Background
- Egypt suffered mighty consequences from food rising prices, which rose by 72% in the last fiscal year, pushing the cost of living over the reach of many.
- Inflation is slowing down from historic peak of 38.0% in September but still remains high.
- The official exchange rate was devalued in stages during 2022 but has since then remained roughly unchanged. Foreign exchange shortages have been persisting, which has contributed to the accumulation of import arrears.
- Egypt is still leaning on foreign economic aids, including the new injection of $35 billion by Saudi Arabia and the United Arab Emirates into the central bank. To date, the country is the second-biggest debtor of the IMF.
- In February, Egyptian President Abdel Fattah al-Sisi declared a raise of the monthly minimum wage by 50% to 6,000 pounds ($194), as effect of a necessary and urgent social aid package allocated by the government.
- Egyptian President Abdel Fattah al-Sisi also announced an increase of the tax threshold by 33% for all employees in the public and private sectors.
- A reassessment of public investment is necessary in view of spending efficiency, suggests the OECD report on Egyptian economic situation.
- The conflict in Gaza and the situation in the Red Sea are terribly affecting Egyptian economy with disastrous consequences on the tourism sector and on international trade.
- Egypt ranks as a Top 15 global military power out of 145 countries considered, with a defence market valued at $9 billion in 2023, projected to maintain a Compound Annual Growth Rate (CAGR) of over 3% from 2024 to 2028.
- Between 2014–18 and 2019–23, Egypt experienced a change in arms import trends, moving from being the third-largest importer globally to the seventh. This coincided with acquisitions aimed at strengthening long-range military capabilities, including frigates, submarines, combat aircraft, and missiles, with notable suppliers being Germany, Italy, Russia, France, and the USA.
Analysis
a. Political Background
At the end of 2023 Egyptian people, called to the polls, reconfirmed Abdel Fattah al-Sisi as President of Egypt, resulting in the beginning of his third, six-year term. People’s Republican Party’s candidate, Hazem Omar, only achieved 4.06% of the vote and other candidates haven’t strayed far from the same result. On the other hand, former Member of Parliament Ahmed al-Tantawy, as well as chair of the Doustur Party Gameela Ismail, both withdrew after not attaining the compulsory endorsements to run.
Over the years, voter turnout has declined steadily in Egypt, decreasing as low as 41% in the previous presidential elections in 2018. In 2023’s elections, the government disposed new measures to assure polls affluence. For instance, police handed out bags of flour, rice and other basic commodities to people who voted near some polling stations in Giza. Moreover, head of Egypt’s state media body, Diaa Rashwan, stated that different companies provided buses to facilitate voting by their employees.
The results were predictable, given the long crackdown on dissent of the last years which led to the fact that the election hasn’t really featured other high-profile candidates. Although the street protests against the current President continue and the support for the army is fading drastically since 2011, in the current geopolitical instability in the Middle East, many voters believed it was only Sisi and the military that could provide security. And, despite everything, in time of uncertainty the people tend to opt for something they already know. Given that, it is also necessary to point out that the constitutional amendments approved in 2019 are what made the extension of al-Sisi’s presidency legally possible. The revision that directly influenced al-Sisi’s tenure interests the article 140 of the Constitution. In 2019’s reforms, the parliament approved an extension lead from 4 to 6 years of presidential terms, permitting al-Sisi to run for the third term. The amendments, pushed swiftly through parliament approved by 531 votes to 22, consolidated al-Sisi’s power, drawing severe criticism for eroding democracy principles and rights. These reforms also broaden the executive branch’s power on the judicial and legislative branches. As a matter of fact, the article 185’s modifications handed the president the power to decide on the head judges of Egypt’s top judicial bodies to terms of 4 years or until they reach the age of retirement. The constitutional amendments solidified the military’s role in politics, broadening its mission from a role of defending the security and territory of Egypt to include also safeguarding the constitution, rights, and freedoms of citizens, further expanding the power of military courts to try civilians. Ultimately, the amendments introduced the role of vice president, with the president having unchecked authority to appoint and dismiss without legislative or judicial oversight, albeit with no defined powers. Main criticism on the constitutional amendments concerned the violation of already existing Egyptian constitutional obligations. Firstly, to article 226, which prevented the amendment of the provisions related to the re-election of the president unless the revisions brought more guarantees. Secondly, they threatened article 186’s provisions on the independence of the judiciary and article 192’s provisions on Supreme Constitutional Court being the only competent entity to determine the constitutionality of laws and interpret legislative text. Finally, they weakened article 101’s terms that established the mandates of the House of Representatives as the country’s legislative authority.
