Residents of the northwestern coastal area of Ras el-Hikma gathered
to condemn the low compensation offered to them by the government for
their eviction
Though it seems that the mass cash infusion from the UAE,
international markets and the IMF should alleviate the worst symptoms of
the crisis, there is good reason to believe pressures on public
finances will continue. This mainly stems from historically high
interest rates the regime is using to entice capital inflows together
with spiralling inflation which will continue to push interest rates up.
For example, part of the T-Bill offering in the first week of March,
maturing in 6 months and one year, were sold with a whopping 32.5%
interest rate, an historic high. This will act to apply pressure on the
ballooning debt obligation, pushing the Ministry of Finance to start reworking its draft of the state budget for 2024/25 due to the expected increase in debt servicing which has already consumed 60.3% of public expenditures for the first three month of FY 2023/24. The expected devaluation will also lead
to an increase in the value of external debt as a percentage of the GDP
and the state budget, since both are calculated in EGP. Every one pound decline
of the EGP against the US dollar equals an increase in the cost of
servicing the external debt by 83 billion EGP. The latest devaluation
has increased the value of Egypt’s debt by a massive 1.5 trillion EGP.
Placing this in context, the total size of the Egyptian state budget is
currently standing at almost 3 trillion EGP. The situation is compounded
by rising inflation, which reached 35.7% in February, increasing from 29.8% in January.
This came as a surprise as the expectation was that inflation would
continue to slow. The spike was before the official devaluation of the
pound and it is now anticipated that inflation will hit a new record
of 45% later in the year. Such rampant inflation places pressure on the
central bank to raise interest rates to avoid slipping into negative
interest rate territory and to continue to appeal to investors. This, in
turn, is bound to increase the debt, placing additional burdens on the
already strained state budget and further cannibalising public
resources.
The regime is already poorly equipped to deal with this ongoing debt
dynamic and is left with three possible choices: increase monetary
supply, increase taxation or impose heavy austerity measures. Increasing
monetary supply
is already being used by the regime, growing by 31.9% in 2023, after
jumping by 23.1% and 15.7% over the past two years. This policy,
however, will only act to worsen the problem, raising inflation as the
currency in circulation increases. Pushing up taxation is another way to
raise revenues. However, considering the regressive nature of the
Egyptian taxation system, this will shift the burden onto the shoulders
of the poor and the middle class, a policy preferred by the military
elites. The result of such a move will only act to weaken local demand
which in turn will impact the recovery prospects of an already badly
battered private sector. But the growth of entrenched militarised state
capitalism will not be affected as it continues to consume public
resources to feed its seemingly insatiable appetite. The final policy
option is austerity measures which the regime seems willing to implement
as evidenced by the price hikes
for several basic goods at the beginning of the year. The adverse
effect of austerity is very similar to the increase in regressive
taxation: a weakening of local demand damaging the private sector and
increasing poverty rates.
Regardless, these measures are ignoring the most glaring issue facing
the Egyptian economy, namely the regime’s dogged insistence on
continuing with its policy of mega projects fuelled by debt and public
funds. The most notable example
is the second phase of the New Administrative Capital (NAC), announced
in January, with an estimated pre-devaluation budget of 250-300 billion
EGP. Another example is yet another Suez Canal expansion project, with an estimated budget of US$ 14 billion which is still under planning. This comes despite the amount being transferred
from the Canal to the state budget falling from US$ 4.5 billion in
2014/15 to US$ 3.8 billion in 2021/22, raising major concerns about the
viability of the project. (Further loss has been incurred by Huthi attacks
on Red Sea shipping with revenues down by 40%.) However, since the Suez
Canal is a military fiefdom, with off the book levies being extracted
by the military on each passing ship, the rational for the project
shifts from public benefit to the enrichment of military elites.
The reality is that the same dynamics that led to the financial
crisis still prevail. Indeed, the infusion of capital into regime
coffers will only encourage the continuation of the same old policy
likely leading to a similar result, namely another debt crisis. More
important, however, is that it will transform the regime into a dead
weight around the ankle of its allies, a military autocracy unable to
survive without continuous external support and one that is ever more
vulnerable to the whims of international capital. The most devastating
consequence, however, is for the people of Egypt who will continue to
shoulder the burden of the Sisi regime's folly and the willingness of
his allies to propagate an unsustainable economic model, a black hole
sucking in billions in public funds that could otherwise be used to
alleviate the economic misery that has been inflicted on the vast
majority of the population.