The Egyptian economy is in very bad shape

The war in the Gaza Strip has enormous political, social and economic consequences: not only for the population directly affected by the military operations, but also for those living in neighboring countries. Since the beginning, there have been discussions about the possibility that it could turn into a regional war, also due to the involvement of other countries or groups in the Hamas attacks of October 7. Even if the war were to remain within the borders of Israel and Palestine, the consequences are still likely to be be remarkable also for neighboring countries.

Among these, the one which risks being the most affected is Egypt, bordering the Gaza Strip but which has refused for weeks to open its borders to evacuate the numerous refugees caused by Israeli attacks. Egypt says it cannot afford to take in large numbers of people in difficulty: and although President Abdel Fattah al Sisi doesn’t say it explicitly, it has something to do with the fact that the country is going through one of the most serious economic crises in history. his history.

The Egyptian economy is indeed in disastrous conditions. The Egyptian pound has lost half its value over the past year and has become the world’s worst-performing currency so far this year. The government intervened in various ways to try to stimulate the economy, but without success.

The result was inflation of 38 percent on an annual basis (the highest ever: in Italy we are at 5.4). The prices of food are increasing more than all other goods and this is putting an already very poor population in difficulty, a third of whom lives on an income of two dollars per day (less than one euro).

Egypt is also considered one of the states most at risk of insolvency in the world: almost half of the state’s revenue is intended to pay the interest on its public debt, which amounts to 90% of the GDP, and the state is therefore often unable to pay civil servants’ salaries. The International Monetary Fund also recently refused to grant the country certain loans already granted, convinced that Egypt would not be able to repay them.

However, if you look at the GDP growth data, not all of these problems are visible: according to data from world Bank in 2022, the Egyptian economy grew by 6.6%, the previous year by 3.3%, and the previous year by 3.6%. But growth has been fueled and distorted by enormous government spending, which has inflated public debt to gain and maintain popular consensus through generous and unsustainable spending programs. Most of Egypt’s structural economic problems almost all stem from the large role the government and military play in managing the economy: it is a very authoritarian approach that has defeated the competition in many sectors.

In fact, the army owns many businesses: gas stations, waterworks, cement factories. He then controls entire sectors, such as automobiles, fishing and a large part of the country’s media. By its presence, it frightens competing companies, which cannot compete with companies that do not pay taxes and customs duties. This authoritarian control of the economy has discouraged private investment and undermined the country’s growth and development opportunities. Furthermore, the state has adopted a rather fragmented approach to industrial policy, aiming to be present in all sectors but without actually developing or growing any of them.

In six years, the government has turned to the International Monetary Fund six times to request loans and develop a rescue plan. In the past, the Al Sissi regime also agreed to carry out reforms in exchange for IMF loans, also with the aim of reducing the role of the state in the economy. In its latest agreement with the Fund, the government promised to withdraw the army from at least non-strategic sectors, but so far this has not yet been achieved. Today, Egypt is the Fund’s second largest debtor, after Argentina.

Although the country’s economic crisis remains a long-term structural problem, the situation has been further aggravated by some recent dynamics beyond the state’s control. First of all, the coronavirus pandemic, which has significantly affected the tourism sector, vital for the country and on which 5 percent of GDP depends. This is a fairly high share: just consider that a country with a strong tourism vocation like Italy has a share of GDP that depends on tourism of around 6 percent. Tourism then brought the country strong currencies, such as the euro or the dollar, which were very important for strengthening the reserves of the central bank.

The war in Ukraine then worsened the situation, first of all by depriving the country of the presence of Russian tourists. But also causing a sharp rise in food prices: Egypt is one of the world’s largest wheat importers and with the war it lost a large part of its supplies which came from Russia and Ukraine. The Egyptian state provides the population with subsidized and therefore rather cheap bread: around two-thirds of the population buys this product and with the increase in the price of wheat, this practice has become very expensive and not durable even if it remains necessary for the authoritarian government of Al Sisi to maintain consensus and avoid protests from the population.

Source: ilpost


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