Sisi, the IMF, and Egypt's Crumbling Economy

November 18, 2016 | Fritz Lodge
Photo: iStock.com/Joel_Carillet

When the Arab Spring reached Egypt in January 2011, sparking unprecedented mass protests in Tahrir Square and across the country, calls for democratic reform and liberation from authoritarian rule seemed to dominate the revolutionary movement. However, it was not just political demands that brought millions to the street to protest the regime of President Hosni Mubarak. At its core, the January 2011 revolution was an economic cry for help from a population that felt left behind by an uncaring and unresponsive government.

Today, the government of President Abdel Fattah al Sisi faces a similar problem. Egypt has now received the first tranche of a $12 billion loan from the International Monetary Fund (IMF), but the country still teeters near the brink of an economic, and possibly political, crisis. Egypt’s foreign exchange reserves – necessary to purchase foreign imports – remain dangerously low, inflation at 14 percent and unemployment at 12 percent threaten the livelihoods of ordinary Egyptians, and the Central Bank’s decision to devalue the Egyptian pound on November 3 in order to meet IMF requirements led the currency to drop by almost 50 percent.

Economic protests planned for November 11 failed to spark the kind of mass demonstrations seen in 2011, but as the difficult reforms required by Egypt’s deal with the IMF begin to impact already economically vulnerable citizens, could new economic hardships push Egypt over the edge once again? 

The flotation of the pound against the U.S. dollar provides the most immediate window into Egypt’s economic woes. Realistically, this devaluation was probably inevitable. Cairo had been pouring billions of dollars into artificially propping up Egypt’s currency, and as the IMF has pointed out, accurately pricing the pound will help eliminate the currency black market, incentivizing people to circulate dollars back into the economy and encouraging foreign investor confidence. Indeed, Egypt’s Finance Ministry says that foreign holdings of Egyptian debt have already increased by $900 million since the flotation.

However, allowing the currency to fall so far and so fast risks serious destabilization. As Allison McManus, Research Director at the Tahrir Institute for Middle East Policy, points out, “the free float of the pound, as well as the slashing of fuel subsidies (another key condition for the IMF loan), will exacerbate the pressure on Egyptians’ livelihoods and pull millions into economic precarity.” The currency’s flotation has already effectively wiped out half the value of pound-denominated savings and, combined with high inflation, has significantly reduced the purchasing power of Egyptian citizens.

The government’s primary incentive to pursue such painful reforms stems from a deadly balance of payments imbalance between external revenues and expenses. On one side of the balance sheet, Egypt is a net importer and needs an ample supply of foreign exchange to purchase both popular consumer goods and vital commodities, like wheat and fuel. Unfortunately, Egypt’s three main sources of foreign exchange revenue – tourism, remittances from Egyptian workers in the Gulf, and shipping tithes from the Suez Canal – have all declined significantly since 2011.

After taking power in 2013, the Sisi government attempted to tackle this imbalance, as well as set the economy at large back on track, by slowly cutting subsidies and implementing economic reforms. However, those subsidy cuts have done little to curb government expenses or stem the depletion of foreign exchange reserves. Sisi’s economic plans have so far focused heavily on big ticket infrastructure projects like the Suez Canal expansion – which did not result in significantly increased revenue – at the expense of deeper economic reforms designed to attack structural issues, like Egypt’s suffocating regulatory environment or the government’s unsustainable reliance on domestic bank debt to finance its budget deficits.

In the face of continued economic distress, President Sisi has consistently turned to the countries of the Arabian Gulf, particularly Saudi Arabia, for support. In exchange for Egyptian support against competitors like Iran and continued role as a bulwark against the Muslim Brotherhood, the Gulf states have transferred over $25 billion to Cairo. This has allowed the Egyptian Central Bank to artificially support its own currency, at great expense, by using these dollars to buy Egyptian pounds. However, the relationship with the Gulf seems to have soured this month. After Egypt voted in favor of a Russian-backed U.N. Resolution for a Syrian ceasefire in October, Riyadh abruptly canceled a three-year agreement to ship 700,000 metric tons of discounted oil per month to Egypt.

With this source of revenue in question, qualifying for the IMF loan is a painful but necessary step for a government in desperate need of cash. So far, that pain has not yet translated into widespread upheaval similar to 2011 or to the 1977 bread riots, which forced Egyptian President Anwar Sadat to retreat from his own attempt to meet IMF loan conditions. Mass protests against the IMF deal, supposedly organized by the banned Muslim Brotherhood group, had been planned for November 11, but they failed to materialize.

According to Eric Trager, a Fellow at the Washington Institute for Near East Policy and Cipher Brief expert, there are two reasons for this lackluster response. First, many Egyptians view the IMF deal as a sincere attempt to end the country’s economic woes, and second, “because Egyptian security forces “froze” [the protests] before they even began” through intensive surveillance of protest organizers, mass detentions, arrests, and an overwhelming security presence on the street. Nevertheless, economic pain has eaten away at Sisi’s popularity, which according to the Egyptian pollster Baseera, has dropped 14 points in the past two months.

At the end of the day, if Sisi’s government can quell protest and cushion the impact of reforms on the Egyptian populace in the short term, the IMF loan could offer Egypt’s economy a path to long-term health by opening the door to foreign investment and forcing Cairo to clean up its finances. However, if Sisi does not work to shelter ordinary Egyptians – by expanding cash-transfer programs to the poor, for instance – force alone may not be enough to keep the populace quiet. As McManus writes, “while it might discourage outspoken criticism, a population cannot be beaten or jailed out of hunger and poverty.”

Fritz Lodge is an international producer at The Cipher Brief. Follow him on Twitter @FritzLodge.

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