Egyptians suffer under austerity as Sisi splashes cash on the military

In early December, the world’s arms companies are set to descend on Egypt. For three days, representatives from hundreds of international defence companies will rub shoulders with Egypt’s generals and ply their wares to one of the world’s leading buyers of advanced weaponry.

Egypt’s first arms expo, EDEX 2018, will be held from 3 to 5 December in the country’s brand-new international exhibition centre, a sprawl of concrete blocks rising out of the desert on the outskirts of Cairo.

The event combines two tendencies of President Abdel Fattah el-Sisi’s Egypt: large-scale state construction projects and splashy military spending.

In the five years following the military coup that brought the Sisi government to power in 2013, military spending has risen 215 percent compared with the preceding five years. The authorities have purchased a total of $6.6bn of arms, making Egypt the third-largest arms importer in the world behind India and Saudi Arabia.

At the same time, the Egyptian government has embarked on grand construction ventures that critics decry as ill-conceived vanity projects. The government is currently building a new administrative capital city, featuring a monorail, outside of Cairo that will house state buildings at an estimated cost of $300bn. In 2015, the authorities built an $8bn expansion to the Suez Canal.

The costs of the government’s prolific spending are mounting. In early November, Egypt’s central bank announced that the country’s total foreign debt had exceeded $92bn, an increase of 17.2 percent in a year. Foreign debts have almost doubled since 2015. The interest payments on Egypt’s debts now total around $30bn a year, 38 percent of the government’s budget for 2018-19.

Skyrocketing debt

The Egyptian government recognises the debt problem. In September, Minister of Finance Mohammed Maait said publicly that debt servicing costs are becoming a “huge problem”.

They are more likely to end up with a show pony rather than a navy capable of prolonged expeditionary combat operations

- Anonymous Egyptian military analyst

Spending on large-scale projects has led to Egypt’s debts “skyrocketing”, according to Ahmed Ghoneim, an Egyptian economist and diplomat. “Egypt’s problem has always been increased domestic debt, but over the last three years we’re seeing the emergence of a real problem in the level of foreign debt,” he said.

The wisdom of the government’s extravagant military spending has also been questioned. Recent purchases have included fighter jets, Mistral amphibious assault ships and a FREMM frigate that Egypt’s navy is operating with stripped-down weapons systems.

The usefulness of big-ticket naval purchases is particularly controversial. The Egyptian armed forces' main military campaign is a fight against a militant insurgency in the Sinai peninsula's north.

However, some military experts say the Levant's instability and the discovery of hydrocarbons has prompted the government to shift its threat perceptions towards the eastern Mediterranean and Red Sea, which may explain the desire for a modernised navy.

“The problem is they're mismanaging their expansion and modernisation,” a Egyptian military analyst told Middle East Eye, speaking on condition of anonymity. “So they are more likely to end up with a show pony rather than a navy capable of prolonged expeditionary combat operations.”

Austerity for the poor

Meanwhile, the Egyptian economy is ailing. In November 2016, Egypt instituted a $12bn International Monetary Fund rescue package designed to rebalance its economy and avert a catastrophic collapse.

The programme, which has proved deeply unpopular within Egypt, came with a fiscal austerity regime under which energy and food subsidies have been cut, state-owned companies privatised, the civil service reduced, and the Egyptian pound floated, leading to a steep devaluation of the currency.

On 7 November, the government announced that the price of metro tickets in Cairo would rise again in December. The last time metro prices were hiked, in May, protests were held against the move leading to arrests.

On 11 November, Minister of Supply Ali al-Moselhy said the government would also be taking food ration cards from some public sector workers. In June, the Egyptian government hiked gas prices by 50 percent.

The government’s austerity programme is largely failing to serve the needs of the 50 percent of the Egyptian population that lives near or below the poverty line, according to Abdelhamid Mekawy, an economist at the Egyptian Initiative for Personal Rights, a human rights research group.

Despite the IMF’s praise, Egypt’s economy is in fact subject to “uncertainty and volatility”, according to Osama Diab

“Add to that low job creation and sluggish exports, and Egypt's growth is not pro-poor due to fiscal tightening measures, spending on education, and on health and public services,” Mekaway told MEE.

The IMF, which recommended the changes, has supported the government’s moves. “The authorities’ fiscal consolidation plan remains on track,” the Fund said in the latest assessment of its Egypt programme.

But despite the IMF’s praise, Egypt’s economy is in fact subject to “uncertainty and volatility”, according to Osama Diab, a non-resident fellow focusing on development and economic issues at the Tahrir Institute for Middle East Policy think tank.

“High levels of inflation and unprecedented increases in prices of public utilities have left most Egyptians negatively affected by the programme,” Diab said.

Ailing economy

The International Organisation for Migration estimates that the Egyptian economy needs to create 750,000 new jobs each year to support the country’s growing population. But the economy has been failing to create jobs, and unemployment levels remain at around 10 percent.

The country’s biggest companies have struggled too. Since the new year, Egypt’s main stock market index, the EGX 30, is down 7.41 percent.

This year, the economy has grown, albeit from a low baseline established in the years following the 2013 military coup. In 2017-18, Egypt’s GDP growth was estimated at 5.3 percent, the highest rate in a decade.

But inflation has far exceeded growth. In October, inflation reached 17.7 percent – an increase that builds on the rapid rise in prices the country has experienced over the past two years, which saw inflation hit a 30-year high of more than 30 percent in 2017.

Egypt’s finance ministry is forecasting even stronger GDP growth of 6.5-7.3 percent over the next three years, which would support the government’s plans. But economists are sceptical that high rates of growth can be sustained.

“Those are optimistic figures. I hope they are true but the issue is investment to GDP is still very low in Egypt,” said Alia al-Mahdi, professor of economics at Cairo University.

The ratio of total investment to GDP in Egypt’s economy is currently around 15 percent, a modest figure for a low-income country aspiring to high growth rates. In order to sustain the growth projections the Egyptian government wants, total investment will need to rise to more than 20 percent of GDP, according to Mahdi.

“We have to work on increasing the level of investment in the economy to see real growth, and the only way to do that is if domestic investors are encouraged as well as hot money international investors,” Mahdi told MEE.

Banking on gas

The Egyptian government is hoping that one of the country’s key sectors, the gas industry, holds the solution to its problems. In July, the Ministry of Oil and Gas claimed that Egypt would soon be self sufficient in gas (having become a net importer in 2014).

The authorities aim for increased production at the Zohr offshore gas field, located 200 km north of Port Said in the Mediterranean Sea, to make a significant contribution to the economy. In October, minister of petroleum and mineral resources Tarek al-Molla estimated that the Zohr field could save the government as much as $3bn a year.

However, a private report produced by the Egyptian investment bank CI Capital, and originally reported by Mada Masr, estimates that Egypt’s gas self-sufficiency will last no more than two years before the country will again become a gas importer.

“I don’t think the developments in the gas sector can have a very great impact on the economy,” said Ghoneim, the economist and diplomat. “The government’s announcements have always been overly optimistic about new gas and oil discoveries and it never turned out to relieve the burden on the Egyptian people,” he said.

Gas is unlikely to hold the key to fixing Egypt’s economy, according to Madhi, the Cairo University professor. “Egypt can’t become a country that relies on one resource, like the oil producing states,” she said.