On Monday, the Central Bank of Egypt decided, in a special meeting, to raise overnight interest rates for deposits, loans and primary operations by 100 points (1 percent) to record 9.25 percent, 10.25 percent percent and 9.75 percent, respectively. .
As the Bank expressed its belief in “the resilience of the exchange rate as a tool to adapt to shock waves”, the US dollar exchange rate rose after the meeting from EGP 15.7 to EGP 18.54 (trending). bullish) in what people call as “the floating second” on the first devaluation of the Egyptian pound in November 2015.
According to the press release of the meeting, the Bank attributed the decision to “local inflationary pressures and excessive pressure on the trade balance.” However, several economic commentators questioned the Bank’s explanation of targeting the charge at specific economic policies carried out by the Egyptian government over the past few years, which led to the current vulnerability of the Egyptian economy. Therefore, this report aims to shed light on many policies, in addition to the international crises that brought the Egyptian economy to the current impasse.
High-cost, low-benefit megaprojects
Months after taking office, Abdel Fattah Al-Sisi declared the start of construction of a new branch of the Suez Canal. The mega-project costing $8.2bn while Egypt was suffering from severe reserve dollar shortages was said to have doubled the canal’s yields to $13.2bn. Even so, several economic experts warned that the project would not achieve a specific increase in the income of the canal in the short term due to the low growth rates of international trade. In 2021, the Suez Canal’s revenues barely exceeded $6 billion annually. However, al-Sisi, who said it does not depend on feasibility studies, defended his project saying it was to “boost the morale of the Egyptians.”
Two years later, Sisi, obsessed with his profile, proclaimed a new, larger project, the New Administrative Capital, showing that he had not learned the lesson of the New Suez Canal. After the Emirati investment was withdrawn in 2015, the military and government poured in assets to finish the first phase, which cost some $25 billion.
Aside from megaprojects, investments in real estate, highways and infrastructure took up the lion’s share of government spending at 71 percent, leaving minimal investments for other sectors.
Sisi’s obsession with spectacular feats even drove up the cost of his unfeasible real estate and infrastructure projects through his insistence that the projects be completed ahead of schedule. For example, according to Carnegie Middle East Center senior fellow Yezid Sayigh, “Al-Sisi’s demand in 2014 that the Suez Canal expansion be carried out in one year (instead of the three years they had estimated Army engineers) inflated the bill from $4 billion to more than $8 billion.”
The government’s lack of foresight continued even after the Covid-19 pandemic, when the Egyptian government contracted the German giant Siemens to build a high-speed line. The government said that the total cost of a 1000 km network amounts to EGP 360 billion (then around $22.5 billion), while Siemens reported that the order value of the initial line is around $3 billion. Siemens’ deal came after it concluded another with the Bombardier-led consortium in 2019 for $4.5 billion.
In conclusion, what the government had saved through harsh austerity and social savings was wasted on low-return projects that depleted national income.
To finance such capital-consuming investments, the Egyptian government resorted to foreign loans. As a result, Egypt’s foreign debt peaked dramatically from EGP 40 billion in 2015 to just under USD 140 billion in 2021 ($137.42 billion), an increase of 350 percent in six years. Such a huge figure was supposed to make Egypt a powerful and productive economy if it had been wisely invested in value-generating projects. Instead, public debt rose steadily after the initial drop in 2017 to stand at 91.5 percent of GDP.
The growing public debt overwhelmed the Egyptian budget, with its fees and interest consuming between 30 and 40 percent of its total value. In 2018, Egyptian Finance Minister Mohamed Mait said in a television interview that the government’s loans were to pay off the debt burden, meaning the country entered a vicious cycle of lending.
High interest rates
According to Bloomberg, Egypt had the highest real interest rate in the world to attract foreign investors or so-called “speculative money” for its local debt. Hot money is a well-known economic jargon that indicates international investors who move finances between the country’s financial assets for quick profits. As of December 2021, Egypt’s foreign holdings of treasury bills amounted to $20.423 million. However, after the Russian invasion of Ukraine, Egypt witnessed an exodus of dollars, with estimates ranging from $300 million to 3% of the billion outflows.
Like many emerging markets, Egypt relies on speculative capital to meet its ongoing dollar financing needs. According to The Economist, Bruno Bonizzi, high interest rates to attract cash flows in emerging economies create a “subordinate financialization.” Investors extract capital gains and resources from emerging economies.
In addition, high interest rates guide foreign investors towards portfolio investment as a safe, fast and profitable investment away from direct investment, which means long-term investments in productive projects. This appears in the stagnation of foreign direct investment in Egypt at USD 5-8 billion annually, most concentrated in the energy and natural resources sector.
Ironically, while Egypt cut food and energy subsidies, the country ranked as the world’s third largest arms importer in 2014-2018, according to SIPRI. The Stockholm Institute reported again in 2021 that Egypt’s arms imports increased by 136 percent in 2015-2020 compared to 2010-2015.
The most notable deal was in 2015, when Egypt bought 24 Rafale fighter jets along with two advanced warships from France for €5.3 billion. Another €3.75 billion order for 30 Rafale aircraft was announced in 2021 to be delivered in 2024-2026. According to the Egyptian Defense Ministry, the deal is financed with a 10-year loan. In 2020, and despite human rights criticism, Egypt bought 2 FREMM frigates from Italy for approximately €1.2 billion. Italy’s Il Fatto Quotidiano reported that the frigate deal is part of a larger €9 billion order called by Italian reports “the deal of the century” as it will be the most high-profile Italian arms sale since World War II. World War.
The Egyptian army needed to modernize and diversify its equipment. Still, many purchases were not well-planned according to a strategy to form a modern integrated army, but rather were motivated by political and personal interests of high-profile Egyptian officers and generals. Then the bill for the weapons doubled, out of the blue.
More recently, the story of Safwan Thabet, the Egyptian businessman, has been trending in Egypt, as the owner of the giant dairy food industries, Juhayna, has been jailed, and his son, Seif, the CEO of Juhayna, since 2020. However, no clear charges were leveled at Thabet and Seif, except for propaganda charges of financing terrorism. At the same time, reports said that Thabet was arrested after refusing to sell the majority stake in his company to the military.
Thabet was just one case among numerous Egyptian businessmen, who complained about the expansive military business disrupting free market rules as the military business gains particular advantages, including Egyptian tycoon Naguib Sawiris, who told AFP: “Companies that are government-owned or with the military don’t pay taxes or customs,” adding: “We, of course, can’t do that, so competition from the start is unfair.” Even the IMF pointed to the negative effect of the state company over competition.
The negative effect of military business is not limited to unfair competition. According to researchers at the Carnegie Middle East Center, the military industry is inefficient considering its overall savings. It also suffers from mismanagement and corruption due to the dominance of former officials and networks of interest in its dynamics, without oversight or parliamentary review. Another risk is that the military business will play a weak role in enhancing new opportunities for the Egyptian economy through localization of technology, for example.
Sisi bears a heavy responsibility for making these five mistakes; the effects of his failed economic decisions began to manifest themselves violently in the Egyptians, the high prices and the increase in the price of a loaf of bread, gas cylinders and other necessities and basic merchandise caused a wide sector of the Egyptians to express their anger against Sisi and we hold him solely responsible for this accelerated collapse.
The views expressed in this article are those of the author and do not necessarily reflect the editorial policy of the Middle East Monitor.