Ten years into the rule of Abel Fateh el-Sisi and with another five having just been secured, the Egyptian economy remains mired in a long unfolding crisis. In some ways, this is a crisis born of the global financial system. At its core, however, it is one brought about by asinine policymaking.
Naturally, the Sisi regime’s malfeasance has impacted the Egyptian people most directly. By the Generals’ hands, real wages have collapsed, the cost of living exploded, and the savings of so many families have disappeared via currency debasement. Nor is there any light visible at the end of the tunnel: If black market exchange rates and the futures’ trade are anything to go by, the Egyptian pound is likely to depreciate by more than fifty percent within the next twelve months, falling to roughly 55-56 EGP/USD. For a sense of what a fall this represents, recall that the pound traded at 7.80 per dollar as late as 2015. And with the Houthi’s interventions in the Bab al Mandab Strait now reducing the transit fees Egypt collects on shipping traffic through the Suez Canal—fees which typically generate essential hard currency for the economy—new pressures on the foreign reserve stock could make holding the line at 55-56 EGP/USD a best case scenario.[1] Mindful that the pound’s depreciation will make it more difficult for the country to pay down foreign debt, Moody’s opted to downgrade Egypt’s sovereign credit outlook in mid-January.
That Sisi might cede what remains of Egypt’s dignity for the billions needed to stop the country’s economic free fall in the months to come cannot be ruled out
While that which has been done to the Egyptian people is sufficiently tragic on its own, what is worse is that the folly of Sisi et al may soon bring suffering beyond Egypt’s borders. During the first week of Israel’s campaign on Gaza, American Secretary of State Antony Blinken traveled to Cairo to feel out the possibility of a deal. Aware of the leadership’s desperation, Biden’s lieutenant offered financial support in exchange for Egypt taking in hundreds of thousands of Palestinians displaced by the Israeli war machine. The proposal was rebuffed, though it was not the last (or first) time Washington teased out the possibility. Given their holdings of Egyptian external debt, it is the case that the Gulf’s monarchies, Saudi Arabia and the UAE especially, will retain de facto veto power over any such capitulation. Nevertheless, that Sisi might cede what remains of Egypt’s dignity for the billions needed to stop the country’s economic free fall in the months to come cannot be ruled out.
Building Egypt’s House on a Floodplain
To best appreciate how this has come to pass, one need return to the recent past and to the manner with which the regime of el-Sisi attempted to jury-rig economic growth and political stability after the coup of 2013.
Initially, the strategy of the Generals reduced to simply spending the enormous sums that were granted them by partners in the Gulf as compensation for their repression of the Muslim Brotherhood. After the last of these dollars was run down and inflation commenced a rapid ascent (circa 2015-2016), the next gambit was to remake Egypt into a capital market darling.
Fulfillment of conditions attached to a 2016 loan from the IMF was key to the second of these plots. By carrying out a currency devaluation and compressing wages—the latter enacted through cuts to public expenditures and the disciplining of organized labor—Sisi et al won themselves top marks from the Fund’s assessors, even if they pushed millions into poverty and millions more out of the labor force[2]: Having satisfied the gatekeeper of international financial markets, Cairo would be freed to open any number of new credit lines thereafter. Billions flowed in from multilateral institutions like the World Bank, European Investment Bank, and the African Development Bank, funding development projects and propping up the country’s banks. Billions more came from European commercial banks like Crédit Agricole, BNP Paribas, and Société Générale: Insured by the governments of Germany and France, these loans ended up steered into the pockets of European firms by way of arms purchases and infrastructure contracts.[3] Egypt’s wealthiest decile got in on the act, too, helping underwrite the regime’s lavish spending with their savings and accruing sizable gains in return. The richest of the rich made out especially well: Per a recent report from Oxfam, the aggregate wealth of Egyptian millionaires grew from $97.7 billion in 2019 to $153.9 billion in 2022.[4]
Then there were the billions in hot money—speculative, short-term capital inflows—that Egypt’s policymakers managed to corral during the late 2010s. These were the spoils of imaginative interest and exchange rate policies. In short, by issuing short maturity pound-denominated treasuries (i.e. local government debt that would need be paid off within a few months) at sky-high interest rates and pegging the Egyptian pound to the dollar after the devaluation of 2016, Sisi’s policymakers made Egypt’s local debt into one of the global south’s most attractive investment opportunities. Wall Street’s specialists in the carry trade—those who borrow where credit is cheap (i.e. in the US, UK, and Europe, predominantly) to lend where it is expensive—proved especially keen. After briefly taking fright during the early days of the coronavirus outbreak, they sent staggering sums to Cairo for buying up these local currency treasuries.[5]
