Can Sisi ride out coronavirus and Egypt's crippled economy?

Can Sisi ride out coronavirus and Egypt's crippled economy?
Comment: While the army continues to tighten its grip on the economy, Egypt is facing new challenges, including a towering debt the collapse of the tourist trade, writes Jean-Pierre Sereni.
9 min read
27 Mar, 2020
The capital city under construction has been dubbed 'New Dubai' [AFP]
Field Marshal President Abdel Fattah al-Sisi, already dangerously threatened by the fallout from his incoherent and ruinous economic and financial policies, is now faced with unprecedented external shocks.

Large scale public works - for the most part perfectly useless - and pharaonic housing projects have swallowed up tens of billions of dollars supplied by gullible investors in the Gulf countries, taken in by a Ponzi scheme in disguise. 

Yet in just a few weeks, confidence has vanished the world over, the coronavirus has paralysed the financial and oil markets, the Saudi royal family - Sisi's main Arab backers - has burst apart, and on 7 March, Lebanon, a long-time subscriber to the Ponzi scheme, defaulted on its Eurobond debt of $1.2 billion. 

What happens when the markets shut down and no one invests their savings any more?

Over one third under the poverty line

On paper, the Egyptian economy is in good health, with a growth rate just over 5 percent in the second half of 2019, its foreign exchange reserves are on the upswing again, and inflation pretty much under control - all encouraging signs for regional and European financial markets.

Behind this spectacular turn of fortune is a three-year agreement signed in 2016 with the International Monetary Fund (IMF), the ninth since 1962. There's nothing very original about it; in return for a loan of $12 billion, exchange controls were abolished, the Egyptian pound was devalued by 50 percent, the interest rate was set well above that of inflation, and subsidies were slashed.

Needless to say, poverty skyrocketed for over 100 million people, with 32.5 percent of the population now living
under the poverty line, a figure obviously based on norms well below international standards.

Ever since he took power in 2013, President Sisi has been in search of foreign capital to jump-start an Egyptian economy severely damaged by the 2008–2009 economic crisis, by the Tahrir Square revolution and by the mismanagement of the only Egyptian president ever to emanate from the Muslim Brotherhood, Mohamed Morsi.

Yet in just a few weeks, confidence has vanished the world over, and the coronavirus has paralysed the financial and oil markets

At first, the capital came from the Gulf oil monarchies, anxious to help the new regime which had ousted their bête noire. It took the form of government loans, currency deposits in local banks or public and private real estate investments. But these failed to stabilise the economy.

Next came the IMF and its allies, and for four years they contributed, according to the finance minister, $200 billion dollars. In just a few months, the conditions of foreign currency funding were overturned, interest rates became positive, much higher than inflation, exchange rates were stabilised, and even became stronger against the dollar.

Foreign debt consumes half the revenue

The purchase of Egyptian treasury bonds with foreign currency loans maturing in less than a year became a very lucrative operation, offering outstanding returns at a time when zero rates have become the norm on the major western exchanges.

The rates posted in 2018 were around 16 percent, they dropped a bit in 2019, but this was more than made up for by that year's foreign exchange gains. As in a Ponzi scheme, a good share of the incoming funds goes to reimbursing outgoing investors, at a proportion that varies from 35 to 45 percent of the annual sums involved. This amounts to about $40 to $45 billion dollars.

[Click to enlarge]

Funds rose by 47 percent over three years. Currently, the fortunate investors - non-residents, according to the IMF, often wealthy individuals in Gulf countries - see only the profits of the operation, and are unconcerned about its sustainability.

Yet servicing the interest on the public debt, domestic and foreign, already absorbs 50 percent of the state's budgetary income, an all-time high. Worse still, according to the experts, Egyptian statistics do not take into account certain loans, especially those from China and Russia. These must be added to Egyptian indebtedness, which the IMF, no doubt over-optimistically predicts will decline by 2023.

Are the bases of the Egyptian economy solid enough to deal with this avalanche of debts?

Its $45 billion in foreign currency reserves will provide only a temporary respite if the crisis deepens. Sooner or later the country will have to meet its obligations. For the most part, its external balances still rest on services, the notorious "Big Five" i.e., the funds sent home by the 10 million expatriates - 10 percent of the population -, the Suez Canal transit fees, the revenue generated in particular by the 9 million tourists who visit the Valley of the Kings each year, and last but not least, the aid contributed by western countries, primarily the United States, by far Cairo's principal military ally.

Read more: Egypt declares full nationwide lock-down, night time curfew in fight against coronavirus

To these must be added, thanks to the efforts of the Italian firm ENI, a new raw material. Since just last year, Egypt has become a major producer of natural gas.

