After the Arab Spring

Emad Mekay, IBA Middle East CorrespondentMonday 14 October 2019

Egypt received a $12bn IMF bailout following the overthrow of Hosni Mubarak’s regime and macroeconomic indicators are positive. Nevertheless, one of the region’s most influential countries, with a population of 100 million, remains shackled by poverty, debt and public resentment.

Egypt is enjoying a near ubiquitous addition to its desert landscape: a chain of green and pink petrol stations oddly named ‘Chill-Out’ in English. From prime locations on Egypt’s roads, the stations offer services from imported tyres to coffee shops and branches of McDonald’s and KFC, all courtesy of the chain’s powerful business owners: the country’s ruling military.

The stations are one of the flashy signs of how the military are overhauling the economy of the most populous Arabic-speaking nation under a programme, started three years ago with the Washington-based International Monetary Fund (IMF), that saw the country building new five-lane toll roads, bridges across the Nile with glass floors, and megaprojects that include a new fenced capital city which hosts the largest church and mosque in the region.

But, as the IMF’s loan programme comes to an end, economic conditions on the ground are still as confusing as ever. Egypt looks like a success story by macro-economic indicators, but there are several risks ahead. Many Egyptians complain they are falling further behind.

Back to the Brotherhood

In June 2013, the military overthrew the country’s first and only democratically elected government. Under the leadership of strongman General Abdel Fattah al-Sisi, they spent the first two years cementing their grip on power. They filled prisons to capacity with thousands of young secular democrats, who had campaigned for freedoms and more rights, and with members of the Muslim Brotherhood, the largest political Islamic grouping. Military officers came to run the local media. Criticism on social media was criminalised. Hundreds of websites, including Human Rights Watch and Al Jazeera, were banned, and free press and personal liberties strangled. Now, this nation of 100 million people lives under martial law, which Sisi so mechanically renews every three months that it no longer makes headlines.

By mid-2015, Sisi had created the quietest political environment ever experienced in this nation, once humming with intellectual fervour. Assured of the lack of political opposition, the military turned their attention to the deteriorating state of the economy. The flagship of the Sisi government economic plan was a $12bn rescue loan from the IMF which included sensitive measures such as cutting social spending, trimming subsidies, raising taxes and limiting bailouts to troubled national sectors. The agreement was announced as a panacea for the country’s chronic economic woes: a stepping stone towards new prosperity by fixing budget deficits and attracting foreign investment.

The IMF deal opened the doors for the Sisi government to tap several other credit lines on the international market. Flush with borrowed cash, officials ploughed money into 7,000km of new toll roads, tunnels and even contracts for monorails – all built by military construction companies or with their help. Vast infrastructure projects, such as the so-called Suez Canal Expansion, a new capital city and a trade hub east of Port Said, dominated the news cycle and were presented as a triumph of national will and international standing. The government also moved to invest in big oil and gas projects and to develop gas fields in the Eastern Mediterranean. Natural gas production increased by 75 per cent in 2016 and Cairo is eyeing the potential to develop downstream petrochemical industries.

Military manoeuvres

Though, the most noticeable aspects of the economic adjustment programme in Egypt were the lifting of food and energy subsidies and the sharp devaluation of the Egyptian pound, which lost half of its value.

While his predecessors chose to tread cautiously on subsidies for fear of public backlash, the 64-year-old Sisi, who once ran the country’s feared military intelligence branch, never flinched. He implemented round after round of deeply unpopular austerity measures, removing subsidies on bread, other food items, electricity and fuel. To contain public frustration, announcements would come quietly over weekends or on the eve of major public holidays. The military would then be deployed to the streets overnight to preempt protests that materialised initially but quickly disappeared under harsh crackdowns by well-armed troops.

When Sisi increased the price of the Cairo metro tickets four-fold in one go last year for 3.5 million daily commuters, thousands of armed security forces swarmed metro stops to arrest the few passengers who dared object.

The media, now fully controlled by the military, would air non-stop commentary by talk show hosts or government-allied economists exulting the virtues of liberating the economy from the burden of subsidies. To a background of street flag-waving and patriotic songs beaming day and night, Egyptians would wake up in the morning to find out their taxes had increased. Now, consumers pay a 14 per cent VAT on phone calls and almost all purchases, a minimum of 22 per cent personal income tax and a new fluctuating real estate tax. In July 2017, inflation peaked to 33 per cent before it eased to 14.4 per cent this year.

This July, the government raised fuel prices by 16–30 per cent and electricity tariffs by another 15 per cent, the fourth consecutive hike in less than three years. Fees are now charged for once-free mundane official services at police stations. Emergency ambulance services were five times more expensive in August than in July.

Sisi has now successfully cut subsidies from 11 per cent to five per cent of GDP, slashed public servants’ payroll and benefits, frozen government hiring and is offering early retirement buyouts to ease pressure on the budget with little political fallout.