So long as new dollars and euros kept pouring in, it was possible for the debt-lubricated configuration to endure. The scale of annual trade deficits and of the state’s debt obligations certainly made it all a bit of a high-wire act. So too did the economy’s reliance on hot money, and the fact that for all the debt taken on, the economy’s productive capacity had barely improved. Nevertheless, with the Federal Reserve in the United States committed to keeping interest rates low, it was a high-wire act Egyptian governors could plausibly walk. This was because in keeping rates low, the Fed made it cheap and easy for investors from New York to Hong Kong to raise capital. As investment opportunities in their home markets had grown scarce due to the Covid-era explosion of asset valuations, the Fed’s policies also made it likely that those investors looked to places like Egypt in order to make a buck. In this environment, the political economy of Sisi’s rule—one dependent on unceasing credit flows, the receipt of which allowed for the pockets of the military to be lined and healthy investment gains to be delivered to foreign and local lenders alike—retained solidity.
A Brief Post-Mortem
In February of 2022, Russia invaded Ukraine. Uncertain where things might go next, investor sentiment turned cagey, prompting global declines in lending and borrowing. As this was happening, actual supply disruptions provoked by the war were combining with speculative gambling on the future price of commodities to send the present-day cost of goods like wheat to unprecedented heights. Then, in March, the board of the Federal Reserve, hitherto nonplussed by inflation, pivoted and began raising interest rates.
Just like that, policymakers throughout the global south, previously operating in one of history’s most forgiving financial climates, found themselves in a far more punishing world.
Just like that, policymakers throughout the global south, previously operating in one of history’s most forgiving financial climates, found themselves in a far more punishing world. The change was especially jarring in Egypt. As the world’s largest wheat importer, supply confusion—Ukraine had furnished 28% of the country’s imported wheat in 2021—interfaced with extreme spikes in the pricing of grains to drive up the import bill considerably.[6] Compounding matters, the Fed’s moves spurred investors into deleveraging out of less easily cashable assets like Egyptian sovereign debt and Egyptian pound deposits. The fire sale which resulted as Wall Street firms all offloaded their Egyptian holdings at once was large enough to leave the country’s Eurobonds (i.e. government bonds denominated in foreign currencies) trading at two thirds their face value by spring 2023. And the fallout was more intense when it came to pound-denominated treasuries: Sales of these government debt obligations on secondary markets amounted to $22 billion in February and March of 2022 alone, and (corresponding) sales of the Egyptian pound on foreign currency markets topped $30 billion before the calendar even turned to April.[7]
Aware that the Sisi regime might soon be short on the dollars and euros needed to pay for imports and stay current on its debts, Saudi Arabia, the UAE and Qatar agreed to place $13 billion worth of emergency short-term deposits at the Egyptian Central Bank at the end of March. The influx of hard currency allowed the Central Bank’s governor Tarek Amer to fend off bedlam, but was not enough to make up for the dollars which had just exited the country: Net capital flows in winter and early spring, a measure of the investment funds coming in and going out of a country, showed a deficit of $14.8 billion. The loss reduced Egypt’s stock of international reserves, the majority of which were borrowed, to the point that it could only cover between four and five months of imports for the remainder of the year.[8]
At this stage, the chance of the reserve stock being rebuilt through the state issuing new debts was effectively nil. This was because each and every one of Egypt’s creditors no longer had the stomach to carry on. As they were well aware, interest payments on the state’s local currency debt alone were to reach 8.6% GDP for fiscal year 2022/2023 and 12.5% GDP for 2023/2024, according to the IMF’s latest projections. The servicing of public and publicly guaranteed external debts, meanwhile, was to demand approximately $20 billion in 2023 and more than $25 billion in 2024.[9] Add in the dollar amounts needed to cover the private sector’s external debts and the projected trade deficit and Egypt’s external financing needs became rather staggering. Indeed, they were such as to render the country a stay-away for the most risk-on of speculators: Not even the Central Bank’s raising of interest rates on three-month treasuries to more than 15 percent in August could entice Wall Street’s return.
