Egypt Watch

Egyptian government made a statement on the economic crisis full of fallacies

The Egyptian government released a comprehensive 52-page report responding to what the information called “claims and allegations about the Egyptian economic performance” between June and November 2022. The few months witnessed the peak of an economic crisis that struck the country after the Russian invasion of Ukraine and the subsequent financial repercussions of the war. The report was supposed to be a highly acclaimed step of transparency, but instead, it became propaganda filled with fallacies and made-up achievements.

Sovereign debt crisis

The report addresses the foreign debt crisis, stressing that “Egypt is still within the safe limits regarding the foreign debt ratio to the GDP, still at 34.1%, which is under 50%.” But the report ignored the rate of increase, omitting that foreign debt increased by 238% within eight years, from USD 46 billion in June 2014, when Abdel Fattah al-Sisi took office, up to USD 155.7 billion in June 2022. The more critical criticism regarding the foreign governmental loaning, however, is not quantitative but rather qualitative, considering the consumption of loans in long-term infrastructure and real estate megaprojects with minimal and postponed foreign currency profits, what criticizes the financial status of the country with scarce greenback resources and high needs. The government did not reply to this sensitive question while persisting in financially compromised projects such as the New Administrative Capital.

The government enumerated several greenback resources supporting its financial status and ability to pay off debts. On the other hand, no comments were made on the at least USD 20 billion financial gaps expected in the 2023 budget. And while the report cites the Bloomberg report saying Egypt is likely to benefit from the free exchange rate in drawing up a foreign cash influx, it omits the Bloomberg report that the value of Egyptian treasury bills regresses, increasing the loaning costs despite the pound devaluation and the agreement with the International Monetary Fund.

Bloomberg has quoted Todd Shubert, head of fixed income research at the Bank of Singapore, “a resolutely hawkish Fed is dampening enthusiasm for investing in risk assets, particularly frontier markets like Egypt. A rebound in Egyptian bonds will need improvement in the global climate for risk assets and a more concrete plan on how the country will deal with its not inconsiderable financing needs.” Gordan Powers from Columbia Threadneedle Investments, quoted in the same report, added, “The IMF involvement is a nice policy anchor but does not by itself fix any of the external funding issues as program success is very much contingent on execution of the privatization and foreign-direct-investment agenda, of which investors remain sceptical given previous disappointments.”

Currency floating

The government defended the currency floating, describing it as appropriate for “economies open to the external world and with independent monetary policies, as it contributes to increasing exports and rebelling imports,” considering it foundational for anti-inflation policies of the Central Bank of Egypt to stabilize prices and keep the inflation rate in check. The report attempted to show devaluation as a planned policy rather than resulting from wrong economic choices such as excessive loaning and overdependence on hot money provisions and justifying currency devaluation aimed at getting the government rid of the consequences of devaluation, including soaring prices, corrosion of individual savings and spreading poverty, while inflation rate kept as high as 19.2% last November, over double of the target of 7+/-2 % declared by the CBE. Indeed, exports increased from USD 20.4 billion in 2016 to USD 32.3 billion in 2021, but imports went hand in hand with exports from USD 66.3 billion in 2016 up to USD 76.8 billion in 2021.

Greenback shortage and imports crisis

Greenback shortage was denied, “the government pumps enough greenback cash for the imports accumulated in the ports prioritizing essential commodities and production inputs.” But on the contrary, the Federation of Egyptian Industries still complains of material and input shortages, with shipments still accumulated in ports waiting for USD cash for customs payment. The gap between the official USD exchange rate (about 24.6 pounds) and the unofficial one (exceeding 30 pounds) was ignored in the report. The same occurs with the crisis of poultry fodder that the report attributed to lack of provision due to the war, while fodder shipments are waiting in ports. Accordingly, prices of fodder components in the Egyptian market doubled, soya beans ton increased from 26 thousand pounds in November to 38 thousand in December, and Brazilian/Argentinian corn increased from 10.8 thousand to 13.5 thousand.

Lack of social justice

The governmental statement stressed justice of taxes and tax increases avoid burdening the middle and low classes. Recent protests of lawyers and other professionals against the new taxes system, however, raise queries over high fees put by the government for every service, including registration in the new tax digital system. Further payments were also issued on shop licenses up to 20,000. The government celebrated its increased spending on social protection, health and education, while health and education still acquire shares of the governmental budget, EGP 128.1 billion (1.4% of GDP) and EGP 192.7 billion (2.1% of GDP) respectively, which are well below the constitutional dues that provide 3% of GDP for health and 4% for education.

The World Bank reported last September declined public expenditure for human development in Egypt in 2020, as Egypt allocated only 0.3% of GDP by PPP for social protection, which is a third of what the government used to allocate before 2014 and of the international average of social security 0.9%, even below the average in MENA, which is 0.42%.