Chronicle of the Middle East and North Africa

In Egypt, Economic Reforms Look Good on Paper but Poverty on the Rise

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A general view of Ezbet al-Nakhl, a shanty town north of the Egyptian capital Cairo. Photo AFP

‘Egypt’s macroeconomic situation has improved markedly since the initiation of the authorities’ reform programme in November 2016,’ the International Monetary Fund (IMF) wrote in its fourth review of that same reform programme, which was part of a $12 billion loan agreement to ease Egypt’s dollar crisis in 2016.

The World Bank made a similar assessment in its April 2019 economic update for Egypt, saying ‘economic growth has been robust’ – averaging 5.3 per cent in the 2017/2018 fiscal year and the first quarter of the 2018/2019 fiscal year – and is ‘expected to reach 6 per cent in the medium term’.

Some commentators disagree. Yehia Hamed, former investment minster, argued an article on the Foreign Policy website that Egypt’s economy is in fact ‘collapsing’ rather than ‘booming’, whereas economist Abdelhafez Alsawy penned an analysis titled ‘Egyptian Economy: Declining Not Recovering’. However, both Hamed and Alsawy have a certain political bias, as they are affiliated with the Muslim Brotherhood. The Islamist group was violently removed from power by current President Abdel Fattah al-Sisi in 2013 and has been subject to a major crackdown since. The Ministry of Foreign Affairs has hence dismissed the Foreign Policy analysis as inaccurate and politicized.

To what extent, then, has the reform programme, which notably included the floating of the Egyptian pound (EGP), introducing a value-added tax and removing subsidies on fuel and electricity, borne fruit?

Macroeconomic indicators, such as Egypt’s increasing foreign currency reserves, shrinking fiscal deficit and promising economic growth, are largely positive. This is not only due to the IMF reform programme but also because major gas field discoveries and tourism recovery had a positive impact on the state’s budget. Non-oil private sector activity and foreign direct investment continue to struggle, however, an issue that will be addressed below.

A major elephant in the room, one that the Foreign Ministry conveniently ignored in its response to the Foreign Policy piece, is poverty.

A short article published in the local business newspaper al-Borsa in May 2019 shed light on the sensitivity of the matter. It noted that the government suspended the publication of a report on poverty in Egypt, as the results did ‘not reflect the achievements of the state’. The authors of the government-backed report were summoned by senior officials to rewrite their findings, once in February and again in May.

The report, compiled by the state’s statistics agency CAPMAS, found that Egyptians living in poverty had risen to 30.2 per cent compared to 27.8 per cent in 2015. And the poverty line used in the report was set at 800 EGP per month, which is significantly lower than the World Bank’s 950 EGP per month. The poverty rate in 2015 had itself increased since 2011, when poverty stood at 25.2 per cent, according to CAPMAS.

The World Bank also noted in a May press release announcing a two-year extension of the reform programme that ‘some 60 per cent of Egypt’s population is either poor or vulnerable, and inequality is on the rise’. It urged Egypt to do more to ‘accelerate economic inclusion and absorb a growing labour force’.

The government has shown before that it does not want bad news concerning living standards to spread. In 2017, a Ramadan charity ad highlighting the lack of access to clean drinking water in Upper Egypt was taken off air as it undermined the efforts of the state to improve water quality. In October 2018, economist Abdel-Khalek Farouk was briefly detained for allegedly publishing false news, after he argued in his latest book that poverty in Egypt was a result of failing government policies and corruption.

The government does communicate its ‘efforts’ in terms of promising targets, such as the aim to reduce poverty by half by 2020 and eradicate it completely by 2030.

While food subsidies for the most vulnerable remain in place, the other reforms have hit the poor hard. Inflation soared towards 30 per cent in the year after the currency float and has remained high (>10 per cent) since. To give an example, a quarter chicken meal at a basic street restaurant in Cairo cost 10 EGP in 2014 and now costs around 25 EGP. Metro prices have increased from 1 EGP to between 3 EGP and 10 EGP. In July 2019, the last remaining subsidies on fuel and electricity will be removed, leaving Egyptians with higher electricity bills and transport costs, such as bus and taxi fares.

“The price hikes for sure affect the poorest most,” said Osama Diab, a non-resident fellow at the Tahrir Institute for Middle East Policy, in a Q&A in 2018. “The metro is mostly a public utility of the poor, because the well-off in Egypt will more often than not transport in their own private vehicles or in taxis. Also, the more recent hike in electricity prices was regressive; the increase for the lowest consumption bracket was about 70 per cent, whereas for the highest it was a mere 7.4 per cent.”

The idea behind the economic reforms is that when Egypt’s macroeconomic situation has stabilized, this will have a trickle-down effect in the medium term, creating better living conditions for all. However, doubts have been raised about the reality of this scenario.

“I believe that we should not expect any trickle down to happen,” political economist Kareem AbdelBary told Fanack in an email. “On the contrary, poverty rates are going to peak even further.”

He continued: “In my opinion, this goes back to the nature of the reform programme itself, which emphasizes the retreat of the state from providing the basic services as it used to, in addition to decreasing its public spending on socioeconomic programmes.”

The World Bank has voiced concerns as well. ‘Debt servicing is expected to remain a burden on the budget, therefore hindering larger social spending, notably on health and education,’ it said in its April review.

Moreover, private sector activity has been contracting nearly every month since September 2018. According to the World Bank, non-oil private sector activity is hampered ‘by the cumbersome business environment’, and as a result job creation ‘remains modest’. The government is trying to stimulate the private sector through, for instance, removing legal barriers, privatization programs and establishing free trade zones.

Furthermore, foreign direct investment fell 2018 (8.2 per cent) for the second year in a row. While some business people put this down to declining international markets, it remains worrisome that the majority of foreign direct investment went to the oil and gas sector, which generally does not generate many new jobs.

“The ongoing investments by the regime focus on infrastructure in hope of attracting more foreign investments. Yet this projection that more advanced infrastructure will aid the influx of foreign investments is nonsensical,” AbdelBary said. He argues that the cost of labour in Egypt is, despite the currency devaluation, still relatively high compared to East Asia, and that prevailing social instability “makes it unappealing to invest here”.

Problems in the non-oil private sector are also linked to the army’s growing involvement in the economy. Army companies have competitive advantages over the private sector in terms of tax benefits, access to cheap labour via conscription and control over large swathes of land. These companies are especially dominant in infrastructure projects.

Investors shy away from either competing with the army or entering a joint venture with an army company, a model Egypt is increasingly pushing for. AbdelBary also said that army activities “definitely” hinder private sector development.

President al-Sisi, himself an army general, addressed concerns over the army’s economic activities in May, saying it only has a “supervisory and management role”. However, in June, the minister of military production told local press that his ministry is actively seeking international partnerships and aims to expand both locally and internationally. He said the ministry is due to open a new factory in October 2019 to provide elevators and escalators for army projects in the New Administrative Capital currently under construction outside Cairo, a statement that seems to contradict al-Sisi’s ‘supervisory’ claim.

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