So for 2019, the total can be quickly calculated: Nearly $30 billion from expat Egyptians, almost $6 billion from the Canal, and $14 billion from the tourist trade, i.e., a grand total of $50 billion, not including the dwindling foreign aid and the increasing revenue from the recently discovered natural gas.

This bonanza pays for a very large share of the country's imports, but is obviously very fragile, especially now. A prolonged slowdown in Europe, lasting collapse of the price of oil as a result of the coronavirus and the Saudi decision to glut the market, would be enough to shrink the the earnings from Egyptians abroad, and play havoc with the crowds of tourists. Reservations have already fallen by 80 percent.

Exports only cover one third of imports

Among the consequences of the IMF plan, the gravest failure has been its inability to boost goods exports which practically never budged between 2016 and 2019. The Purchasing Managers Index (PMI) published by IHS Markit, which provides an overview of the private market activity exclusive of petroleum, has gone down during 48 of the last 56 months.

And yet, it's this activity which holds the country's (slim) hopes of being able to better finance its trade balance and create indispensable jobs for the 3.5 million young people who will be entering the labour market between now and 2025.

"The rate of male employment has been declining, from 71 percent in 2010 to 63 percent in 2016," as the World Bank has observed, reflecting a baby boom and the low demand for workers on the part of too few companies.

Among the consequences of the IMF plan, the gravest failure has been its inability to boost goods exports

The IMF's experts and the Egyptian military do not share the same dream. The IMF recommends "a new wave of reforms to boost the private sector", while the military has no use for civilians, and prefers to build a new capital city in the desert to replace Cairo with its traffic jams and rebellious population.

Some 60km to the west of Cairo lies the biggest public works project in all of Africa: on an area seven times that of Paris, a population of six million is meant to occupy the new ministry buildings lined up in parade formation, and the row upon row of mansion blocks.

This "New Dubai" as the nameless city has been dubbed, while a commission has wrangled for over two years trying to decide what to call it, is a project personally conceived of by the president.

Its cost is unknown and estimations waver between $50 and $300 billion. It is also unclear whether it is accounted for in the official figures for the Egyptian public debt.

"Sisi wants to leave the bureaucrats in the old capital and take only the officers with him" jokes a man who has long been familiar with what goes on in the Nile Valley.

Who is paying the bill? Probably the Chinese in part, and in larger part, the state, thanks to its Ponzi scheme.

In 2017-2018, the public sector's share (state + public companies) of all investments was 58 percent, 30 to 40 points higher than Malaysia or Poland.

If we add the direct contributions of the major petroleum companies who have invested heavily in recent years in gas production, it's clear that the national private sector does not carry much weight and is in fact excluded from the economic and financial playing field. It has neither access to the Ponzi scheme, nor to the regime's vast projects, nor is it privy to its economic policies.

Unprecedented military activism

Indeed, the military regime, autocratic by nature, has no civilian partners, at best a clientele of state agents whose loyalty to the chief is a function of the privileges he hands out.

The "cronies" and "favourites" of the Mubarak era, who benefited from the privatisations and multiple other advantages at the turn of the new century, are out of jail now, but are completely sidelined. The military corporations have taken their place. In a large Cairo hospital, dozens of service providers of every kind were dismissed overnight and replaced by a military company.

This economic activism among the military is an unprecedented phenomenon. They have turned to many new sectors such as medicine imports and motorway construction, not to mention all the services, large and small.

The officers' preferences go to large-sale projects like the Suez Canal doubling, given the go-ahead before the IMF came on the scene. They are determined by national pride rather than economic calculations. It is said that a giant expressway spanning Cairo's working class neighbourhoods and the Nile, providing a stoplight free connection with the new capital, was supplemented at the last minute with two pedestrian walkways. Why? So that the project would figure in the Guinness Book of Records, topping an equally gigantic project by a big Turkish corporation.

But the sectors that interest the military are not very attractive in the eyes of the Egyptian upper classes. They didn't buy the apartments in the new desert cities built a good 30 years ago, and will probably be just as reluctant to buy into "New Dubai".

Can the military influence the private sector? President Sisi recently declared his intention of having a dozen affiliates of the National Service Projects Organisation (NSPO), one of the three branches of the military industry, created in 1979, listed on the Stock Exchange.

But to do this would require introducing a minimal degree of transparency into the accounts of these firms, a practice which is quite foreign to Egyptian managers, civilian or military.

Jean-Pierre Sereni is a journalist and author, specialising in north Africa and the Gulf.

Follow him on Twitter: @jeanpieeresrn

This article was originally by our partners at OrientXXI

Opinions expressed in this article remain those of the author and do not necessarily represent those of The New Arab, its editorial board or staff.