The Sick Man of the Middle East
Summary: a summer energy crisis with rolling power cuts, the
continuing Gaza war and an ever-deepening reliance on costly foreign
borrowing further underline the multiple vulnerabilities of the Egyptian
economy.
We thank our regular contributor Maged Mandour for today’s
newsletter. Maged is a political analyst who also contributes to Middle
East Eye and Open Democracy. He is a writer for Sada, the Carnegie
Endowment online journal. Maged is the author of the recently published Egypt under El-Sisi
(I.B.Tauris) which examines social and political developments since
the coup of 2013. You can find Maged’s most recent AD podcast here.
More than a decade after the coup that ended Egypt's democratic
experiment, the Sisi regime that emerged from it is facing an
unprecedented reckoning. Plagued by a series of interconnected
challenges and self-inflicted wounds, a government whose ideological
legitimacy is anchored in chauvinistic nationalism is steadily losing
the ability to formulate its own policies. Arguably, Egypt has now
become the “sick man of the Middle East,” a parasitic burden to its
allies and an ineffective regional player, unable to influence
developments in neighbouring Gaza or across the Red Sea in Yemen. Nor is
it able to avert the risk of a wide regional war that, should it come
about, will have devastating impacts on the Egyptian economy. On top of
this, the economy is so fragile that it now heavily relies on regional
backers, and more worryingly, international capital flows to stave off a
complete financial collapse while steadily losing the ability to
formulate its own monetary policy, a sure sign of the peripheralisation
of the Egyptian economy and the concomitant loss of sovereignty.
The vulnerability of the economy to the whims of international
investors became apparent in August with a sudden drop in the value of
the pound to reach 49.5 EGP to the dollar, a historic low. The rapid drop was caused by the departure of what Prime Minister Madbouly said was “7-8%”
of the total value of international capital invested in short-term
Egyptian debt instruments, so-called “hot money”, as foreign investors
sought safer assets. Hot money had rushed into the country after news of the mammoth Ras El Hekma deal, valued at US$ 35 billion of Emirati investments and the increase in the value of the IMF loan from US$3 to 8 billion. The total stock of hot money reached US$ 32.7 billion
by the end of March, a historic high and an increase of 180% from the
beginning of the year. Such a heavy dependence places the regime at the
mercy of international investors who can heavily influence a key aspect
of monetary policy, namely interest rates. This was reflected in the 19
August increase in interest rates
offered on 3 month debt instruments, which exceeded 29%, jumping from
28.3% the week earlier and an average of between 26.75% and 27% over the
past several months. This simply means that international investors can
apply enormous pressure on government finances by demanding higher
interest rates with the regime having limited bargaining power thus
adding further pressure to an already bleak financial picture, with debt
servicing consuming 91%
of the tax revenues for the new fiscal year. A further rise in rates
has the potential to create a truly catastrophic collapse of the
economy.
The regime increasingly finds itself hostage to international
developments, regional tensions and the decisions of the Fed and the
ECB, in effect steadily losing its ability to control monetary policy
and transforming the Central Bank of Egypt into an appendage to Western
central banks. One only needs to keep in mind that the debt crisis was
triggered in 2022 by the exodus of US$ 20 billion of hot money because of the Russian invasion of Ukraine. A lesson that remains unheeded.
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