Al-Sisi’s Policies Won’t Break the Debt Cycle in Egypt

A new package of austerity measures was announced by the Egyptian government on November 7, in response to ballooning public debt. The measures included liberalizing the price of bread flour as of January 1, 2019, and raising the price of Cairo metro tickets as of December 2019 following a similar fare hike in May.

This is the latest in a series of ineffectual policies that aim to tackle the growing debt crisis, as the government continues to avoid the structural reforms necessary to confront it.

Egyptian Prime Minister Mostafa Madbouly announced that Egypt’s external debt had reached a record high of $92.64 billion (36.8 percent of the GDP) as of June 2018, an increase of 17 percent in the course of a single year. External debt is compounded by rising domestic debt, which reached 3.4 trillion Egyptian pounds ($190 million) as of the end of 2017, a 12 percent increase compared to the previous year.

This rapid increase in debt has outstripped GDP growth, making the debt-to-GDP ratio jump from 87.1 percent in 2013 to reach 101.2 percent by the end of 2017. This has placed significant burdens on the state to make larger interest payments, which reached 31 percent of the annual budget for the 2016–17 fiscal year.

Minister of Finance Amr el-Garhy has stated that the government aims to reduce the public debt to 80 percent of the GDP by 2020 by reducing the budget deficit and increasing per capita income.

However, the minister did not explain how the government plans to do this, and given the current structural weaknesses of the Egyptian economy,” it is difficult to imagine how can this ambitious goal be achieved,”according to a report published by Carnegie Endowment titled Sisi’s Debt Crisis highlighted the critical problems of al-Sisi’s debt crisis.

The Root of the Debt Crisis Lies in the Military’s Management 

The Central Bank’s massive devaluation of the pound in November 2016, which it expected would improve Egypt’s economic performance, has worsened the impact of the debt crisis. GDP growth remains low at only 4.1 percent, reflecting a drop in total exports from $26 billion in the 2013–14 fiscal year to $21.6 billion in 2016–17.

The same picture emerges in the tourism sector, where the total number of tourists that visited Egypt in the 2016–17 period reached only 3.3 million, down from 4.3 million in 2015–16 and 7.7 million in 2013–14.

However, the root of the debt crisis lies in the military’s management of Egypt’s political economy. Military institutions have taken aid from Gulf countries and borrowed heavily from foreign institutions to expand their commercial footprint.

This included massive investments in non-productive mega-projects, the most notable of which are the new Suez  Canal, which cost $8 billion to construct, and the new administrative capital,  which is expected to cost $300 billion.

“The rising level of public debt to pay for these projects indicates the regime’s unwillingness to invest in sectors that would build a competitive export sector,” said the report.

The military also spent heavily on arms imports, which increased by 215 percent in 2013–17 compared to 2008–12, making Egypt the third largest importer of weaponry after India and Saudi Arabia. Rather than invest in the development of a dynamic private sector—in particular, to boost tourism and develop a solid manufacturing base to make exports more competitive—the regime has opted to invest in enriching the military elites.

In essence, it discarded economic necessity in favor of consolidating support for Abdel Fattah al-Sisi among the military top brass.

The military’s aggressive expansion into the private sector also placed significant pressure on a range of industries from mining to food, as active state support to military-owned businesses through tax breaks and subsidies severely hampered the ability of smaller businesses to compete on an equal footing.

The Lower and the Middle Class Carry the Burden 

Even as the military’s spending worsened an evolving debt crisis, the regime focused on paying for it with a massive austerity drive. This policy has shifted the burden onto the shoulders of the lower and middle classes, with little thought of the possible social unrest that might result. Over the course of the past couple years, these austerity measures included cuts in energy and electricity subsidies, the imposition of a value-added tax(VAT) and an increase in the prices of Cairo metro tickets.

This trend continues in the current budget, in which 41.5 percent of tax revenues come from VATs, a regressive form of taxation that places a heavier burden on the lower and middle classes, up from 34.5 percent in 2014–15.

By contrast, the share of tax revenues that come from corporate income decreased from 30.0 percent in 2014–15 to 21.8 percent in the current budget.

Al-Sisi’s Economic Policies Proceed in Worsening the living Conditions 

The new austerity package launched on November 7 follows this trend, as does Sisi’s announcement two days earlier that 5 million government employees would not receive their customary annual raise this year. Even though there has been no immediate backlash, dissatisfaction with the changes adds to the accumulating pressure of worsening living conditions.

The effects of such policies have also been worsened by rampant inflation, estimated to be 20.9 percent as of October 2018, which has particularly affected of the costs of basic foodstuffs. The price of beans, a dietary staple for lower-income families, increased from 14 Egyptian pounds ($0.78) per kilo in September 2018, to over 30 pounds ($1.68) in November.

The situation is compounded by Egypt’s diminished prospects of winning financial support from Gulf allies even though it received billions of dollars’ worth of aid from them over the past few years. Sisi has promised to take on an active role in guaranteeing the security of the Gulf states, yet he has not followed through on those pledges.

Egypt is particularly unwilling to play a more prominent role in supporting Saudi regional goals, as seen by the lack of its participation in the Yemen War. Even though Egypt is participating in the blockade of Qatar and has handed over Tiran and Sanafir islands to Saudi sovereignty, Saudi Arabia expected Egypt to play a bigger role in supporting its policies.

The Cycle of Debt hard to Break Under the Military Rule

According to the report, “In essence, it appears that the regime has opted for the path of least resistance by continuing to impose heavy austerity measures, rather than break the cycle of debt by undertaking deep structural reforms to the private sector to spur sustainable growth.”

These measures could include privatizing military-owned enterprises and the imposing taxes on their profits, investing more in the education system to raise the quality of the labor force, implementing progressive taxation, and raising the minimum wage to stimulate local demand. However, as long as the regime continues to focus on consolidating support among the military, these measures are unlikely to be implemented.

In the short term, the current policy will allow the state to increase revenues while cementing the alliance between the regime and the military, its primary constituency. In the long term, however, protests against austerity are likely to become more frequent. Spontaneous protests have already erupted against the first hike in the price of Cairo metro tickets in May.

Even though the regime has so far been able to use extreme repression to deal with unrest, in 2017 the Arabic Network for Human Rights Information documented 505 social and labor protests,  and the real number is likely higher. “Such demonstrations could easily escalate to a point where they undermine the cohesion of the military between the officers and the conscripts, who belong to the lower and middle classes—at which point the regime may be forced to permit this dissent or risk alienating its base,” said the report.  Continuing down this path of austerity opens up the possibility the regime’s repressive apparatus will disintegrate under the weight of austerity and the military’s debt-driven economic expansion.