Seeing the writing on the wall, the Sisi regime made a last ditch turn in late summer. Tarek Amer—a man, like many other senior economic policymakers, with a pedigree tracing back to the Free Officers movement—resigned from his post at the Central Bank in August. His replacement, Hassan Abdallah, next proceeded to oversee a managed depreciation of the pound at the end of October. Within days, the currency lost more than a quarter of its value. Despite intensifying the country’s cost-of-living crisis, however, neither the depreciation nor subsequent hikes to interest rates earned Egypt readmission to international capital markets. With nowhere else to go, Sisi’s policymakers returned to the IMF hat in hand. An agreement on a new Extended Fund Facility (EFF) arrangement capitalized at $3 billion was reached nearly a year ago to the day (December 2022).
The IMF “Rescue Package”
Leaving actual financial assistance aside, the IMF arrangement promised that recovery lay in Egypt’s honoring of a reform initiative encompassing monetary policy, fiscal policy, and competition/state ownership policy. Materially, the last of these initiatives centered on increasing the role of the private sector in the economy through expediting privatization plans and addressing variables more generally impeding market access (Read: Addressing the military and its vast commercial holdings). And in actuality, this is where the entirety of the IMF gambit hinged and hinges: Should these efforts fail to attract foreign direct investment (FDI) inflows of $10 and $17 billion per annum over the next half decade as well as annual inflows of $6-8.5 billion in portfolio investments (i.e. hot money), the IMF’s own math shows that Egypt’s balance of payments issues—at the crux of the current impasse—will worsen.
This should suffice to give any onlooker pause, whether Egypt and the IMF agree to top up the existing EFF to $5+ billion or not, as looks likely at the time of writing.
The government’s trumpeting of successful transactions notwithstanding, FDI inflows for 2023 are up less than 10% year-on-year according to the latest reporting from the Ministry of Finance. Even after summer sales of state-owned companies in the tobacco and the oil and chemicals sectors to local and Gulf investors assuaged the concerns of IMF monitors, then, it looks Egypt’s FDI take for 2023 will barely crack the $10 billion threshold referenced above. An inauspicious start to say the least, and one that has clearly prompted the Madbouly government to go looking for more state-owned enterprises (sixty-one, by a recent count) to privatize.[10]
Projections on future inflows strike as unduly optimistic as well. Outside potential investments in the energy sector, western firms, mindful of currency risks, the unreliability of the judicial system, the military’s vast and non-diminishing commercial interests[11], are likely to continue keeping their powder dry when it comes to long-term fixed investments. Speculative investors from Europe and the United States look likely to stay cool on Cairo as well: The risk premium they are requiring in order to purchase Egyptian equities is as yet prohibitive[12], and demand for Egyptian treasuries—despite the staggering interest rates attached—remains negligible.[13] Lest one think this a passing fad, one of America’s grand financial houses, Morgan Stanley, downgraded its outlook for Egypt in October 2023 and in January 2024, JPMorgan decided to boot Egypt from its index for emerging market government bonds, a decision that precipitated the immediate exit of $1.2 billion.[14] Though Israel’s war on Gaza has led some on Wall Street to change their tune a bit—confident as it now is that the American and European states, along with the international financial institutions they command, will deliver the cash needed to keep Israel’s southern neighbor stable—the fundamentals remain unchanged.[15]
