Sisi’s third term heralds a new economic blueprint

Reuters/Amr Abdallah Dalsh

The likely start of President Abdel Fattah Al Sisi’s third term coincides with an economic crisis that has seen inflation surge to 35 percent and the Egyptian pound lose 50 percent of its value against the US dollar amid successive devaluations in the past year.

In the wake of the invasion of Ukraine, Western hedge funds exited the local T-bill carry, one third of the population is now struggling to survive at the World Bank’s absolute poverty line, and external debt has risen to $165 billion.

The Egyptian pound trades at a 25 percent discount in the parallel market and it is no secret that the IMF is insisting on another major devaluation in exchange for its latest $3 billion bailout loan.

Prospects for fresh US funding have been complicated by the alleged bribing of a US senator in return for sensitive intelligence, which has caused Congress to block $235 million in military aid. However, the EU fears another migration crisis and has approved faster disbursement of a $10 billion loan.

• Oil’s inverse correlation to the dollar could return
• Egypt inflation falls to 36.4% on price declines
• China shows faith in Egypt with deeper investment

The imminent devaluation of the Egyptian pound will be devastating for Egypt’s impoverished millions at a time when food inflation is among the highest in the emerging markets at 65 percent.

Unlike Turkey, Egypt’s inflation crisis cannot be addressed by a U-turn in monetary policy alone as it is embedded in the nexus between the military, government spending and the food subsidy regime.

Egypt, the world’s largest wheat importer at a time when two-thirds of its citizens are dependent on state subsidised bread, relied on Russia and Ukraine for no less than 86 percent of its wheat imports. It is the biggest sovereign victim of the war-disrupted Black Sea grain trade.

President Sisi’s decade in power has seen a sharp increase in the military’s business empire, which has supplanted the private sector as the largest borrower from the local banking system.

The real problem is that showcase projects financed with borrowed money have led to the exit of Western private funds and flight capital amid a chronic dollar shortage.

Gresham’s law – bad money drives out the good – now operates in the souks of old Cairo with a vengeance.

Private financiers in Wall Street and the City of London will no longer underwrite fiscal profligacy on a scale reminiscent of the debt crisis during the reign of Khedive Ismail in the late 1870s.

Sisi will be forced to slash government spending on showcase mega projects which Egypt can no longer afford – or risk the wrath of myriad creditors.

Egypt’s key role

Egypt’s 109 million citizens, its pivotal diplomatic role in the Gaza, Libya, Sudan and Yemen conflicts, geo-strategic importance in African and Arab affairs, ownership of the Suez Canal and location on the migrant route to Europe make it an obvious “too big to fail” state for the US, the EU, Saudi Arabia, the Gulf oil monarchies and China.

The escalation of the Gaza war has only increased Egypt’s importance on the world stage as it is the conduit for humanitarian aid to the Palestinian enclave. This fact is reflected in Egypt’s status as the second largest sovereign borrower from the IMF after Argentina with $22 billion in outstanding loans.

The German government alone has lent Cairo $8 billion in bilateral aid. Egypt has also received more than $50 billion in foreign aid from the US since President Sadat signed the Camp David peace accords with Israel on the White House lawn in March 1979.

Pexels/Eric Seddon

Now China has also become Egypt’s latest “Great Power” financial patron. The People’s Bank of China has just deposited a billion dollars in Egypt’s central bank to boost its foreign exchange reserves.

China is also the largest investor in the Suez zone as it ships 60 percent of its goods to Europe via the Suez Canal. As Egypt has a free trade agreement with the EU, Chinese companies benefit from paying minimal tariffs on exports.

Saudi Arabia, the UAE and Kuwait have invested an estimated $100 billion in Egypt since 2013, a financial lifeline to the Sisi government that enabled it to initiate mega projects such as the $50 billion new administrative capital and $8 billion expansion of the Suez Canal.

Political stability in Egypt is mission critical for Washington, Riyadh, Berlin, Paris and now Beijing to a degree that was just not the case in Lebanon, which was forced to borrow private capital from its diaspora.

Yet Riyadh, Kuwait and Abu Dhabi have both publicly called for structural reforms, a new IMF agreement and the handover of controlling stakes in state-owned companies.

Sisi’s third term thus marks a major inflection point in Egypt’s currency, foreign debt and development policy blueprint.

Matein Khalid is the chief investment officer in the private office of Abdulla Saeed Al Naboodah and the CEO designate of a venture capital firm. He is also an adjunct professor of real estate investing and banking at the American University of Sharjah