Mustafa Metin BaşbayIs the Egyptian Economy Really a Success Story?
Abstract: In recent years, international commentators have increasingly interpreted the Egyptian economy as a success story due to the country’s strong growth performance and improving macroeconomic fundamentals. Pro-government Egyptian media have used this narrative of a ‘success story’ to imply that the economy has fared better under President Sisi than former President Morsi. The secondary implication is that strong-man rule is therefore perhaps better for the country than democracy after all. Careful inspection, however, demonstrates that whatever financial relief the country has experienced in recent years has been due to foreign capital inflows to the country. Official lenders approve of the Sisi administration for its geopolitical positioning while private investors merely seek the high interest rates guaranteed by the IMF programme. Excessive borrowing, most of which is short-term carry trade or is otherwise used for unproductive construction projects, is not sustainable and will likely lead to financial instability in the future.
Introduction
In recent years, the Egyptian economy has been widely praised as a success story., President Sisi’s administration can claim its stabilization efforts, supported by the IMF programme, to have worked and contributed to the country’s strong economic performance. The African Development Bank, for instance, states that “Egypt’s economic growth has been strong and resilient since the economic reforms initiated in 2016.”[i] It has been argued that even in the face of the pandemic, Egypt has fared relatively well compared to other emerging economies and has maintained its growth performance. Indeed, Egypt’s growth rate has steadily increased since 2013, reaching its peak in 2019 before the pandemic, and the unemployment rate has declined considerably. The implications of this success story also extend to the political sphere as proponents of the Sisi regime suggest that the Egyptian economy’s recent economic performance demonstrates that the country functions better under strongman rule.[ii]
This narrative breaks down, however, when one realizes that whatever financial relief the country may have experienced in recent years is mostly based on excessive and expensive foreign borrowing. The government is taking large amounts of IMF loans that are conditional on structural adjustment policies as well as financial support from Gulf countries such as Saudi Arabia and the United Arab Emirates. Meanwhile, private lenders are flooding the country’s financial markets with capital inflows for high and easy returns. But this financial bonanza is not creating sustainable long-term economic growth because most of the resources flowing to the country are either short-term speculative carry trade or are spent on extravagant construction projects which do not create enough economic surplus to pay back external debts while continuing to add to the country’s future debt obligations.
It is also tenable to argue that official lenders such as the IMF and Gulf countries favor Egypt for its geostrategic positioning in international politics more than its economic policies. Namely, contrary to the previous Morsi government, the Sisi administration aligns with major powers in regional diplomatic issues, especially concerning issues such as the Palestine-Israel conflict, the Libyan crisis, and maritime disputes in the Mediterranean. It is, furthermore, less of a threat to other authoritarian regimes in the region as it shares their animosity towards established opposition groups (e.g. the Muslim Brotherhood). Under these conditions, official lenders and donor countries continue to support the country economically, and thus foreign private lenders also consider the Egyptian economy a less risky investment at least in the short term.
The trend of increasing debts, denominated in dollars and due back at high interest rates, will most likely result in financial instability. The country’s total external debt stock has already more than tripled since 2014, reaching a record $137 billion by the end of 2021.[iii] Most of the capital lending that comes through private lenders is short-term (i.e., hot money) which does not really put its trust in the country for long-term growth. At one point, foreign lenders will start to suspect that their loans will not be repaid, which can create a capital outflow that would lead to a real economic crisis. This is a scenario which has played out many times in other developing countries in the past (e.g. 1980s’ Latin America crisis, 1997 East Asian crisis). In such a crisis, a sudden drought of foreign exchange coupled with a sharp depreciation of the local currency leaves businesses as well as the government bankrupt, leading to mass unemployment and prolonged depression.