Poverty and inflation: Egypt’s economy hit by global turmoil

Dubai, United Arab Emirates

Stores sell last season’s winter clothes in the middle of summer. Repair shops lack spare parts for appliances. There is a waiting list to buy a new car.

Egypt, a country of more than 103 million people, is running out of foreign currency needed to buy essentials like grain and fuel. To keep US dollars in the country, the government has tightened imports, which means fewer new cars and summer dresses.

For almost a third of Egyptians living in poverty and the millions more in poor conditions, the country’s economic difficulties mean life is much more difficult than out-of-season shopping – they find it harder to save food on the table. A decade after deadly protests and political upheaval rocked the Middle East’s most populous nation, the economy is still faltering and taking further hits.

Fatima, a 32-year-old cleaner in Cairo, says her family stopped buying red meat five months ago. Chicken has also become a luxury. She borrows from relatives to make ends meet.

She worries about the impact of high prices on the Egyptian social fabric. Asking to be identified only by her first name for fear of reprisals, she fears that crime and theft will increase “because people will not have enough money to feed themselves”.

For decades, most Egyptians have depended on the government to keep basic commodities affordable, but that social contract is under strain due to the impact of Russia’s war in Ukraine. Egypt requested loans to pay for grain imports for state-subsidized bread. It is also grappling with soaring consumer prices as the value of the currency declines. The threat of food insecurity in the world’s biggest importer of wheat, 80% of which comes from the war-torn Black Sea region, has raised concerns.

“When it comes to, say, bread in exchange for freedom, that contract was broken a long time ago,” said Timothy Kaldas, economics expert at the Tahrir Institute for Middle East Policy.

Annual inflation rose to 15.3% in August, from just over 6% in the same month last year. The Egyptian pound recently hit a record high against a rising US dollar, selling at 19.5 pounds to the dollar. This has widened trade and budget deficits, with the foreign exchange reserves needed to buy grain and fuel falling nearly 10% in March, shortly after the Russian invasion sent commodity prices skyrocketing. and that investors have taken billions of dollars out of Egypt.

Egypt has few options to deal with the hole in its finances. As with previous crises, he turned to Gulf Arab allies and the International Monetary Fund for a bailout.

A new IMF loan would support Egypt’s dwindling foreign exchange reserves, which fell to $33 billion from $41 billion in February. A new loan, however, will add to Egypt’s bloated external debt, which rose from $37 billion in 2010 – before the Arab Spring uprisings – to $158 billion in March, according to figures from the Egyptian central bank.

Leaders attribute the challenges to the coronavirus pandemic, which has hurt the vital tourism industry, and price shocks caused by war in Ukraine. They also blamed revolutionaries and those who may have supported the Muslim Brotherhood.

“Why don’t you want to pay the cost of what you did in 2011 and 2013?” President Abdel Fattah el-Sisi said in a televised address this month. “Didn’t what you did have a negative impact on the economy?”

He was referring to the protests that toppled Egypt’s longtime president, ushered in a controversial Muslim Brotherhood presidency and led to a populist-backed military takeover and el-Sisi’s ascension to the presidency.

The former military general said the fallout from those years had cost Egypt $450 billion – a price, he said, that everyone must bear.

“We solve the problem together. I say this to all Egyptians…we will settle this matter together and pay the price together,” he said.

Critics, however, argue that the government has squandered chances for real reform and is spending too much on superfluous megaprojects as it builds a new administrative capital. The government presented the construction boom as a job creator and an economic driver.

The state’s grip on the economy and the “oversized role of military-linked companies” have historically crowded out foreign investors and the private sector, said Hasnain Malik, who heads equity research at Tellimer, an emerging markets investment analysis firm. Government plans to sell minority stakes in some state-owned companies “do not necessarily solve this problem”, he said.

Egypt’s elite can afford the rising costs, living comfortably in Nile-view apartments and gated communities beyond the hustle and bustle of Cairo. Life for middle-class Egyptians is deteriorating, said Maha, a 38-year-old tech company worker and mother of two who asked to be identified only by her first name to speak freely.

“I think we will eventually go down the social ladder and end up below the poverty line,” she said.

The government this summer took out a loan of $500 million from the World Bank and $221 million from the African Development Bank to help buy wheat. This covers around six weeks of a bread subsidy program supporting 70 million low-income Egyptians.

China helped with a $2.8 billion currency exchange. Saudi Arabia, the United Arab Emirates and Qatar stepped in with pledges of $22 billion in short-term deposits and investments.

“Having what they define as stability in Egypt is in their strategic interest. They really don’t want to experience a repeat of 2011 and its aftermath,” said David Butter, associate fellow at international affairs think tank Chatham House. Gulf Arab states are also making strategic investments in Egypt in the short and long term, he said.

The government has announced an “extraordinary” social protection program to be rolled out this month, targeting 9 million families with expanded cash transfers and food stamps. This is in addition to other assistance programs, including pop-up stalls selling subsidized staple foods. Officials explain how they handled the shortage of supplies caused by the pandemic and the war in Ukraine, saying there is enough wheat and other food staples for six months.

For some, leaving promised more hope. According to the organization chart of the International Organization for Migration, Egyptians rank behind Afghans as the top “irregular arrivals” in Europe so far this year. Most arrive by sea.

As pressure mounts on the Egyptian pound, the government could devalue the currency again.

” It will hurt. This will increase inflation,” said Kaldas, the Tahrir Institute’s economic expert. “Bread subsidies are just one item in a family’s budget. So for a lot of families, it’s still going to be very painful.

___

Follow Aya Batrawy on Twitter at www.twitter.com/ayaelb.

This story was originally published September 25, 2022 2:12 a.m.