As for Gulf investors, cast as agents of salvation by the IMF though they may be, there is reason in thinking they will be no such thing. To begin, the khalijiyyun are driving hard bargains when it comes to the price and currency of potential transactions. As is such, while major deals like Qatar’s acquisition of a 30-45% share in Vodafone Egypt and Abu Dhabi’s acquisition of fuel retailer Wataniya are certain to go through in the end, it is probable that the terms of sale will be far less favorable than Cairo hopes: Those are the breaks when someone has you over the barrel. More salient to our concerns, moreover, is these investors’ enduring disinterest in Egypt’s productive, export-oriented industries. The Saudi Egyptian Investment Company, an appendage of Saudi Arabia’s largest sovereign wealth fund (the Public Investment Fund), is expressly targeting banking, retail, and media assets. The UAE’s leading players—including the Abu Dhabi Development Holding Company, the buyer of the Egyptian tobacco company referenced above—are sticking to similar domains while also looking to deepen their presence in the luxury real estate market. Straying little from the template of its 2021 CityGate investment, Qatar, meanwhile, is targeting hotels and the built environment, too.[16]
Seen collectively, then, the bearers of Gulf capital are coming in search either of locally-facing industries from which they can capture steady rents (banks, retail outfits, telecommunications companies) or high-end real estate, from which they can extract capital gains. Either way, these investments will do little in boosting Egypt’s capacity to make stuff or generate hard currency, and as such, do little to ease the economy’s external imbalances. While one should not diminish the other forms of assistance coming from the Gulf such as the $1.4 billion currency swap arranged between the Central Bank of the UAE and the Central Bank of Egypt in September, it should therefore be clear that the peninsula’s monarchies are furnishing neither the scale nor the kind of capital needed to lift Egypt out of its troubles.
A Stopgap Fix that Worsens Structural Issues
When one zooms out, moreover, it becomes apparent just how fraught the wider IMF strategy is. Consider in particular the ledger of net international investment income. As has been sketched, the scheme crafted for replenishing Egypt’s international reserves has two emphases: (i) the sale of equity positions in a host of profitable properties to foreign parties (i.e. attracting FDI); and (ii) the sale of short-term (and high-interest) government debt to foreign parties (i.e. attracting portfolio investment). Both these measures stand to elevate the investment returns that non-residents will make on holdings of Egyptian assets, and, by extension, to increase recurring outflows of capital as foreign firms repatriate their profits. In effect, this widens an existing drain on the country’ reserves: As the gap between the investment returns that non-residents make in Egypt and the investment returns that Egyptians make overseas grows—with the latter depressed by the fact that Egypt’s international investments concentrate in safe, low-returning reserve assets like gold, cash dollars, and US treasuries–so too do annual losses in hard currency. As the losses born of international investment already topped $10 billion per annum in recent years, this is going to spell real trouble going forward.
At a more structural level, the plans cobbled together by the IMF and its interlocutors in Cairo also convey an ignorance of, or disregard for, the issues at the root of Egypt’s balance of payment issues. Put most simply, the issues are that Egypt is, for a host of reasons—some of which derive from generations of policy errors and others from the character of global capitalism—light on the industrial-technological capacity and intellectual property claims that other nations leverage to capture high levels of value and rent from international trade. The country is also unable to service the basic needs of the population through domestic production. The latest lending arrangement from the IMF lacks even the pretense of addressing these structural issues. Certainly, it may well shrink Egypt’s import bill (and the bellies of her children) by imposing austerity and reductions to households’ purchasing power through currency devaluations. Nevertheless, it will do little to address the core issue of productive capacity. To the contrary, with interest rates being hiked ever higher in hopes of appeasing foreign lenders, local businesses are almost certain to cut back on investment—as they have been since 2016—thereby degrading the economy’s productive capacityfurther.
Sisi and those around him have long inflated the idea that their state project is too big to fail. Should the reins of government fall from their hands, the story goes, chaos will envelop the country, and soon thereafter, the most harrowing of Europe’s fears will be realized: terrorism, migration, and who knows what in the domain of foreign policy. For Egyptians, of course, disaster if not chaos is already here.
