Sisi’s equation: inflation in exchange for borrowing

Abdel Fattah El-Sisi received the Human Development Report in Egypt for the year 2021 in mid-September, and the Egyptian political system celebrated the report, which was issued after a 10-year absence.

The report praised what the post-2013 regime had achieved. Its introduction supported its path, despite the repression associated with its inception, stating “Egypt has gone through many major political, social and economic developments since the revolution in January 2011, culminating in the events of June 2013, when the country was able to put an end to political conflict and extremism and regain control over its capabilities. The country then began a new phase aimed at achieving sustainable economic and social development, strengthening political stability and security, combating terrorism, protecting borders, improving public services, consolidating principles of governance, and tackling corruption.”

In its executive summary, the report noted: “Various international institutions have praised the success of the economic reform process in Egypt. The International Monetary Fund (IMF), in successive reports on the performance of Egypt’s economy, has said that Egypt’s economy continues to perform well despite the less-than-positive global conditions. This performance had led to a rise in the growth rate to 5.4 per cent by fiscal year 2020/2021, while the budget deficit had decreased to 7.6 per cent of GDP and the unemployment rate to 7.3 per cent. In addition, there has been a decrease in the current account deficit, a recovery in activity in tourism (prior to the COVID-19 pandemic) and a decrease in total government debt, supported by financial control measures and high growth.”

It is important to explain some concepts so that the picture is clearer; the GDP is the Gross Domestic Product, which is the final value of all goods and services within a country during a specific period of time, and it reflects the economic condition of the country by estimating the size of the economy and the growth rate of this country. There are several ways to calculate it, but the expenditure method is the one through which the GDP number can be maximised if the country is productively weak, so it will be appropriate to view the Egyptian case through it.

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Calculating the GDP by accounting for expenditures includes infrastructure expenditures such as bridges, including the construction of prisons, schools and hospitals, as all state expenditures are included in the calculation of this value. The growth rate is calculated by comparing the new year with the previous year. If a country’s gross domestic product was $100 billion, and the following year it became $102 billion, the annual growth rate for this country reached 2 per cent.

According to the Egyptian Minister of Planning, the growth rate in Egypt may reach 5.4 per cent by the end of this year, but will the picture be this bright if we focus on the detailed situation away from the total numbers? In other words, do these “positive” numbers reflect on the reality of citizens in terms of wages and prices?

In mid-March, Sisi decided to raise the minimum wage from 1,200 Egyptian pounds to 2,400 Egyptian pounds (1 USD equals approximately 15.6 Egyptian pounds), and the total increases in wages, bonuses and pensions will reach 92.5 billion Egyptian pounds (about $6 billion), but is 2,400 Egyptian pounds enough for a family of four?

According to the Central Agency for Public Mobilisation and Statistics, the inflation rate rose in October 2021 by 7.3 per cent, compared to 4.6 per cent in 2020. The Agency attributed this increase to the rise in the prices of meat, poultry, dairy, types of cheese, eggs, fish and seafood, grains and bread, rent for housing, private transportation expenses, newspapers, books and stationery, pre-primary and basic education expenses, higher education expenses, secondary and technical education expenses and health care expenses.

The Egyptian Minister of Supply also announced raising the price of a litre of vegetable oil from 21 to 25 Egyptian pounds, starting in November. According to the Minister, Egypt imports 97 per cent of its crude oil needs. The Egyptian government also raised the prices of household gas and the commercial sector by rates ranging from 4.2 per cent to 6.4 per cent, while gas prices for consumption-intensive factories (iron, steel, cement, fertilisers, and petrochemicals) increased by 28 per cent, to reach $5.75 per million thermal units. This increase comes at a time when global gas prices fell by 8 per cent, falling to $4.89 per million thermal units.

These increases will lead to an increase in food prices to varying degrees, especially the increase in gas prices, which led to an increase in the prices of building materials, as well as the prices of fertilisers on which the agricultural sector is based and, consequently, the prices of vegetables and fruits.

The increase in meat and poultry prices is due to the significant increase in the price per ton of feed, which ranges between 8,100 and 8,150 Egyptian pounds, compared to 5,000 Egyptian pounds last year. Egypt imports about 80 per cent of the corn, beans and soybeans used in poultry and animal feed.

In light of these increases, which are distributed between basic food needs, housing and transportation needs, is it possible to rely on government data that gives positive macroeconomic indicators? This is assuming it is accurate.

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According to the French economist, Jean-Pierre Sereni, “The Egyptian government’s financial strategy since its 2016 accord with the International Monetary Fund (IMF) has consisted in remunerating foreign capital lavishly in order to finance the national budget deficit as well as the current account deficit in the balance of payments. Year in and year out, its overall financing needs flirt with the incredible figure of 35 per cent of the GNP, whereas even in 2020—when the Covid-19 pandemic peaked—they never rose above 10 per cent in the principal Western countries. Cairo offers some of the world’s highest interest rates, 13 to 14 per cent, per annum for loans in the local currency, 7 to 8 per cent for loans in foreign currencies. According to the US credit rating agency, Bloomberg, which keeps close tabs on 50 emerging countries, Egypt’s real rates of interest (nominal rate minus rate of inflation) are the highest in the world,” adding that “Consumers are being made to pay for the handouts to foreign speculators.”

This is the equation offered by the Egyptian political system: allowing inflation so that consumers bear the bills for irrational government expenditures on infrastructure, ignoring the priority focusing spending on education and health. In exchange for this inflation and popular spending, borrowing and debt increase, consuming 90.6 per cent of the Egyptian gross product. With these terrifying numbers, the political system is still claiming reforms, and international institutions and governments are providing unlimited support to one of the most brutal repressive regimes in the world.

This article first appeared in Arabic in Arabi21 on 14 December 2021

The views expressed in this article belong to the author and do not necessarily reflect the editorial policy of Middle East Monitor.