The Egyptian media and senior government officials hold the Russia-Ukraine war responsible for the major economic crisis that Egypt has faced since February last year, and even before. According to them, the war cancelled out the “massive gains” made by the economy during the implementation of the reform programme between 2016 and 2021. The cost to the economy in Egypt caused by the war, they claim, is estimated to be billions of dollars.
Three months after the outbreak of the war, Prime Minister Mostafa Madbouly revealed his government’s estimates on 15 May 2022 for the cost of the direct financial impact of the war on Egypt. It was said to be costing the country 130 billion Egyptian pounds ($7.1 bn), with an additional 335bn pounds ($18.3bn) indirectly.
According to senior officials and various media outlets, the war caused $22bn of hot money to be moved out of Egypt, and deterred foreign investment. The scarcity of foreign currency, specifically the US dollar, and thus the floating of the Egyptian pound three times in less than a year, are also blamed on the war in Ukraine, as is the drying up of the vital tourism sector and the collapse of its foreign exchange earnings. It is also, we are told, responsible for major price rises in essential goods, pushing inflation to its highest level in five years.
The blame for the huge and unprecedented general budget deficit is pinned on the war, as is the increase in public debt, the increase in the cost of foreign borrowing, and the increase in the import bill, especially of food produce such as wheat, corn, oils, barley and rice, as well as petroleum derivatives, petrol, diesel and natural gas.
The Egyptian media claim that the war in Ukraine caused the collapse of the purchasing power of citizens; the lack of financial liquidity in their pockets and the loss of their savings; the return of the currency black market and the hoarding of foreign currency instead of local currency; rising unemployment and the spread of extreme poverty; the collapse of the middle class; and stagnant markets with a sharp decline in purchases.
Simply put, the Russia-Ukraine war, claims the media, has impoverished the Egyptian people, hindered the economic reform plan, and prompted the government to resort to foreign borrowing. However, most of this information is false.
What the officials and the media did not say is that the Egyptian economic crisis preceded the war. The country’s drowning in record foreign debt began in November 2016 with the signing of an agreement with the International Monetary Fund, not in February 2022 when Russia invaded Ukraine.
Furthermore, the real currency crisis began with the problems in the tourism sector between 2013 and 2016, then again during the coronavirus pandemic. The crisis deepened with the policy of expanding external borrowing and obtaining about $130 billion in loans within a few years.
The price jumps did not start with the Russia-Ukraine war. They began with the government ignoring vital sectors such as agriculture, production, industry and export. The price hikes fuelled the government’s policy of reducing subsidies for basic commodities, including food, petrol, diesel and gas. They also led to the increase in the cost of public transport, government fees and taxes, and the devaluation of the currency several times, which raised the cost of imported goods.
The war is not responsible for pumping about $100 billion into projects that are not a priority for either the people or the economy. Such projects could have been postponed without damaging the country, including the new administrative capital costing $58 billion; the Suez Canal expansion, $8 billion; the luxury electric rail line at $30 billion; and other major projects that are being built with dollar loans in a country that has a chronic trade deficit of about $30 billion annually, a huge financing gap, and fleeing foreign investments. The war is not responsible for wasting public money.
Yes, the war did have a negative effect on the Egyptian economy, especially tourism and foreign investment, and raised the cost of food imports from Russia and Ukraine, not least wheat. However, food prices in Egypt fell after Russia allowed Ukraine to export grain with guarantees from Turkey and the UN.
The media is trying to portray to the Egyptian people that the suffering of citizens and the economy is catastrophic and prolonged, and that the effects in Egypt outweigh the repercussions on the warring countries themselves, and this is a big lie. The economy in Russia shrunk by just 2.1 per cent during 2022, and the Ukrainian currency has only lost about 30 per cent of its value since the start of the war.
The impact of the Russia-Ukraine war on the Egyptian economy could have been limited and for a short period if the state did not rely on hot money to achieve false stability of the Egyptian pound, and if the state was content with strategic goods, such as wheat, corn, oils, rice and medicines. This could also have been the case if foreign borrowing was reined-in; if there was no misuse of the state’s limited foreign currency reserves; and if the state avoided the wrong economic policies based on preferring borrowing over local production and digging into citizens’ pockets and increasing taxes and fees. Moreover, the government could have limited the effects if they ended its policy of the excessive expansion of fierce neoliberalism that impoverished millions, causing the collapse of the middle class and pushing them into poverty.
This article first appeared in Arabic in Al-Araby Al-Jadeed on 26 February 2023
The views expressed in this article belong to the author and do not necessarily reflect the editorial policy of Middle East Monitor.