Egypt’s troubles over the last ten years testify to what the global financial system can wrought in peripheral locales, on the one hand, and to the striking shortcomings of those directing the country’s state, on the other. The patterned flows of capital facilitated by the global financial system—a flood of high-interest credit during the good times, a financial crisis-beckoning exit of hard currency during the bad—made setting a progressive developmental course deeply challenging. The use of debt by Sisi’s governors—funneled into both the built environment (through grandiose construction and infrastructure projects) and the pockets of local and foreign lenders—made economic catastrophe something of an inevitability.
At this point, the question is less whether Sisi et al represent a risk systemic enough to mandate saving. Rather, it is whether the problems the Generals have created may now be so great as to open the door to a historic betrayal of the Palestinian people. At the time of writing, it is too early to say how things will play out. It would not be the first time that the United States leveraged Egypt’s financial problems for geopolitical purposes (See: The debt relief offered the Mubarak regime in exchange for backing the first US-led war on Iraq in 1991). Regardless, Egypt’s economic troubles are no closer to their end than their beginning. Another lost decade of growth awaits, and with it, social and political turmoil.
[1] See: Alternative Policy Solutions, “Suez Canal Losses and Low Real Estate Financing Rates”, Adasa Newsletter (American University of Cairo: January 7, 2024).
[2] Osama Diab, “Fighting inflation fiscally”, Brief: Alternative Policy Solutions (American University of Cairo: April 2022)
[3] Stephan Roll, “Loans for the President: External Debt and Power Consolidation in Egypt”, SWP Research Paper (Stiftung Wissenschaft und Politik: December 2022)
[4] Alexandros Kentikelenis, Amine Bouzaiene, Sahar Mechmech, Rowaida Moshrif, and Nabil Abdo, “The Middle East and North Africa Gap: Prosperity for the rich, austerity for the rest”, Report: Oxfam International (October 2023).
[5] Beyond the many creditors cashing in through interest payments, it bears mentioning that the beneficiaries of the state’s fiscal bonanza also included military-run companies—contracted to build and manage any number of grandiose construction projects—and the officials (current and retired) who managed and/or subcontracted for them.
See: Sarah Taweel, “Al-Sisi’s bubble in the desert: the political economy of Egypt’s new administrative capital”, Report: Project on Middle East Democracy (June 2023).
[6] Staff Writer, “Economic crisis pushes up Egypt’s wheat, oil imports to $15.6 bln in 2022”, Arab Finance (May 16, 2022).
[7] International Monetary Fund, “Arab Republic of Egypt: Request for Extended Arrangement Under the Extended Fund Facility Staff Report”, IMF Country Report No.23/2 (January 2023)
[8] Central Bank of Egypt, “External Position of the Egyptian Economy: July/March of FY 2021/2022”, Volume no.77 (March 2022).
[9] Central Bank of Egypt, “External Position of the Egyptian Economy: Fiscal Year 2021/2022”, Volume no.78 (July 2022)
[10] On an expanded privatization initiative, see: Staff Writer, “AM—Going Down?”, Newsletter: EnterpriseAM (January 10, 2024).
[11] Just two military-owned firms—Safi and Wataniya—were included on the list of thirty-two state-owned companies targeted for sale or partial sale in 2023. Disclosures have also revealed that the Army has stripped assets from those firms it is being forced to sell and transferring them to ones they will keep.
[12] Fatmah Salah, “Economic crisis continues to take toll on Egyptian stocks as investors ask for risk premium”, Daily News Egypt (August 22, 2023).
[13] Netty Ismail Idayu and Tarek El-Tablawy. “Egypt’s $35,000 bond sale shows currency risk sapping demand”, Bloomberg (April 4, 2023)
[14] Mirette Magdy, “JPMorgan cuts Egypt from key bond indexes as FX shortages mount”, Bloomberg (January 11, 2024).
[15] Mirette Magdy, Paul Abelsky, and Ziad Daoud, “Egypt needs cash and Gaza war gives world new reasons to help out”, Bloomberg (December 7, 2023).
[16] Reuters Dubai. “Qatar’s Sovereign Wealth fund in talks with Egypt over hotels investment: Report”, Reuters (June 14, 2023).