Egypt: Debt crisis has no clear exit - and worse is to come

Egypt is going through one of the most dramatic debt crises in its modern history. As a direct consequence of the regime’s model of debt-fuelled, militarised capitalism, the pound has been devalued three times in the past year, losing half of its value by January, as core inflation reached a record high above 40 percent. 

This situation has been compounded by speculation about another imminent currency devaluation. As the dollar shortage continues, an import backlog has worsened the crisis, leading to market shortages and squeezing of the private sector - despite Egypt’s assertion in January that the backlog was resolved.

Indeed, all signs point to a prolonged crisis that will last for years - and Egypt’s Gulf allies appear unwilling to provide aid without substantial economic reforms in a marked departure from their traditional policy towards the regime, which entailed almost unconditional aid. 

The privatisation programme that the Egyptian government declared in response to the debt crisis seems to be stalling. In late March, the sale of a 10-percent stake in the state-controlled Telecom Egypt was reportedly suspended by the government amid adverse market conditions. 

The depth and duration of this crisis will have profound economic and political consequences, some of which will extend far beyond the regime of President Abdel Fattah al-Sisi. The most obvious, and arguably the most costly, will be the rapid increase in poverty, with millions more people expected to drop below the poverty line. 

One needs only to look at the consequences of the 2016 devaluation to get a sense of the impact. Between 2015 and 2018, poverty rates increased from 27.8 percent to 32.5 percent, according to government data. This is equivalent to five million more people dropping below the poverty line. 

The depth and extent of poverty expansion in the current crisis will likely be much worse, for two reasons. Firstly, there are no capital inflows in mega-infrastructure projects, which could act to partially mitigate the impacts of currency devaluation.

Secondly, the depth and extent of the currency devaluation is expected to be much deeper and more prolonged. Considering the lack of capital inflows, and a forecast external financing need of $19bn in fiscal year 2023, and $22.5bn in fiscal year 2024, the pound will continue to face severe stress, adding more pressure to the cost of living. 

Collapsing narrative

The consequences of the rapid decline in living standards and soaring inflation are significant and interrelated, with the most profound being the collapse of a main pillar of the regime’s nationalist narrative: namely, the notion that the regime will restore glory to Egypt. “Egypt will be as big as the world,” Sisi once said. 

Indeed, the mega-projects launched by the regime, and the overt economic dominance of the military, have all revolved around a nationalist aspiration to grandeur. The economic crisis has taken a sledgehammer to this narrative, opening the way for counter-narratives to contest the regime’s legitimacy. 

The recent surprise election win of dissident Khaled al-Balshy, who is now head of the independent guild of Egyptian journalists, highlights the cracks appearing in the regime’s absolute dominance. Balshy, the chief editor of the Darb news website - one of many media outlets blocked by the regime - is known for his leftist tendencies, so his win is significant. 

Yet, this development should not be misconstrued as a fundamental change in the regime’s policy, or a softening of repression. Rather, it is an indicator of the magnitude of the crisis, and the emerging possibility of shaking the regime’s iron grip through smaller concessions. 

In the longer term, the regime will likely intensify its repression of dissent. This trend has already manifested itself in the recent arrests of social media content creators, who have posted satirical content about spiralling inflation and regime repression. With no civilian ruling party and a decimated opposition, the regime has few options, beyond repression, to manage dissent. 

In simpler terms, the regime does not possess the tools necessary to co-opt popular discontent in a manner that would defuse it. The possibility of increased, mass state violence on the horizon is ominous, deepening the already dire human rights situation in the country. We will likely see increased militarisation of the political system as the regime grapples with this crisis. 

Substantial hurdles

Arguably the most profound and long-lasting impact of the crisis is the deepening indebtedness of the Egyptian economy, and the substantial hurdles for development that any future government will face. Indeed, for the foreseeable future, most of the country’s resources will be directed towards the repayment of the regime’s debt. 

This will entail a substantial reduction in investment in social services, health and education - all requirements for the creation of a productive labour force. It will also drain capital from the country, inhibiting the development of a viable and competitive private sector. This will stunt Egypt’s development capacity in the long term. 

A credit crunch would be devastating for the Egyptian economy, possibly pushing the country closer to default

Breaking the cycle of debt is a very unlikely prospect, with the regime planning to borrow $44bn from the local market in the second quarter of the current fiscal year, in order to balance the budget. Even if the regime is able to close the substantial financing gap in the next two years, it will only be able to do so by borrowing more money at exponentially increasing financing costs. 

In February, the Egyptian government issued $1.5bn worth of Islamic bonds, known as sukuk, at the exorbitant rate of 11 percent. The goal was to help Egypt repay $1.25bn in five-year Eurobonds, issued at a fixed interest rate of 5.6 percent, increasing pressure on the budget. 

Debt repayment will thus continue to absorb the country’s economic resources for the foreseeable future, leaving Egypt vulnerable to the ravages of international financial capital and global turbulence. A credit crunch would be devastating for the Egyptian economy, possibly pushing the country closer to default.

Ultimately, what we are witnessing is a fundamental transformation of the Egyptian political economy. Its effects will far outlast Sisi and his regime, and will probably be its most enduring legacy. 

The views expressed in this article belong to the author and do not necessarily reflect the editorial policy of Middle East Eye.