b. The socio-economic challenges
The economic situation in Egypt stays on thin ice. Main critics concern the non-essential mega projects of the regime, which keep leading to an increasing of public debt, such as rebuilding the Capital from scratch in the desert to the East of current Cairo. Inflation reached an historic peak of 38% in September and is now giving signs of slightly levelling. On the other hand, after the escalation of the conflict in neighbouring Israel and the exacerbation of tense relations in the entire Middle East region has caused the plummeting of tourism revenues since the start of the year. Moreover, Houthis’ attacks on shipping in the Red Sea have been another major setback to the country’s economy, which counted on the revenues of transit fees -last year earned Egypt $9.4 billion.
OECD report on Egyptian economic situation indicates a slowed down GDP growth projection for FY 2023/24 of 3.2%, compared to 2022/2023’s 3.8%. The analysis forecasts an anticipated recovery during the next two fiscal years.
Fiscal consolidation commitment appears to be crucial, along with improving public financial management. Targeted fiscal support to those most in need should endure, while untargeted energy subsidies should be progressively reduced to cut emissions. According to the OECD, public investment efficiency should be reviewed to create fiscal space for priority policies like health and education. A rethink of the public investment strategy could translate in a reduction of public debt, which should become the main goal for an economic recovery. Finally, expanding access to finance, digital diffusion, and job creation efforts are necessary reforms to pursue in order to reduce informal work and boost productivity.
Despite initial positive reactions to last year economic reform, scepticism persists among markets and investors, who remain cautious and vigilant for further indicators of regression. While acknowledging the reforms as a step in the right direction, there’s concern over past unfulfilled promises and the need for sustained implementation and commitment.
c. Investments and foreign aid
The government has to deal with large near-term financing needs. International market funding has been limited since early 2022, although the regime has pursued a diversification of its debt portfolio and instruments. Restoring investor confidence in the public finances are indispensable to bring down debt service costs. And, investment recovery may be slow due to the tight financing conditions. Export momentum could return if disruptions to tourism and Suez Canal traffic cease.
Nevertheless, substantial downside risks persist, including further loss of investor confidence, which may lead to further currency depreciation and tighter financing conditions. The government faces significant near-term financing needs with limited international market funding.
Moreover, Egypt is extremely sensitive to climate change. Given its limited annual precipitation and the extremely arid weather, 95% of the population is concentrated around the Nile. In three decades, the population doubled, reaching 109 million people in 2021 and so did the demand of fresh water. As Egypt’s population is projected to reach 160 million by 2050, the country will face even more significant challenges in meeting the increasing demands for food and clean water. These challenges will be compounded by limitations in state capacity, exacerbated by the effects of climate change on natural resources. Not to say that climate change will inevitably lead to heightened temperatures and unpredictable weather phenomena, which could disrupt Egyptian agriculture, affecting a sector that employs almost 55 percent of the country’s labour force.
Therefore, the government should focus on stepping up efforts in renewable energy investment and climate adaptation strategies. In particular, efforts to increase renewable energy supply to meet the National Energy Plan’s goals require substantial financing mobilization and private sector involvement. To raise the share of electricity generation from renewable sources to 42% by 2030, the regime should include mobilizing financing, through the use of green bonds and concessionary loans, as well as attracting private investment with long-term power-purchasing agreements. Barriers hindering business entry and expansion, as well as trade barriers, need to be lowered to promote competition and attract investment. Addressing perceived corruption, improving public procurement, and reducing state dominance on the economy are vital changes for private sector growth. Investors seek assurance of the government’s seriousness in withdrawing from the economy gradually and establishing a credible currency market. Until then, they anticipate a challenging journey ahead, which could hinder Egypt’s economic recovery efforts.
