Egypt’s collapse

The country of 110 million people is in economic dire straits, but it’s also in a strategically crucial region that is already aflame. Egypt is simply too big to fail.

Fears are growing over the slow-motion collapse of Egypt’s economy, and the possible knock-on effects on the Middle East and wider region, including Europe. For decades, Egypt has been a chronic underperformer, with a rigid and outdated economy dominated by state interests – particularly those run by the country’s all-powerful military. But in recent years things have taken a sharp turn for the worse.

President Abdel Fattah al-Sisi, the ex-general who took power in a 2013 coup and assumed the presidency the following year, has proved a disastrous economic manager. Rather than dismantle the military’s long-standing chokehold over the economy, Sisi has reinforced it – and gone on a debt-fuelled spending splurge on prestige mega-projects that the country can’t afford. Egypt was already badly hit by the sharp rise in food prices following Russia’s invasion of Ukraine in February 2022. And now the conflict in Gaza, and its spill over into the Red Sea, restricting access to the Suez Canal, has made things even worse.

Tourism brought in about $14bn last year, accounting for 14% of dollar inflows, but has collapsed since the start of the Gaza war, on Egypt’s north-eastern border, in October. Separately, the Suez Canal normally accounts for about 30% of containership traffic and earns Egypt almost $10bn a year – but the attacks on shipping by the Houthi rebels who control much of western Yemen have cut traffic by about half.

Egypt is also home to the eastern Mediterranean’s only two gas liquefaction facilities, where it processes and re-exports gas from Israel’s southern gas fields. But those re-exports have fallen 50% because of war-related disruption. Egypt, already struggling with an influx of 450,000 Sudanese refugees since conflict re-erupted in its southern neighbour ten months ago, is now facing a second humanitarian crisis on its doorstep, and the possibility of more than a million Palestinian refugees. Another big source of income – remittances home from Egypt’s huge population living around the World– is drying up due to fears over transferring money into the country’s tanking currency, the Egyptian pound. Foreign investors are also withdrawing capital or demanding ever higher interest rates.

The Egyptian Pound has been devalued three times since early 2022, losing 70% of its value. And that’s if you value it at the official exchange rate of 30-31 pounds per dollar in the formal banking sector, where the supply of foreign currency is minimal.

A parallel market has emerged, with the Pound more than halving again, to about 70 per dollar. The plunging currency helped push inflation to an annual rate of 34% in December, up from 6% two years ago. Over the past decade, fiscal deficits have averaged 9.5% of GDP. As such, the government has accumulated a massive public debt of more than 90% of GDP. And with the currency in free fall. It now spends 60% of the national budget servicing it. External debt, including loans from the International Monetary Fund (IMF) rose from an average of $40bn in the early 2010s to $130bn by 2020, including nearly 70% in long-term debt. Since then, it has risen further, to around $160bn, and debt repayment obligations are forecast to reach $29bn this year, or 8% of GDP.

Nevertheless, costly grandiose projects continue to be developed. The mightiest and most obscene of Sisi’s plans is the new capital being built in the desert east of Cairo. With work still in its first phase, some $60bn has already been spent, but planned financing from the UAE and China has been pulled. Other costly proposals include a new ‘summer capital’ on the north coast, a nuclear-power plant (in a country with excess electricity), a new ‘sustainable’ city in the Nile delta, and the revival of a wildly ambitious Mubarak-era project, known as Toshka, that would in effect create a second Nile valley by diverting water using canals. What the projects have in common is that they are of dubious economic value. But are politically symbolic. The message may have been that Egypt can still do great things. But they’ve become unsustainable burdens on the country.

For the time being, the Egyptian economy and government are being propped up by a mix of new loans from allies in the UAE and Saudi Arabia, and repeated IMF bailouts. Egypt is now the IMF’s second-biggest debtor. In February, Abu Dhabi stepped in with $35bn of investment, a sum that should help secure further IMF support.

In the long term, the country’s prospects depend on cutting the role of the state and bureaucracy, controlling the public finances, and building on its growing sectors – such as agricultural, herbal and horticulture businesses, building materials, garments and light manufactured goods, and information technology. In the short run, it needs to kick-start economic reforms by devaluing its currency formally. But to do so would see its dollar debts surge relative to GDP, and raise the price of food, especially grains, where Egypt relies on imports.

Ideally, Egypt needs to restructure its debts, live within its means and get the army out of business. But there’s no sign that Sisi, who was re-elected in an unfree and unfair election in December, has any intention of doing so. And indeed, such austerity would be highly dangerous – raising the prospect of years of default, unrest and violence.

Egypt’s problems are threatening to tip it over the edge and losing the diplomatic clout it has always had in the region, to the likes of the UAE and Qatar. But the same problems are, paradoxically, increasing its negotiating power when it comes to attracting outside help. When so much of the Middle East is aflame, a major nation of 110 million people, in such a strategically crucial location, is simply too big to fail.

Against its economic judgement, the World will bail Egypt out again. However, it is not a country to invest in and Egyptian Nationals will be better served moving funds to a safer haven.

29th April 2024