Egypt protests expose the fragility of the economy

After a few days of sporadic and rare protests in Egypt, the Central Bank of Egypt announced that net foreign direct investment in Egypt fell by roughly $1.8 billion, or 23 per cent, during the fiscal year 2018/2019. Foreign investment recorded $5.902 billion, compared to $7.719 billion in the previous fiscal year 2017/18.

That level is well below the international monetary fund (IMF)’s forecast of $9.5 billion in April, and below investment of $11.5 billion at the start of the IMF programme in Egypt. This huge decline reveals the fragility of the Egyptian economy, although the Egyptian regime considers the improvement of the Egyptian economy as its greatest achievement.

After the Egyptian economy emerged as a rising star in the skies of emerging markets, it suddenly faded after the recent protests against the regime that revealed that the public had not benefitted from economic reforms.

Many Egyptians are overjoyed by the recent protests – the Egyptian regime has had to re-dispense food supplies to nearly 2 million Egyptian families.

Al-Sisi has also ordered improved salaries for imams, and the government and armed forces have begun paying back contractors’ arrears. In fact, most Egyptians did not feel that the economy improved, but that prices increased and living conditions worsened.

Although these rare protests caused a brief shock to the $2 billion domestic stock market and put pressure on sovereign debt, Egyptians’ life conditions have improved.

The protests against Abdel Fattah al-Sisi recalled the memory of the protests that overthrow the ousted President Hosni Mubarak in 2011. The protests that erupted last month revealed the “lack of public benefit so far from long heavy years of economic reforms and won the admiration of investors.”

While economists have praised the economic reform programme, getting down to the ground may not be comfortable. Markets stabilised this week after security forces were able to prevent more protesters from landing, a move the Egyptian regime hopes will reassure investors.

Investors’ appetite for Egypt has increased since Cairo struck a $12 billion loan agreement with the IMF in 2016, but recent protests have scared them.

Cairo implemented austerity measures to help reduce the deficit, starting with the devaluation of its currency in 2016 and embarking on other subsidy-cutting reforms.

But some investors fear that authorities will back away from measures such as cutting subsidies on fuel and other commodities, infuriating Egyptians, one-third of whom live below the poverty line.

“Investors are worried about the risk of a financial reforms downturn by backing away from subsidy cuts or increasing spending on public sector wages or cash transfers.”

The main risk is that any financial reforms downturn could diminish Egypt’s chances of reaching a deal with the IMF on a new deal after the current one ends in November.

The first sign of the possible reforms downturn is the Ministry of Supply’s announcement that it has returned 1.8 million people to the food subsidy system since February, following previous cuts.

Although economic reforms have helped contain inflation, they have not created jobs to meet the needs of a country of 100 million people. Al-Sisi usually calls on Egyptians with poor living conditions to be patient whilst he builds a strong Egyptian economy, but recent protests have revealed that al-Sisi’s economy is not strong, and that only a few demonstrators can make it shake.