January- August 2018 Economic Analysis

This year from January to August think tanks have published detailed reports and papers on the current economic situation in Egypt and its deterioration since the 2013 Coup. 17 think tanks have published research and reports but those that have monitored and reported on the topic throughout the year have included  Brookings Institute, Carnegie Endowment, Egyptian Institute for Studies, Economic Research Forum, Middle East Institute and The Tahrir Institute for Middle East Policy. More recently the European Council on Foreign Relations and The Washington Institute for Near East Policy have introduced reports on Egypt’s economy in the last two months. A total of 46 reports on the economy have been published.

In the early part of the year economic analysis examined the Egyptian pound, socio-economic challenges, the public debt, stabilization of the economy and the IMF. However discussions have steered towards the militarization of the economy, the energy crisis, youth unemployment, foreign investment, the suffering of agriculture in Egypt, the subsidy cut, the Grand Ethiopian Renaissance Dam and the latest release of US foreign aid.

 

Militarization of Egypt’s economy has been front and centre in several reports published. In fact Transparency International published a lengthy study called “The Officers Republic: The Egyptian Military and Abuse of Power” in March 2018. The military has kept the extent to which it controls the economy private, however economic analysts “estimated the proportion of the army’s economy at about 50% of the State economy, while others said it was between 45% and 60%.”[1] The 2015 decree by General Sisi authorizing the Defense and Interior Ministries to form security and guarding companies, allowed for increasing military presence in the private sector.[2] This transitioned the army and police from their sole purpose of security and defense into the private sector and from there it escalated. Through the militarization of Egypt’s economy, the private sector is being monopolized. Furthering this, on July 25, 2018, the Egyptian Council of Representatives approved a law on the regulation of public contracts.[3] The purpose of the law is to secure the army’s commercial transactions by abolishing legal restrictions on government bodies in signing no-bid contracts. This allowed for investment partnerships to form between companies of the Ministry of Defense and the government. Setting this monopoly in stone, law number 32 which was passed by parliament in 2016 – bans third parties, including Egypt’s Public Prosecutor, from challenging the conditions of public contracts.[4]

Egypt’s public debt (both domestic and external) has been on the rise. By the end of 2014 the domestic debt reached LE 1.83 trillion, an increase of about LE 300 billion since the 2013 military coup.  The situation has worsened since with the domestic debt reaching,  LE 2.1 trillion in June 2018.[5] The exacerbation of the Egyptian public debt affects the fragility of the GDP, the budget deficit and the imbalance of the balance of payments.

Several  reports have discussed cuts made by the Egyptian government to important sectors and services, one of which is agriculture. The defunding of the agriculture sector in Egypt has led to a reduction of 68% in research and investments. This has resulted in the cancellation of more than 15 research projects serving the agricultural sector at the Agricultural Research Centre and 12 research programs at the Desert Research Centre. Cotton has always been well known for being a top crop in Egypt, but this year cotton production was reported at its lowest in the past 100 years.[6]

In another effort to reduce subsidies, the Egyptian government made the decision to cut fuel subsidy. Analysts identified that while Egypt provides 70% of its fuel demands through its domestic resources, and imports 30%, the government relied on world prices for calculation of the value of subsidized fuel, assuming it imported majority its fuel needs from abroad.[7]  The Egyptian government extended its subsidy reduction to electricity and drinking water. These decision were partly linked to an agreement with the IMF to cut subsidies in exchange for the fourth loan tranche (approx. 2 billion dollars).[8] This being said, only a small portion of the loan is allocated to  support the budget and the remaining will be used to back the foreign exchange reserves, meaning the loan will not be employed in any development projects. Cutting subsidies has caused  inflation in the prices of goods and services even though wages have not seen an increase.[9] The attempts to reduce the aggravating budget deficit have exacerbated prominent living conditions suffered by Egyptians under the rule of the military coup. These problems range from the drastic increase in fuel prices, the electricity crisis, low wages, aggravation of unemployment, specter of price rises, the bread queues, along with the erosion of the Egyptian pound. [10]

With the decision to float the Egyptian pound after the military coup, the pound has lost over 60 percent of its value.[11] The government’s decision to float the Egyptian pound did entice the return of some foreign investment. However the currency also lost more than half of its value. Evidently, this caused a sharp hike in the cost of living as prices for fuel, food, and public utilities reached unprecedented levels.[12]

The Grand Ethiopian Renaissance Dam, a topic commonly discussed in 2017, has regained focus in the last several months.  Ethiopia is building a dam along the Nile River to rely on for energy security and economic growth. However, for Cairo, this is an existential threat as the Nile river provides around 85% of Egypt’s fresh water.[13] The creation of this dam will divert much of the water that has historically flowed into Cairo’s Nile Delta. A drop in the water flow could cause the country to suffer from absolute water scarcity in the near future and cause unemployment for over 200,000 Egyptians[14].

In the midst of all these financial disasters, on Wednesday, July 25, 2018, the US released $195 million in military aid to Egypt[15], suspended from Egypt for a year for human rights concerns. However as reported by the Human Rights Watch, human rights abuses have not improved in Egypt over the past year. Egypt has not repealed or amended the draconian 2017 NGO law, and it has continued levelling fabricated charges against activists and banning them from leaving the country. The US justified the decision by saying that Egypt has taken steps over the last year in response to specific U.S. concerns but rather such a decision shows that the US could use human rights as a cover up for other political interests[16]  in using its economic aid.

Therefore, “for those Egypt-observers who thought FY18 might be the year that Egypt’s assistance would get a long overdue facelift, this aid package, rooted in parameters of the past and aloof to dynamics on the ground, is a message: don’t hold your breath.”[17]

[1] https://www.me-policy.org/2018/05/04/the-officers-republic-the-egyptian-military-and-abuse-of-power/

[2] https://www.me-policy.org/2018/07/12/egyptian-military-destruction-of-economy-3/

[3] https://www.me-policy.org/2018/08/29/egyptian-institute-for-studies-militarization-of-egypt-amid-army-economic-hegemony-2/

[4] https://www.me-policy.org/2018/06/13/egypts-shaky-investment-climate/

[5] https://www.me-policy.org/2018/07/12/egyptian-military-destruction-of-economy-3/

[6]https://www.me-policy.org/2018/07/12/egyptian-military-destruction-of-economy-3/

[7]https://www.brookings.edu/blog/order-from-chaos/2018/03/01/egypts-long-term-stability-and-the-role-of-the-european-union/

[8]https://www.me-policy.org/2018/08/02/reduction-of-subsidy-and-egypts-financial-situation/

[9]https://www.me-policy.org/2018/08/02/reduction-of-subsidy-and-egypts-financial-situation/

[10]https://www.me-policy.org/2018/07/12/egyptian-military-destruction-of-economy-3/

[11] https://www.me-policy.org/2018/04/27/do-egyptians-regret-hosni-mubarak-today/

[12] https://www.me-policy.org/2018/04/30/egypts-long-term-stability-and-the-role-of-the-european-union-2/

[13] https://www.me-policy.org/2018/08/01/the-end-is-nile-international-cooperation-on-egypts-water-crisis/

[14] https://www.washingtoninstitute.org/policy-analysis/view/breaking-the-stalemate-in-the-egypt-ethiopia-dam-dispute

[15]https://www.me-policy.org/2018/07/12/egyptian-military-destruction-of-economy-3/

[16] https://www.me-policy.org/2018/08/01/us-release-of-military-aid-to-egypt-sends-signal-2/

[17] https://www.me-policy.org/2018/04/09/what-egypts-fy18-aid-package-means-for-egypt-u-s-relations/

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