Egypt's economic trompe l'oeil

Toy store in the Egyptian capital of Cairo.KHALED DESOUKI / AFP via Getty Images

Egypt's economy is often a question of prospects.

Like one of those visual tests based on drawings that lead you to see one way or another depending on the angle and distance from which you look at them.

In the distance, for example, it is easy to see in her a robust heavyweight, which, however, from close up becomes more of a doped gym croissant that flaunts its upper body while its base languishes.

These contrasts have accelerated since Egypt and the International Monetary Fund (IMF) began a romance five years ago that has evolved into one of the deepest relationships between the organization and an African country in recent years.

In 2016, the IMF granted Cairo a $ 12 billion loan in exchange for a program to straighten out its economy, weighed down by instability caused by the regime's opposition to a democratic transition after the 2011 revolution.

The army and its high involvement in the economy is one of the great burdens

Since the conclusion of that reform plan, in the summer of 2019, Egypt has eliminated serious macroeconomic imbalances and stabilized its financial situation. The country recovered economic growth, tripled its foreign exchange reserves, corrected its balance of payments, lowered unemployment, controlled inflation, achieved a fiscal surplus and a better credit rating, and brought exchange rates together. For the IMF and the Government, it was an unquestionable success. But despite the acclaim and the good looks of the big numbers in the Arab country, the details showed much more questionable achievements of solidity and sustainability.

Because the devil lies in the details. And in Egypt there are many. Its growth is not inclusive: the poverty rate increased from 27.8% in 2015 to 32.5% in 2018. And the sectors that have contributed the most to this growth are the extractive industry, tourism, construction and the canal. Suez, of which the regime remains a large part. The private sector, outside of oil and gas, has contracted almost every month. The majority of foreign investment is concentrated in the extractive sector. The fall in unemployment is due, in large part, to the fall in the active population, and the improvement in the balance of payments, to the increase in remittances and tourism, not exports. The trade deficit is still huge. The fiscal surplus does not include debt repayment. And the increase in foreign exchange reserves has been achieved with loans,that have doubled the external debt between 2016 and 2020.

Indeed, at the end of its program, the IMF admitted that one of the great threats to Egypt was a change in global financial conditions.

And three months later the first case of coronavirus was identified, whose crisis quickly exposed this fragility.

In March 2020, Egypt suffered a horrifying capital flight, in three months its foreign exchange reserves fell by 20%, and some of its main sources of dollars, such as remittances, tourism and natural gas, threatened to suffer a severe setback.

To the rescue

The shock forced the IMF to intervene in May of last year with an emergency loan of 2,770 million dollars and in June with another of 5,200 million in order not to spoil the achievements of the 2016 program. Its intervention, added to the decision of the Government of not imposing a total closure of the economy and the luck that contagions have not been triggered, has made it easier for Egypt to navigate the crisis better than most of the region. "Egypt has not been much affected by the pandemic," admits Alia El Mahdi, professor of economics at Cairo University.

The country was one of the few in the world that grew (3.8%) in 2020, although not in an inclusive way. And despite the uncertainty generated by the delta variant of the virus and the slowness in the vaccination plan - only around 3% of the population have received the first dose - it is trusted that the relaxation of restrictions, underway since June, boost the private sector. Even so, the number of people employed in the first quarter of 2021 fell 2.4%, and domestic demand remains weak.

In addition, a rise in dollar interest rates would affect Egypt's external debt financing costs and its balance of payments by causing an appreciation of the US currency. Rising energy prices, as the world economy recovers, could hit Egypt soon, says economist Amr Adly, a professor at the American University of Cairo. The Mahdi also claims to be aware of the evolution of Egypt's very high external debt, as well as the basic availability of water, which is generating increasing concern about Ethiopia's great dam on the Nile.

In this context, and when the crisis subsides, Egypt will have to return to the path of structural reforms.

And here again, there are discrepancies.

For organizations such as the IMF and the World Bank, the priority inevitably passes through privatization.

But many believe that his agenda does not address the underlying problems of the country's economy.

The first, and in which there is very little room for maneuver, is an authoritarian, opaque government system with rentier economic policies that prioritizes control of the economy by the ruling class in the face of change, according to some analysts.

And here the elephant in the room is the army and its expansive participation in the economy, which represents one of the great obstacles to taking advantage of the reforms of the last five years and unleashing the economic potential of the country.

Beyond that, Egypt lacks a strong industrial sector and relies heavily on importing essential products, so growing means widening its trade deficit and adding pressure on its dollar reserves. "One issue they should pay more attention to is the content and volume of exports, which have to do with industrial deepening and diversification of Egypt's position in the [global] division of labor," says Adly, who also points out the country's energy policy as another fundamental issue that needs to be improved.

The Mahdi agrees on the need to bet on productive sectors that generate positive growth, through policies aimed at substantially increasing exports of manufactures. And a thorough reform of the country's educational system, which currently ranks as one of the least successful and competitive in the world.