Rising inflation is hurting Egypt’s economy. Will the country’s powerful military cede economic power to salvage it?

MENASource

January 24, 2023 • 11:04 am ET

Inflation is damaging Egypt’s economy. Will the powerful military of this country give up its economic power to save it?

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Shahira Amin

Egypt’s economy is reeling from economic hardship. I the prices of food and other basic items including housing and medical services have increased in the past few months as the country faces inflation. The inflation rate averaged 22 percent in December 2022 – the highest rate the country has registered since 2017, according to the official Ahram Online.

Analysts predict that inflation will continue to rise in the coming months, given the country’s limited foreign exchange reserves, which will further strain low-income households that are already struggling.

This trend is shocking, considering that almost 30 percent of Egyptians live below the poverty line. Rising anger over unprecedented inflation could lead to new social unrest in the Arab world’s most populous country, with dire political and security implications for the entire region.

At the same time, foreign reserves fell sharply, reaching $34 billion in December 2022—enough to cover about 5.4 months of Egypt’s imports, according to the Central Bank of Egypt. The pressure on the Egyptian pound pushed the government to approve the third devaluation of the Egyptian local currency in less than a year, reaching 32 Egyptian pounds against the dollar at noon on January 11 on the official market, before returning to 29.6 to the dollar. Next day.

The latest devaluation was prompted by an agreement signed with the International Monetary Fund (IMF) in December 2022 to provide Egypt with the first installment of a 46-month rescue loan. The Egyptian government hopes to use the loan to restore investor confidence in the faltering economy and encourage additional funding from regional and international partners. The change of the exchange rate and the reduction of fuel and electricity subsidies are the main pillars of the reform program of the country’s system, approved by the government since 2016 in collaboration with the IMF.

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While the country’s poor economic situation is the result of the global disruption caused by the COVID-19 pandemic and Russia’s war in Ukraine – which greatly affected Egypt’s tourism sector – some analysts suggest that the government is not abusing another priority. Several infrastructure projects undertaken in recent years have strained the state budget while expanding the military’s role in the economy. This includes the New Administrative Capital, currently under construction outside Cairo.

At the end of December 2022, a post published by the National Nutrition Center of Egypt on its official Facebook page – and later picked up by state media – promotes “chicken legs” as an alternative to “rich in protein” and “cheap” food to help. citizens are facing recent price hikes that have fueled public anger and social media uproar. The debate over the proposal reached parliament. In a public parliamentary session on January 3, Member of Parliament Karim El-Sadat criticized an official from the Ministry of Supply who spoke about the nutrition of chicken legs in a television show, accusing the official of “going outside” with the truth. of the current economic crisis.

“This, at a time when there is a shortage of basic goods and many goods are beyond the reach of the common citizen,” Sadat said. “We, as deputies, are left to deal with the anger of the citizens over the increase in prices.”

Egypt’s armed forces, which have a competitive edge over the private sector due to the military’s tax exemption, have strengthened their grip on the country’s economy in recent years. From hotels, gas stations, car manufacturers, pharmaceuticals, and infrastructure projects to the provision of goods and services, the military has gradually expanded its involvement in many sectors of the economy, generating large revenues for the military fund from businesses that are directly owned and operated by officials or through contracts awarded. for companies linked to the military, leaving the private sector out in the cold.

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To secure the IMF loan, however, Cairo had to agree to the IMF’s demands to reduce the strict role of the military in the economy and increase that of the private sector as leveling the playing field between the public and private sectors has been announced by the Fund as. :”significant structural reforms to increase competitiveness.”

Promises aside, it will be difficult for Cairo to meet the IMF’s push to push back the public sector and the military out of the economy. Despite President Adel Fattah al-Sisi’s repeated promises to list public-owned firms on the stock exchange, “opening the door to private sector participation in state-owned enterprises,” there has been no real effort to sell military firms to the private sector yet, he points out. a possible push within the military. The float in shares of military-owned firms would mark a turning point in Egypt, where the financial value of military assets remains low and the military budget has long been shielded from public scrutiny.

At this time, the Gulf Cooperation Council (GCC) says that, facing the growing threat of Iran in the region, it understands that the collapse of the Egyptian economy and the disintegration of the Egyptian army will be a threat that exists in their countries; Riyadh and Abu Dhabi have both repeatedly emphasized that “Egypt’s security is part of Arab security.” If the Egyptian economy were to fail, the ensuing political turmoil and insecurity in Egypt would certainly spread to the Gulf states. Therefore, the main GCC countries have poured billions of dollars since the 2011 uprising – 92 billion dollars so far, according to an anonymous official at the Central Bank – to stabilize the Egyptian economy and restore stability and regional security. However, while the GCC bailout has managed to prevent Egypt’s economic collapse so far, they have failed to develop a sustainable economic system that can support Egypt in the long term.

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Reluctant to pour more financial aid into Egypt’s seemingly bottomless economy, Egypt’s wealthier Gulf allies are now looking to buy the country’s assets that Cairo is selling to plug the cash gap. The country hopes to attract investments worth 40 billion dollars over the next four years to build its foreign reserves and reduce its external debt burden.

But this is not a success: while the government claims that the investment will consolidate Egypt’s position as one of the leading investment destinations in the world, the sale of assets is a matter of great concern to many Egyptians, because they see this as a sign of continuity. the erosion of their country’s economic and foreign policy autonomy.

As another long-term remedy, Egypt needs to create a favorable investment climate, giving local businesses a level playing field. Unless that happens, Gulf investments will have little value for Egypt and investors alike.

Shahira Amin is a senior non-resident fellow at the Atlantic Council’s Scowcroft Middle East Security Initiative and a freelance journalist based in Cairo. A former contributor to CNN’s Inside Africa, Amin has covered post-revolution developments in Egypt for several outlets including Index on Censorship and Al-Monitor. Follow him on Twitter @sherryamin13.

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Image: An Egyptian woman buys vegetables at a popular market in Cairo, Egypt, January 18, 2023. REUTERS/Hadeer Mahmoud



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