Monday, the Central Bank of Egypt decided, in a special meeting, to raise the overnight interest rates for deposits, lending and primary operations with 100 points (1 per cent) to record 9.25 per cent, 10.25 per cent and 9.75 per cent, respectively.
As the Bank expressed its belief in “the resilience of the exchange rate as a tool to accommodate the shockwaves”, the exchange rate of the American dollar increased after the meeting from 15.7 EGP up to 18.54 EGP (in rising trend) in what the people called as “the second floating” about the first devaluation of the Egyptian pound in November 2015.
According to the press statement of the meeting, the Bank attributed the decision to the “local inflationary pressures and excessive pressure on the balance of trade.” However, several economic commentators challenged the Bank’s explanation directing the charge to specific economic policies made by the Egyptian government over the past few years, leading to the current vulnerability of the Egyptian economy. Therefore, this report aims at shedding light on many policies, other than the international crises that brought the Egyptian economy to the current impasse.
High-cost low-profit mega projects
Months after taking office, Abdel Fattah Al-Sisi declared the start of constructing a new branch of the Suez Canal. The mega project that cost $8.2 billion while Egypt was suffering a severe shortage of the greenback reserve was said to double the yields of the canal to hit $13.2 billion. Still, several economic experts warned that the project would achieve no specific increase in the canal revenues in the short term regarding the slow growth rates of international trade. In 2021, the Suez Canal revenues hardly exceeded $6 billion annually. Nevertheless, Al-Sisi, who said that he does not depend on feasibility studies, defended his project, saying that it was to “raise the morale of the Egyptians.”
Two years later, Sisi, obsessed with his profile, declared a new, more extensive project, the New Administrative Capital, proving that he had not learned the New Suez Canal lesson. After the Emirati investment was withdrawn in 2015, the military and the government injected assets to finish the first phase, which cost about $25 billion.
Aside from the mega projects, the investments in real estate, roads, and infrastructure acquired the largest share of the government spending with 71 per cent, letting minimal investments for the other sectors.
Sisi’s obsession with spectacular feats even raised the cost of his infeasible infrastructure and real estate projects through his insistence on the projects being completed ahead of schedule. For example, according to the senior researcher of Carnegie Middle East Centre, Yezid Sayigh, “Al-Sisi’s demand in 2014 that the expansion of the Suez Canal is accomplished in one year (rather than the three years that army engineers had estimated) inflated the bill from $4 billion to over $8 billion.”
The governmental improvidence continued even after the Covid-19 pandemic, when the Egyptian government contracted with the German giant, Siemens, to construct a high-speed line. The government said the total cost of a 1000km network amounts to EGP 360 billion (then about $22.5 billion), while Siemens reported the order value of the initial line is around $3 billion. Siemens’ deal came after concluding another one with Bombardier-led consortium in 2019 with $4.5 billion.
In conclusion, what the government had saved through harsh austerity and social thrift was wasted on low-profit projects exhausting the national income.
To finance such capital-consuming investments, the Egyptian government turned to external loans. As a result, the Egyptian foreign debt peaked dramatically from EGP 40 billion in 2015 to hit just below USD 140 billion in 2021 (USD 137.420 billion), with a 350 per cent increase within six years. Such a huge figure was supposed to convert Egypt into a powerful, productive economy had it been wisely invested in value-producing projects. Instead, the public debt increased steadily after the initial decline in 2017 to settle at 91.5 per cent of the GDP.
The spiking public debt burdened the Egyptian budget, with its dues and interests consuming 30-40 per cent of its total value. In 2018, the Egyptian Minister of Finance, Mohamed Mait, said in a TV interview that the government loans were to pay off the debt burdens, which means that the country entered a vicious cycle of loaning.
According to Bloomberg, Egypt counted on the world’s highest real interest rate to attract foreign investors or the so-called “hot money” for its local debt. Hot money is a well-known economic slang indicating the international investors who move financials between the country’s financial assets to extract quick profit. In December 2021, the foreign holdings of Egypt’s treasury bills amounted to $20.423 billion. However, after the Russian invasion of Ukraine, Egypt witnessed a dollar exodus,, with estimations ranging between $300 million and 3 per cent billion outflows.
Like many emerging markets, Egypt depends on hot money to procure her ongoing requirements of greenback financials. According to the Economist, Bruno Bonizzi, high-interest rates to attract cash inflows in emerging economics create “subordinate financialisation”. The investors extract the surplus-value and resources out of the emerging economies.
In addition, the high-interest rates direct the foreign investors into the portfolio investment as a safe, quick and profitable investment away from the direct investment, which means long-term investments in productive projects. This appears in the stagnation of direct foreign investment in Egypt at USD 5-8 billion annually, most concentrated in the energy and natural resources sector.
Ironically, while Egypt was cutting food and energy subsidies, the country ranked the world’s third-largest importer of arms in 2014-2018, according to SIPRI. Stockholm Institute reported again in 2021, Egypt’s arms imports increased by 136 per cent in 2015-2020 compared to 2010-2015.
The most notable deal was in 2015, when Egypt purchased 24 Rafale fighter jets along with two advanced warships from France for €5.3 billion. Another order of 30 Rafale jets was announced in 2021 for €3.75 billion to be delivered in 2024-2026. According to the Egyptian Defence Ministry, the deal is financed by a 10-year loan. In 2020, and despite human rights criticism, Egypt purchased 2 FREMM frigates from Italy for approximately €1.2 billion. The Italian Il Fatto Quotidiano reported the frigates deal is part of a larger €9 billion order called by Italian reports as “the deal of the century” as it will be the most prominent Italian arms sales since WWII.
The Egyptian military required modernisation and diversify its equipment. Still, many purchases were not well-planned according to a strategy to form a modern integrated army, but rather motivated by political and personal interests of the Egyptian high-profile officials and generals. So, the bill of the armament was doubled, out of the blue.
Most recently, the story of Safwan Thabet, the Egyptian businessman, has been trending in Egypt as the owner of milk food industries giant, Juhayna, has been put in prison, and his son, Seif, the CEO of Juhayna, since 2020. However, no clear charges were directed to Thabet and Seif, except for the propaganda charges of funding terrorism. At the same time, reports said Thabet was arrested after refusing to sell his company’s main share to the military.
Thabet was only one case among numerous Egyptian businessmen, who complained of the expansive military business that disrupts the free-market rules as the military business gets particular advantages, including the Egyptian tycoon, Naguib Sawiris, who told AFP, “Companies that are government-owned or with the military don’t pay taxes or customs,” adding, “We, of course, can’t do that, so the competition from the beginning is unfair.” Even the IMF indicated the negative effect of the state-owned business on the competition.
The negative effect of the military business is not confined to unfair competition. According to Carnegie Middle East Centre researchers, the military industry is poorly efficient considering its overall savings. It also suffers from maladministration and corruption due to the domination of the ex-officers and interest networks on its dynamics, without oversight or parliamentary review. Another risk is that the military business plays a weak role in enhancing further opportunities of the Egyptian economy through localising technology, for example.
Sisi bears significant responsibility for making these five mistakes; the effects of his failed economic decisions began to appear violently on the Egyptians, the high prices and the increase in the price of a loaf of bread, gas cylinders and other basic needs and commodities prompted a large sector of Egyptians to express their anger at Sisi and hold him solely responsible for this accelerating collapse.
The views expressed in this article belong to the author and do not necessarily reflect the editorial policy of Middle East Monitor.