As the Egyptian parliament was nearing the conclusion of its review of the government’s draft budget for the 2017–18 (July–June) fiscal year, President Abdel-Fattah el-Sisi on 21 June announced a package of measures including extra funding for food subsidies, pensions and social safety net provision. The Ministry of Finance said that these measures would cost about £E75 billion ($4.2 billion) and push total budget spending up to £E1.2 trillion ($66 billion), but added that this sum would be covered by higher revenue arising from stronger economic growth and investment.
The president’s gesture was politically astute. It allowed him to present himself as being sensitive to the hardship faced by Egyptian families as a result of the measures that the government is taking to address deep-seated structural economic problems. The most radical of these measures has been the flotation of the Egyptian pound on 3 November last year. This triggered a devaluation of over 50%, which in turn pushed up the rate of inflation from its previous average of about 10% to 30%. The reforms have brought major benefits to the balance of payments through stimulating large capital inflows, but the hoped-for rewards of sustained strong economic growth and lower inflation will take time to materialize.
Sisi has just entered the final year of his first presidential term. It is taken for granted that he will stand for re-election in May 2018, and he has presumably calculated that an early dose of austerity mitigation will help to retain the loyalty of his core supporters. However, Sisi and the various elements of his security state are taking no chances. The space for dissent and legitimate policy debate is being drastically constricted: access within Egypt to over 100 media websites has been blocked; emergency laws have been reintroduced; the recently passed law on NGOs provides for prison sentences for a range of infringements, including carrying out unauthorized opinion polls; judges have been penalized for challenging the government, most notably over the decision to confer sovereignty over two Red Sea islands to Saudi Arabia; and Khaled Ali, a lawyer involved in the islands cases, risks being deprived of his right to stand in the presidential election as a result of a specious charge relating to his celebration of one of the court verdicts.
Any concerns in the international community about the illiberalism of the Sisi state have been overlaid by a regard for Egypt’s importance for regional security, commercial considerations (including a series of major arms deals with Russia, France, Germany and the US), and support for the economic reforms.
The board of the IMF is set to decide soon on whether to follow the recommendation of a staff mission to disburse a second tranche of $1.25 billion from the $12 billion extended fund facility approved in November, when an initial $2.75 billion was released. The IMF is unlikely to be unduly perturbed by the extra spending that Sisi has announced, as the programme calls for a short-term boost to food subsidies and for the strengthening of social safety net provisions. The IMF mission also endorsed the draft budget, which included an increase in the sum allocated for fuel subsidies, which suggests that the government is not being asked to make any immediate increases to fuel prices. The main issue that the IMF raised in its assessment was the need to use monetary tools available to combat the rise in inflation. The Central Bank of Egypt responded with a 200-basis point hike in interest rates, a measure that attracted much criticism, but which also delivered a stern message on inflationary expectations. The IMF is also likely to be reassured by the finance minister’s insistence that the extra social spending will not affect the government’s target of bringing the fiscal deficit down to 9.1% of GDP in 2017–18, and of achieving the first primary budget surplus (excluding interest payments) in 10 years.
Global financial investors have also issued a vote of confidence in Egypt’s reform by subscribing to an additional $3 billion in bonds in May at significantly lower prices than in a $4 billion issue in January. The government has made use of part of the cumulative capital inflows of recent months to pay a further $1.5 billion to international oil companies, bringing their total arrears down to about $2 billion, and encouraging them to continue with the investments that should bring Egypt back to self-sufficiency in natural gas within two to three years.
This positive gloss cannot disguise the underlying precariousness of the Egyptian economy. Growth is struggling to reach 4%, while the population is increasing by about 2.3% per year; gross public debt is around 100% of GDP, and external debt has risen sharply, both in absolute terms (more than $70 billion) and as a percentage of devaluation-affected GDP (40%); food inflation is running at 40%, and the poverty level, based on World Bank assessments, is approaching 30%.
The implicit argument from the government side is that sustaining the economic recovery depends on the maintenance of security in the face of real threats of terrorism and subversion. Foreign governments engaging with Egypt should not accept this as grounds for suppression of civil liberties and for the lack of accountability for the security establishment, including in its interventions in the economy.
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