On the other hand, Egypt has always leaned on foreign aid. Egypt has faced persistent fiscal deficits, averaging 9.5% of GDP over the past decade, leading to a significant accumulation of public debt. External debt, including IMF credit, surged from $40 billion post-Arab Spring to $130 billion in 2020, comprising nearly 70% long-term debt, and posing substantial economic challenges. The IMF announced progress in negotiations for an economic reform program with Egypt, signalling a potential augmentation of the country’s $3 billion loan. Ivanna Vladkova Hollar, IMF mission chief for Egypt, highlighted “excellent progress” in discussions, emphasizing the authorities’ strong commitment to implementing the reform package promptly. IMF Managing Director Kristalina Georgieva stated that negotiations were in the “very last stretch” to expand the loan agreement signed in December 2022. Talks aimed to revive disbursements, halted last year when Egypt failed to allow the Egyptian pound to float against market forces, opting instead to fix it against the dollar. Consequently, the pound’s black-market value plummeted to as low as 71 pounds, diverging significantly from its official rate of 30.85 pounds to the dollar. Egypt’s long-standing foreign currency shortage, compounded by reluctance to adopt a flexible exchange rate, has also hindered IMF negotiations. Inizio modulo
Anther relevant actor is the United Arab Emirates. As a matter of fact, Abu Dhabi has pledged a $35 billion investment in a vast development venture along Egypt’s north-western Mediterranean coast, potentially alleviating the financial strain in the country of over 110 million people. Spearheaded by state investment vehicle ADQ, this move aims to develop a tourism and financial hub, crucial for unlocking an IMF loan package exceeding $10 billion. With initial investment expected imminently, primarily from UAE deposits, this venture signals potential -temporary- relief for Egypt’ economic challenges, underlining the strategic importance of Gulf state support. Led by ADQ, the project envisions transforming Ras al-Hekma into a leading Mediterranean destination, amplifying Egypt’s economic and tourism potential.
d. The social protection package and devaluation of the currency
In February, President Al-Sisi, alongside Prime Minister Mostafa Madbouly and Finance Minister Mohamed Maiit, directed the government to address economic challenges to stabilize the country at the macroeconomic level. They discussed a new social protection package that aims to create different measures to calm prices, curb inflation, and ensure economic stability.
One of the most relevant reforms involves the presidential decree mandating a minimum 50% increase in government employees’ salaries, raising the minimum to EGP 6,000. Meanwhile, the social package includes the allocation of EGP 15 billion for higher wages for essential workers, such as doctors, nurses, teachers, and university faculty. Another EGP 4.5 billion will enhance medical professionals’ compensation, including increased risk allowances and a higher allowance for night and overnight shifts.
President Al-Sisi initiated the hiring of 120,000 new staff across various sectors, alongside a 15% pension increase for 13 million citizens and additional funds for social security programs. The income tax exemption for all employees in the government, public and private sector rose by 33%, easing financial burdens, from EGP 45,000 up to EGP 60,000, at an annual cost of EGP 5 billion.
Egypt, grappling with economic challenges since February 2022 due to global supply disruptions from the Russian-Ukrainian conflict, aims to control inflation and limiting it to 7% (±2%) until the end of 2024.
However, according to Extra News rumours linking wage hikes to a new devaluation of the Egyptian pound were refuted. Since March 2022, Egypt has devalued its currency three times, depreciating the pound by approximately 70% against the US dollar. In October 2023, Ziad Daoud, during an interview with Bloomberg, said that Egypt main problems are its big trade deficit, namely the country’s imports are higher than the exports which creates a huge funding gap, and that it doesn’t have enough money going into the country to fund this funding gap. The latter gives Egypt two choices: using its reserves to protect the currency or letting the currency weaken. In the analysis, the economist pointed out that the majority of Egyptian reserves is borrowed money, which means that Egypt cannot use them to protect the currency, leaving the country with the only option of devaluating it. Furthermore, in February 2024, JP Morgan forecasted a forthcoming devaluation of the Egyptian pound, estimating it between EGP 45 to EGP 50 against the US dollar, alongside a potential 2% increase in interest rates, possibly reaching 23.5%. The analysis suggested that this devaluation, coupled with rising inflation rates, could help curb inflation’s rapid surge in the near future.
e. A nation amidst conflicts
The shockwaves from the Gaza conflict have compounded Egypt’s existing economic troubles, including unsustainable debt levels and a worsening cost-of-living crisis since 2022. These challenges are of concern to European leaders, who fear that instability in Egypt could have regional repercussions and disrupt the vital Suez Canal trade route to Asia.