During the IMF programme, Sisi and his hand-picked loyalists promoted doing business in Egypt to international investors, playing up the country’s large market of 100 million people and a two per cent growth rate per year. The country offers a cheap currency, cheap labour with no ability to organise under a harsh martial law and the opportunity to buy minority stakes in at least 23 state-owned enterprises, including Banque du Caire, one of the country’s largest.

Riding the rapid pace of economic decisions, the government was quick to declare victory two months before the IMF loan was due to end. ‘We are out of the ditch,’ Tarek Amer, the country’s Central Bank Governor and a top Sisi confidante, told the press.

Government officials say GDP is now at 5.5 per cent and will grow to six per cent in the coming two years, mostly supported by rising natural gas production from the Eastern Mediterranean. Further, Sisi’s government brandishes foreign reserves cushions of $44bn – after they collapsed to $16bn after the start of the Arab Spring in 2011 – as more proof of the economy’s health.

In July, the IMF said: ‘Economic growth has been steadily improving since the beginning of the reforms, and at 5.5 per cent is among the highest in the region.’ The World Bank said Egypt’s programme included ‘bold reforms’ that help in ‘eliminating extreme poverty and promoting shared prosperity’. The IMF, which has provided the country with billions in loans, said the changes sought ‘inclusive growth’ and were ‘transformational’ and ‘home-grown’.

Morgan Stanley’s Head of Emerging Markets and Chief Global Strategist Ruchir Sharma described Egypt as ‘the best reform story in the Middle East, perhaps in any emerging market’. Sharma even lamented how the international press reports on the country’s political tensions.

Mixed messages

But, against this official euphoria, a different set of numbers came in. In the first report on income since the launch of the IMF-backed programme, the country’s census bureau quietly revealed in July that 32.5 per cent of the population were living in poverty – subsisting on $44 a month – by the end of 2018, up from 27.8 per cent in 2015 and almost double the rate in 2000. The figures, unlike other indicators, hardly made it to the Egyptian media but still validated what many Egyptians complain about: they don’t enjoy the benefits of massive international loans or the adjustment programme. Late in September, thousands braved the brutal security forces and protested in several Egyptian cities against living conditions and widespread state corruption.

Officers of the IBA Poverty and Social Development Committee found similarities between IMF programme in Egypt and other international bailout deals that ended up failing ordinary citizens. ‘It’s a pertinent example of how the poor are disadvantaged by economic growth because they are not a part of the expanding economy but are actually the unintended consequences of it,’ says Neil Gold, Chair of the Committee and Of Counsel at Norton Rose Fulbright in New York. ‘Trickle down doesn’t work – at least not always.’

Norman Clark is an officer of the IBA Poverty and Social Development Committee and a founding principal of Walker Clark in Fort Myers, Florida. He notes the typical absence of shared benefits in those adjustment programmes. ‘To focus only on the “good numbers” at the top of the economy (eg, GDP, low unemployment, booming business, etc) is really just Andrew Mellon’s and Herbert Hoover’s “trickle down” theory, which has been disproven consistently since 1930. So, yes, it is possible to have good numbers at the top, but bad numbers at the bottom,’ Clark tells Global Insight.

‘Those who are serious about eradicating extreme poverty cannot allow themselves to be distracted by the “bull markets” and GDP numbers,’ Clark continues. ‘To do so is implicitly to assume, as some of the more notorious presidential administrations in the US have done, that the inability to rise out of poverty is a moral defect, rather than a treatable, and to a large extent preventable, side effect of untamed capitalism.’ Instead, Clark advocates for a ‘do well by doing good’ principle through social entrepreneurship and access to justice efforts through formal fee-collecting practice groups.

Another indicator on the downside is paltry growth in foreign direct investment (FDI), essential for higher exports, job creation and a dynamic private sector. The country is heading for a second year of declining FDI. Pharos Holding, a Cairo investment bank, forecast FDI to reach $9bn by the end of the year, less than the government’s target of a minimum of $10bn annually. ‘Net FDI inflows are still at the same level as they were before the 2016 reforms began,’ Fitch Ratings said in a recent analysis. A breakdown of the FDI figures shows that six out of every ten dollars went to the energy sector alone, leaving manufacturing, healthcare, education, technology and consumer goods trailing behind.

Amr Adly, an assistant professor in political science at the American University in Cairo, says sectors that enjoy FDI flows, such as oil and gas, do not offer many job opportunities. ‘Sectors that might create jobs characterised by high productivity and wages – such as skill-intensive services and high value-added manufactured exports that require skill and technology inputs – have not grown, certainly not at a rate to influence the overall poverty data,’ Adly says. ‘These sectors require large public investment in education and vocational training, and in research and development, as well as an institutional infrastructure friendly for innovation and entrepreneurship. None of this has been prioritised by Egyptian governments.’

