The economics behind Egypt's political unrest

The economics behind Egypt's political unrest
Analysis: Egypt's economy is growing, but inequality is leaving millions trapped in poverty, writes Alaa Bayoumi.
5 min read
28 February, 2017
An IMF bailout helped restore confidence among foreign investors, but many languish in poverty [AFP]

Since coming to power through a military coup in July 2013, the ruling regime in Egypt has used an iron fist to rule the country and has maintained its grip on power by killing hundreds of activists, jailing tens of thousands, and curtailing freedoms.

In return, it has promised Egyptians stability and economic prosperity.

Unfulfilled promises

Initially, the regime announced several mega-economic projects, promising to revamp the economy and accelerate economic growth counting on tens of billions of dollars in Gulf aid.

It said it will dig a second Suez Canal, build a new capital, establish a new network of major roads throughout the country, and attract foreign investors. 

Yet by the end of last year, Egypt faced several economic problems; Gulf aid had either stopped or became minimal, the expansion of the Suez Canal did not produce any quick economic returns, and many of the new projects announced by the government were either halted or provided little economic return.

The regime was able to speed up economic growth to about 3.5 percent compared to only two percent in the two years following the revolution, but the overall economy suffered on a variety of levels, including a high unemployment rate (12.5 percent), rising debts - both domestic (2.7 trillion EGP/$172bn) and foreign ($60bn), and more than 26 percent of Egyptians living under the poverty line.

This is in addition to a large budget deficit, a shortage of foreign aid and investment, depleting foreign reserves and a depreciating currency.

In November, the government was forced to accept a $12 billion loan from the International Monetary Fund - with painful concessions. It had to float the pound and further cut fuel subsidies. Within weeks, the price of the US dollar more than doubled against the pound, prices of food and basic supplies rose substantially, and inflation rose to historical levels (above 25 percent).

Recent developments

Egyptians were surprised at the end of January to see the Egyptian pound rebound by about 15 percent against the dollar.

The good news was cheered by the government as a vindication of its economic policies, but was met with scepticism by the opposition and with confusion by the public

The good news was cheered by the government as a vindication of its economic policies, but was met with scepticism by the opposition and with confusion by the public. Ordinary citizens could not make sense of the new developments amid painful economic pressure and a deeply divided political atmosphere.

In such context, a deeper and objective look is required to help understand the recent economic developments and how they could affect the country's economy and political stability in the foreseen future.

History could provide many lessons. But, before going back in time, it is worth noting that the recent gains by the Egyptian pound against the dollar were widely attributed to four main short-term factors:

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First, the devaluation of the pound helped relieve Egypt's central bank of the daunting task of backing the pound against the dollar. The pound was left to devalue, saving the central bank's much-needed dollar reserves.

Second, the IMF loan and associated economic reform plan served as a guarantee for international investors that Egypt could pay back its foreign commitments. Therefore, when the Egyptian government offered in January to sell some bonds on the international market, it was able to sell $4 billion-worth of debt.

Third, the dollar surge forced importers to scale back their activities, saving more dollars for the overall economy.

Finally, after the dollar stabilised at a higher price, Egyptians abroad may have felt encouraged to transfer more dollars to Egypt.

These four factors helped strengthen the pound against the dollar by about 15 percent. Still, their positive impact was not immediately felt by the ordinary citizen - who still suffers from high prices and high rates of inflation, unemployment and families under the poverty line.

The government and the IMF believe that recent reforms helped save the country's foreign reserves and helped the government cut its spending, deficit, and debt.

And, they could also help contribute to a higher GDP growth rate in the near future, as economic growth is expected to reach around four percent this year. But for citizens to feel economic relief much more has to be done. The country must do more to fight inequality, corruption and unemployment, and to encourage exports.

In summary, recent economic reforms may help the economy grow at higher rate in the near future - but they will not quickly lead to better living standards as the economy continues to suffer from long-term structural problems. 

Data also shows that continuous economic growth did not significantly improve the lives of millions of Egyptians

Lessons from history

History tells a similar story. The latest data on Egypt's economic growth show an economy that continues to grow despite domestic and regional turmoil. Since 2004, Egypt did not experience any negative economic growth - and its total annual GDP jumped from $79 billion to $330 billion in 2015.

Even during the two years after the 2011 revolution, the Egyptian economy continued to grow, albeit at a slower rate, pushed mainly by strong domestic consumption.

But data also shows that continuous economic growth did not significantly improve the lives of millions of Egyptians for at least two major reasons:

First, the Egyptian population continues to grow rapidly. Over the past two decades, the population grew by about 50 percent to 92 billion people. Second, Egypt faces a clear income distribution problem. Over the past 16 years, Egypt's GDP grew by more than 300 percent - but the percentage of Egyptians living in poverty rose from 16.7 percent to more than 26 percent.

Such contention between fast economic growth and rising poverty could explain the country's spreading political unrest.

Egypt's economy is not stagnant. It continues to grow. But the benefits of such growth are not evenly distributed. Widespread inequality, poverty, unemployment, and corruption are fuelling the anger of millions of people who can see opportunity and economic growth from which they cannot benefit.

What angers Egyptians is not that their country is getting poorer. On the contrary, they feel angry because they see a growing economy that is leaving millions behind. Recent economic developments in Egypt only seem to entrench such feelings of dissatisfaction and resent.

Alaa Bayoumi is an Egyptian journalist and the author of two books studying US foreign policy in the Middle East. He also writes on democratic transition in the Arab world.

Follow him on Twitter: @Alaabayoumi