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Egypt: when the rivers run dry

Suez Canal
A picture taken on May 5, 2019, shows Egyptian President Abdel Fattah al-Sisi (C) posing with ministers and some diplomats during the inauguration of a tunnel which runs under the Suez Canal in Ismailia city east of Cairo. Photo: Khaled DESOUKI / AFP

Mohamed Ali’s videos exposed the corruption of the Egyptian regime, but the economic data tell an even darker story.

By: Maged Mandour

Mohamed Ali, a contractor and a mediocre film star, is now a household name in Egypt. A man that is deeply enmeshed in Egypt`s crony capitalist system, has revealed, through a series of online videos, what many Egyptians already felt and knew: Namely, the corruption of the military institution, and the regime’s deliberate economic and fiscal policy that is leading to the impoverishment of the mass of Egyptians, while enriching the military elites.

A contractor that has worked with the military establishment for the past 15 years, Ali was able to provide first-hand knowledge of the economic role of the military and its impact on the private sector. His series of videos directly led to rare protests against President Abdel Fattah El Sissi, in-spite of the government’s draconian record of repression.

These videos, however, must be placed within the context of the performance of the Egyptian economy in order to understand the extent of the military’s role in hindering economic development and increasing poverty in the country.

In May 2019, the Egyptian Center for Mobilization and Statistics, a government agency, issued a report on “Income, Expenditures, and consumption”. The findings of the report indicate a sharp rise in the levels of relative and absolute poverty, compared to 2015. Relative poverty rates rose from 27.8% to 32.5% in 2018, and the level of absolute poverty rose from 5.3% to 6.2% for the same period.

Poverty rates are determined based on local standards of consumption. The relative poverty level is defined to be 735.6 Egyptian pounds of monthly personal consumption, and the level of absolute poverty is fixed at 490.86 EGP. The equivalent of 44.6 USD and 29.7 USD, respectively. The aforementioned rise in the level of poverty is accompanied by a drop in the level of family consumption by 9.7%, using 2015 prices. The drop was sharper in the urban areas, reaching 13.7%, compared to 5.1% in the rural areas.

This, simply, means that Egyptians are getting poorer, with millions dropping into poverty. The increase in poverty rates, does not only lead to an increase in the level of social deprivation, however, it also means that Egyptians have less disposable income, negatively affecting the growth of the private sector and overall economic growth.

The decline in the level of consumption was not counteracted by an increase in the level of exports in goods and services. This is reflected in the value of Egyptian exports, which reached 47.45 billion USD in 2018, a decrease of 1.66 billion USD compared to 2013. Other indicators also reflect a worsening international competitive position. For example, the trade deficit ballooned from -6.34% of the GDP in 2013 to -10.45% of the GDP in 2018. This is, in-spit of floating the Egyptian pound, in November 2016. Theoretically, this should have led to an increase in the competitiveness of Egyptian exports, and an improved trade balance.

Christ Cathedral Nativity
View of the Christ Cathedral Nativity in the new administrative capital on March 7, 2019, some 50 km east of the capital Cairo. Photo: PEDRO COSTA GOMES / AFP

The structural composition of Egyptian exports also indicates a weakness of the Egyptian manufacturing sector, and the lack of robustness of exports. For example in 2018, based on the data of the central bank, 41.1 % of the value of good exports is derived from crude oil and related products. This means that the performance of Egyptian exports is highly dependent on changes in oil price, rather than competitiveness of its manufacturing sector. This lack of competitiveness, combined with the lower level of domestic consumption and the rise of poverty rates places significant pressures on the ability of the private sector to evolve, and for investments to be diverted to more high value added activities, like manufacturing. The lack of investments in the manufacturing sector is reflected in its size as part of the GDP, which was 16.61% in 2013, slightly decreasing to 16.44% in 2017. In other words, the regime did not invest in the development of the manufacturing sector, and it did not lay down the foundation for sustainable, long-term economic growth.

In terms of income inequality, the Gini coefficient, a measure of wealth distribution, has remained stable from 2015 to 2018, with a slight decrease from 0.30 to 0.29. This indicates that the economic policy followed by the regime has not led to an increase in the wealth of the top 10%, relative to the rest of the populace. The reduction in the level of consumption has affected all segments of society, including the relatively wealthy. This is consistent with the notion that the shrinkage in the domestic market, combined with poor export performance has negatively affected wealth accumulation for most Egyptians, regardless of class.