The Gaza conflict presents additional challenges for Egypt, particularly regarding potential Palestinian displacement into the Sinai region. Egypt vehemently opposes this scenario, fearing it could trigger unrest and mass mobilization, especially if Palestinians perceive the Egyptian authorities as complicit in their displacement. President Abdelfattah al-Sisi has unequivocally rejected Israeli proposals for “voluntary emigration” of Palestinians from Gaza and the deteriorating humanitarian conditions in Gaza raise further concerns about potential spillover effects and exacerbate Egypt’s apprehensions.
To aggravate the current situation, in the summer of 2023, reliable electricity became scarce due to cost-cutting measures. Despite years of investment in the power network, the Gaza conflict continues to impact Egypt’s energy balance. Rolling blackouts were introduced, initially attributed to severe heat waves, but were then exacerbated by the war in Gaza. The halt of gas flow from Israel strained Egypt’s energy security, coinciding with economic turmoil and a decline in Suez Canal revenues. This situation widened energy disparities among the population. The prolonged blackouts disrupted daily life and businesses, particularly impacting rural areas and hospitals. The government’s rationing plan extended blackouts, leading to financial losses and safety concerns. President al-Sisi linked the crisis to Gaza, urging endurance amid economic challenges. To address energy vulnerabilities, Egypt should seek to diversify its energy mix, exploring new drilling opportunities and expanding renewable energy capacity.
Furthermore, Egypt’s economy is set to suffer grievously after Houthi attacks in the Red Sea. Usually, more than 20,000 vessels transit through the Suez Canal each year, which resulted in a revenue of $10bn to the Egypt economy in 2023. However, at the moment, the country’s Suez Canal Authority reported a 40% drop in receipts during the first two weeks of 2024 which will necessarily affect Egypt’s economy in the long run.
In response to Egypt’s economic woes, both Western and Gulf partners, including the EU, have expressed willingness to support Cairo. The US is prepared to provide financial assistance, while Gulf countries are inclined to boost Egypt’s economy through increased private investment. The EU has begun working on a support package for Egypt, similar to the deal struck with Tunisia in 2023.
f. Egypt’s defence expenditure
According to Global Fire Power, Egypt sits as a Top 15 global military power of 145 out of the countries considered. The Egypt defence market shows a significant trajectory, valued at $9 billion in 2023 and forecasted to maintain a Compound Annual Growth Rate (CAGR) of over 3% from 2024 to 2028. SIPRI data indicates that between the periods of 2014–18 and 2019–23, Egypt saw a notable shift in its arms import trends. From 2009-13 to 2014-18, there was a significant surge of 209 percent in arms imports, but this trend reversed with a 26 percent decrease in imports between 2014–18 and 2019–23. Consequently, Egypt moved from being the third-largest importer globally in the former period to the seventh in the latter considered period. During 2019–23, Germany emerged as the primary arms supplier to Egypt, accounting for 27 percent of imports, followed by Italy (22 percent), Russia (20 percent), France (17 percent), and the USA (6.5 percent). This alteration in arms procurement coincided with Egypt’s involvement in various regional tensions, including disputes with Ethiopia over Nile River water, military presence in Sudan, and maritime conflicts in the eastern Mediterranean. In response, Egypt conspicuously strengthened its long-range military capabilities. As a matter of fact, the country acquired 3 frigates and 2 submarines from Germany, 2 frigates from Italy, 20 combat aircraft from Russia, and 3 frigates and long-range missiles from France. The new acquisitions are to be added with those occurred during 2014–18, which included 23 combat aircraft and 2 frigates from France, 30 combat aircraft from Russia, 2 submarines from Germany, and 12 combat aircraft and 2 corvettes from the USA. As of the end of 2023, Egypt’s pending deliveries included 30 combat aircraft from France and 1 frigate from Germany, indicating a continued effort to enhance Egyptian military capabilities. Two questions arise naturally from this expansion of the military force: what are the reasons behind the continuous enhancement? and, given the country’s dire economic situation, how is Egypt able to finance it?
