official figures reflect the reality of the economic conditions of all Egyptians regarding the prices of basic commodities, services and transportation?
MW: Citizens benefit only from the remittances of Egyptians working abroad, while the revenue from the Suez Canal goes to the government.
Theoretically, company revenues from exports are supposed to be reflected in the conditions of the workers in those companies, but some of the owners leave part of their income abroad or transfer their profits abroad if they are a foreign investors, so the share is left for the workers is reduced.
Moreover, real inflation rates are higher than annual wage increases, in both the public and private sectors. Workers face increases in the prices of goods and services, especially those provided by the government such as electricity, natural gas and fuel.
Hence, most Egyptians have not improved their living conditions as they should have according to the official data about improved Suez Canal revenues, exports and foreign exchange reserves.
OG: The Central Agency for Mobilisation and Statistics in its 2019 report indicated that poverty rates in Egypt had risen to 32 per cent of the total population, but in its last statement, it indicated that this percentage had decreased to 29.7 per cent. How can that be explained?
MW: Periodic research carried out by the Statistics Authority is called the Income and Expenditure Event. It is supposed to take place every two years, and the poverty rate is then calculated. The research conducted in the fiscal year 2017/18 resulted in a poverty rate of 32.5 per cent of the population.
The figure of 29.7 per cent for 2019/20 was, according to the head of the government statistics body, determined before the emergence of Covid-19. This was said in the presence of the prime minister. The figure does not reflect the reality of poverty in Egypt at this stage of the pandemic.
Before that figure was released, Al Borsa Al-Eqtisadiah newspaper said that a state authority had intervened with the Statistics Authority to reduce the poverty rate in order to be consistent with the claims made by the regime.
OG: How do you explain the international economic praise that came in the reports mentioned by the Egyptian Council of Ministers in its latest statement?
MW: The government was smart when it focused on expectations, as its handling of the reports of international bodies in advance was selective, choosing the positive aspects and ignoring negative references in those reports related to the large volume of debt and its negative effects on the economy, as well as government spending on investments due to the very high interest payments on debts. The size of the government economy has grown at the expense of the private sector, and the budget deficit has increased.
OG: How do you compare in numbers Egypt’s external debt in the period between 2010 and 2021?
MW: At the end of 2010, Egypt’s foreign debt was $34.99bn, slightly less than foreign currency reserves at that time.
We have witnessed surges in Egypt’s foreign debt since the end of 2015 and the end of the generous Gulf support in kind and cash. The tendency was to borrow from international and regional institutions and issue bonds in dollars and euros in international markets, and thus the foreign debt increased from $48bn in June 2015 to $138.9bn in June 2021, an increase of $90bn over six years, with an annual average increase of $15bn.
OG: What are the benefits of these foreign loans for Egypt’s state budget?
MW: It increased from $666m in the 2014/15 fiscal year, to $4.2bn in the last fiscal year, 2020/21.
Regarding interest payments, most relate to interest paid for domestic debt due to its large volume and the high-interest rate on domestic debt compared with a lower interest rate on foreign debt. The danger of including combined interest payments in the budget is that it has become the largest single budget expenditure. According to the figures for the first third of the current fiscal year 2021/22, the relative share of debt interest within the budget is 40.7 per cent.
OG: To what extent do these loans and their benefits affect the future of the Egyptian economy?
MW: The cost of foreign debt and interest payments in the last fiscal year 2020/21 was about $15.8bn, despite the postponement of debt repayments to Gulf countries. This figure represents three times the annual income from the Suez Canal and three times the tourism income in the last fiscal year. It’s a burden on the economy, which is required to secure enough dollars to purchase fuel and food and pay the returns of foreign investments in Egypt and elsewhere, forcing it to borrow more to pay for old loans. Egypt has fallen into the debt trap. The amount able to be invested in schools, hospitals, roads and infrastructure has fallen by 52 per cent, which delays the implementation of such vital projects. Longer delays mean increases in costs.
OG: The regime talks about the necessity of borrowing from abroad to support mega projects such as the new administrative capital and infrastructure projects such as the road network and bridges. To what extent do you agree with this economic vision and what is your assessment of it in terms of the pros and cons?
MW: External borrowing is welcome when it tends to establish projects that can be exported. The crisis is that the repayment of these loans extends until the year 2071, which means that the state will work to provide a huge amount of local currency and convert it into dollars to meet the interest payments alone, placing a greater burden on the budget, the economy and future generations.
OG: How do you evaluate the difference between poverty rates in Egypt between 2010 and 2021?
MW: According to official data, which many economists do not trust, the poverty rate increased from 21.6 per cent in 2008/9 to 25.2 per cent for the year 2010/11; 26.3 per cent in 2012/13; 27.8 per cent in 2015/16; 32.5 per cent in 2017/18; then down to 29.7 per cent in 2019/20.
The figure of 29.7 per cent, even if it is a reduction on the previous year, is actually more than when the regime took over in 2013. In other words, according to official data, the national projects that the regime said it had implemented to reduce poverty have failed to do so.
The main reason for the increase in poverty rates is that a real practical programme has not been implemented to confront the deep-rooted poverty in the governorates of Upper Egypt, which have still not taken their right to the development processes that are concentrated in Greater Cairo, Alexandria and industrial cities. Furthermore, programmes targeting the poor through government subsidies do not contribute to their exit from poverty due to the low value of such aid, and the government’s inability to deal with continuous price rises.