The restructuring programme has further plunged Egypt into the red. The country’s model under the IMF agenda has been one of consumption-based economic expansion driven by government borrowing and imports. World Bank data shows the country’s external debt had risen to $106.2bn at the end of March from $96.6bn at the end of 2018, which could weigh on the overall budget by forcing expenditure on interest payments instead of on important public policies. Already, Cairo spends ten per cent of GDP on debt servicing and debt is seen growing as a proportion of the budget too.

Egypt’s current-account deficit, a measure of financial and trade flows with other countries, was seen widening over the next year to 2.8 per cent of GDP by the end of June 2020, from an estimated 2.5 per cent in the 2018/2019 financial year. ‘We expect external shortfalls will continue to be funded by debt, given that foreign companies still seem too unsure about Egypt’s reform trajectory to commit money as direct investments,’ says Fitch Ratings.

In September, Moody’s Investors Service reported that Egypt has a weak debt affordability and very large financing needs. The country’s credit rating of B2 indicates a high credit risk.

Other risk factors include weaker growth in the EU, Egypt’s main trading partner, and lower revenues from expat remittances, which are likely to suffer under the ‘Saudization’ programme in Saudi Arabia, which accounts for about 40 per cent of remittances, according to the Institute of International Finance, a banking group in Washington, DC that tracks emerging markets. Neighbouring Saudi Arabia now encourages employment of Saudi nationals at the expense of foreign labour.

The two other main sources of foreign currency – tourism and the Suez Canal – are only marginally increasing. Tourism faces high security risks and the Suez Canal will grapple with slower global growth.

More broadly, geopolitical tensions and uncertainty, which traditionally scare away FDI, are not on Egypt’s side either. The military rulers are major players in fomenting unrest around the region, as they are involved in backing one side in the civil war in Libya and are active in a siege against Qatar in the Gulf and the Israel blockade against the Palestinians in Gaza.

Military monopoly

While the declared target of the IMF and the World Bank programme was to level the field for the private sector and shrink the role of the state, military companies are crowding out the private sector and are expanding their operations across the country. They own 51 per cent of the company developing the new capital city, with a planned cost of $45bn – nearly the equivalent of all of the country’s current foreign reserves.

The military establishment has stakes in businesses from baby formula production, real estate and consumer goods to food companies. Just like the pink gas stations, pop-up grocery kiosks owned by the military sprout up overnight in top locations in Cairo’s busiest squares, like Ataba and Ramses.

Private investors often complain that privileges granted to military-owned companies have contributed to reduced market competition. The military can easily put other competitors out of business as they benefit from free labour in the form of vast numbers of conscripts, discount official services, full access to prime land and transportation at nearly no cost. The military budget is also off-limits for most watchdogs. Martial law, in place for years, gives the authorities power to seize properties and wealth on national security grounds without court procedures.

Alvaro Rodrigo Castellanos Howell, Vice-Chair of the IBA Poverty and Social Development Committee and a founder at Rodriguez Aguilar Castellanos Solares y Alvarado in Guatemala City, laments the absence of governance goals in Egypt’s IMF economy adjustment programmes. ‘An emphasis can be put on business and human rights due diligence when decisions are made to whom to grant such loans,’ Castellanos tells Global Insight. ‘Rule of law and justice for all should be a very significant part of programmes related to economic reforms.’

Rampant corruption, disregard for the rule of law and stifling bureaucracy – all major impediments to sustainable development – remain major challenges here. ‘Poverty, development and international loans are issues that sadly have been on the agenda for decades. Without a strong rule of law, nothing is possible for poverty reduction and the legal profession is nearly powerless, or has an extreme challenge to bring it back,’ says Carmen Pombo, a member of the Advisory Board of the IBA Poverty and Social Development Committee and Chief Executive of the Fernando Pombo Foundation. ‘International money ought to be invested as well for the advancement of the rule of law. This will revert directly in: a) more international investment, because it generates legal certainty, and therefore the market grows; b) poverty reduction; and c) access to justice for everyone,’ she says.

Castellanos goes a step further by proposing affirmative action, particularly in education and public health to correct those bailouts. ‘Affirmative action should be part of these efforts. Of course, not any affirmative actions, but those that, by the international standards of objectivity, reasonability and proportionality, can demonstrate sooner or later that they can achieve equality of opportunities,’ he says.

Convincing Egypt’s military rulers to give up business monopolies to achieve equality may not be an easy task. And until that happens, Egyptians will see more of the military-owned pink and green gas stations and very few improvements to their own living standards.

Emad Mekay is the IBA’s Middle East Correspondent. He can be contacted at emad.mekay@int-bar.org