The reasons behind conspicuous acquisitions and the increase of Egyptian military expenditure can be attributed to several reasons. First reason is arguably Al-Sisi’s search for grandeur. This approach combined with mega-projects aims to emphasize the country’s lost prestige, which is based on nationalist rhetoric and symbols to promise a restoration to regional centrality and glory under al-Sisi’s leadership. This is the representation of the idea that military power equals a stable and solid country. Secondly, al-Sisi is ensuring his legitimacy, by leveraging the acquisition of new weapons and implementing the constitutional reforms enlarging the military’s role in politics and involvement in civilian’s lives. Securing the support of the military and military industry is fundamental for al-Sisi to stay in power. As opposed to most countries, Egyptian army is in all sectors of life to include production of goods and services. Egyptian military enterprises act without any form of oversight, operating in a manner that keeps their financial activities unchecked.
During recent talks with Greek Foreign Minister Giorgos Gerapetritis, President al-Sisi also warned against military escalation in the region implicitly justifying the military reinforcement. It is true that most Egyptian equipment consists of pieces from the outdated Soviet era, and this makes modernization a priority and may partially validate the many acquisitions of the recent years.
As for the second question on how Egypt can finance this huge military spending despite the size of its economy, it should be noted that Egypt is heavily reliant on obtaining “fresh dollars” to service its debt, a dependence that forces President al-Sisi to extract financial resources from a struggling economy. Egypt’s allies in the Gulf, notably Kuwait, Saudi Arabia, and the UAE, have extended substantial support to President al-Sisi, viewing him as crucial to maintaining stability in the Middle East. This support has come in the form of billions of dollars in bailout aid. A research paper by the IISS in October 2023 revealed that the total Gulf backups to Egypt, adjusted for inflation to 2020 US dollars, amounted to US$107.9 billion since the 1960s, with Saudi Arabia contributing the majority at 52.9%. Riyadh is also engaging in bilateral trade with Cairo using local currencies, with the new injection of $35 billion by Saudi Arabia and the United Arab Emirates into the central bank, a move that could bolster the macroeconomic position of the Central Bank of Egypt. However, expressing dissatisfaction with clientelism, the Gulf states have collaborated with the IMF to push for the restructuring of military-owned enterprises. This context is crowned with the narrative exploited by the President that legitimizes these moves with the idea that Egyptians must sacrifice their well-being for the national good.
Conclusions
In conclusion, Egypt is navigating through a complex web of socio-economic challenges, political dynamics, and regional conflicts. The nation grapples with soaring inflation, a depreciating currency, and a mounting debt burden, all exacerbated by the fallout from the Gaza conflict and disruptions in the Red Sea. Despite concerted efforts to implement economic reforms and secure foreign aid, scepticism persists among investors, hindering Egypt’s path to recovery.
Politically, President Abdel Fattah al-Sisi’s consolidation of power through constitutional amendments has sparked criticism for eroding democratic principles. The recent presidential election, marked by the limited opposition, underscores concern about political dissent and transparency.
Economically, Egypt faces the daunting task of balancing fiscal consolidation with targeted support for vulnerable populations. The government’s social protection package aims to mitigate the impact of rising prices and stagnant wages, but structural reforms are needed to address systemic issues such as corruption and inefficient public spending.
On the international front, Egypt’s defence expenditure continues to rise, driven by perceived security threats and strategic ambitions. While Gulf allies provide crucial financial support, concerns linger about the opacity of military-owned enterprises and their impact on economic stability.
Looking ahead, Egypt must navigate a precarious path towards economic recovery while addressing underlying political and social tensions. Sustainable solutions require transparency, accountability, and inclusive governance to ensure the well-being of all Egyptians amidst ongoing challenges and uncertainties on the regional and global stage.