Sisi’s economic vision faces its reckoning as Egypt’s currency slides
African Energy
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By John Hamilton | 6 minute read
Egypt has a good claim to have been the most dynamic of all African countries in 2022, but 2023 may be its year of reckoning. The currency crisis now ravaging the economy could bring President Abdel Fattah el-Sisi’s futuristic edifice of renewables, green hydrogen (GH2), new cities, real estate, electric trains, sea water desalination and social infrastructure crashing down unless he can keep on side a wide coalition. This includes the IMF and Gulf monarchies which are Egypt’s largest creditors, the military, whose economic prerogatives must now be curtailed, a hard-pressed population, and international business partners.
COP27 climate conference host Egypt has a good claim to have been the most dynamic of all African countries in 2022, but 2023 may be its year of reckoning. There are legitimate concerns that the currency crisis now ravaging the economy could bring President Abdel Fattah El Sisi’s futuristic edifice of renewables, green hydrogen (GH2), new cities, real estate, electric trains, sea water desalination and social infrastructure crashing down.
Sisi and his government need to maintain a difficult balancing act to keep on side international lenders, including both the International Monetary Fund (IMF) and his wealthy allies in the Gulf monarchies. Also of huge account is the powerful Egyptian military industrial complex – whose economic prerogatives must now be curtailed if business efficiency is to improve in a less crony-prone state – the hard-pressed 100m-plus population and international business partners.
Sisi’s problem is that he has gambled and lost on the success of a unique hybrid macroeconomic policy, which combines a strong commitment to liberal market-oriented reform with tightly controlled military-led dirigisme. His plan has produced neither reliable capital inflows nor revenues.
In the aftermath of Russia’s invasion of Ukraine money has been flooding out of a capital account that had been sustained by some of the world’s highest interest rates. In a series of precipitous steps following a move to a floating exchange rate, the value of the Egyptian pound has approximately halved from $1=EGP15.74 in March 2022 to EGP29.84 on 19 January. It is unclear how much further the currency has to fall.
Faced with this monetary catastrophe, the most likely choice for the leader, who is nothing if not ruthless, is to wade on through the fiscal carnage in the expectation of eventual victory. Glimmers of optimism in the prospects for upstream gas development may sustain his hope that this is possible.
To make this work Sisi needs to balance a wide range of competing constituencies. First amongst these are his lenders. As of December 2022, Egypt owed just over $18bn to the IMF. It also owed many billions more to its Arab Gulf allies.
A key condition for the IMF’s $3bn extended fund facility agreed in December (less than the government had asked for?(AE 475/1)) was for the government to “reduce the state footprint and increase the role of the private sector in the economy… the gradual exit of the public sector from non-strategic sectors, levelling the playing field between state-owned enterprises (SOEs) and private companies”. This has been generally interpreted as code for getting the military out of the economy.
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With even less public show, but perhaps with greater leverage, Sisi’s sponsors in Riyadh and Abu Dhabi have been urging the general turned president to push the military out of business. According to an expert on Egyptian-Gulf relations consulted by African Energy, the leaders of Saudi Arabia and the United Arab Emirates have never trusted the Egyptian army’s role in the economy. This source argued that part of the motive for the foundation of The Sovereign Fund of Egypt (TSFE) was to establish a more Gulf-friendly and civilian intermediary for investors to partner with (AE 461/1).
There are, however, limits to the extent to which Sisi can marginalise the military, security services and military intelligence. Not only is the military establishment his own constituency, the president is dependent on internal security to enforce painful subsidy reforms and other forms of economic restructuring.
In this context, Sisi’s unapologetic dismissal of human rights concerns not a mere reflex. It is a necessary, if deeply unpleasant, requirement to maintain order in the face of plummeting living standards and deeply unpopular reforms.
The currency challenge for international business
Another constituency that Sisi must keep on board are the foreign businesses who have committed to build much of the infrastructure on which his economic vision depends. Sisi adroitly used his country’s COP27 presidency to leverage huge renewables and GH2 commitments (AE 473/6).
African Energy understands that the core financial assumptions on which some projects have been structured could now be revisited.?