Other indicators shed a more positive light on the performance of the Egyptian economy. However, upon further scrutiny, these figures reflect structural economic imbalances, and the prominent role that the military plays. The first indicator is the GDP growth rate, which reached 5.6% for the fiscal year 2018/19, in spite of a private sector that has shown growth during, only, five month of the past three years.

The growth of the GDP is primarily driven by government spending on mega infrastructure projects (spearheaded by the military), leading to a boom in the construction sector. Government spending is financed by a bloated public debt, the burden of which is disproportionality shouldered by the lower segments of society.

In an indicator of the size of the military’s involvement in the economy, the Armed Forces spokesperson stated, in September 2019, that the military is currently administering 2300 projects nationwide that directly employ 5 million civilians. Taking into account that the total labour force in Egypt is around 26 million workers, then the military directly employs 19.2% of the labour force. This makes the military the second largest employer in the country, after the public sector that employs 5.6 million.

The projects include much-publicised mega infrastructure projects, with dubious economic benefit, the most notable of which is the new administrative capital. The construction sector, which is closely connected to the military led projects, played an important role in generating economic growth. In 2018, it is estimated to have grown by 8.9%, making it the number one contributor to the GDP growth..

This was echoed in a statement made by the Housing Minister, Mostafa Madbouly, in November 2017, where he credited the construction sector as the major driving force for economic growth in the past three years. The minister stated that the construction sector is responsible for the creation of 3-4 million jobs.

Thus, the growth of the GDP is not driven by a dynamic private sector, but mainly by a massive military led construction spree, and mega-infrastructure projects that have little positive impact on increasing the competitiveness of the Egyptian economy. The government spending is financed by a bloated public debt. The external debt has increased to reach 106.2 billion USD as of the third quarter 2018/19, and the domestic debt has risen to 4.2 trillion pounds at the end of March 2019, up from 3.5 trillion pounds a year earlier. This supports the assertions made by Mohamed Ali in his videos, of the prominent role frivolous construction projects, including Presidential palaces and ill-conceived luxury hotels in driving the construction sector and GDP growth. A growth that is not sustainable since it is not based on a dynamic private sector, but rather corruption and graft

The final indicator to be examined is the unemployment rate, which reached 8.1% by the first quarter of 2019, the lowest in 10 years. This drop in the level of unemployment, however, requires some additional qualification. The rate of utilization, which measures the number of workers employed for at least one hour per week as a percentage of the population, has dropped from 44.5% to 39%. This is also accompanied by a reduction in the level of workforce participation from 46.4% to 41.6%, indicating a reduction in the level of those seeking work, rather than an increase in the number of available jobs. Loss of hope should be credited with the drop in the level of unemployment, not improved economic conditions.

The burden of theses structural imbalances, including the over reliance on debt is shouldered by the poor and the lower classes. The government is targeting a reduction of public debt to GDP to 77.5% by the end of June 2022. It currently stands at 90.5%, as of June 2019. The fiscal policy pursued in this regards includes slashing social spending and reliance on regressive taxation, measure negatively affecting the living standard of the mass of Egyptians.

For example, the government is continuing its policy of subsidy cuts, the latest of which was in July 2019, when fuel subsidies were slashed. The planned fuel subsidy for the 2019/20 budget is estimated to be 52.96 billion EGP, compared to 89.07 billion for the previous year, a cut of 40.5%. Another example in the 2019/20 budget is that 42.6% of the proposed tax revenue is to be collected from value added taxes, a regressive form of taxation that places higher burdens on the poor. On the other hand, profits generated from business owned by the armed forces are exempt from taxation, under law 96 (2015). This means that the government is shifting the burden on the shoulders of the poor, as they finance the military construction spree, which in-turn is used to enrich the military elites and other regime insiders.

In essence, the current policy of the Egyptian government will face major structural hurdles, in the future. If the government is not able to revive the private sector, through the stimulation of domestic demand, then the current policy of reliance on mega infrastructure projects is doomed to fail. In essence, as debt continues to pile up, the pressure on the poor will continue to rise, as the government continues to cut social spending. This will reduce the level of effective local demand, leading to greater pressure on the private sector. In addition, if the construction spree continues, the possibility of overcapacity and over-accumulation of capital in the construction sector becomes more prominent. In essence, a bubble that is bound to burst.

Remark: This article was originally published by in September 25, 2019.

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