Are Egypt ‘Lebanese times’ threatening?

Grocery shopping is now a major challenge for many Egyptians. Since the Egyptian currency has been in free fall, food prices have doubled, but wages have halved.

“Instead of buying three kilograms of rice when we go shopping, we just get a kilo or half a kilo,” explains Ahmed Hassan, 40. He is an accountant and father of three from Cairo’s Schoubra district. “We’re trying to reduce our spending. Unfortunately, we can’t limit everything because our children need certain things,” he told DW.

The Egyptian currency has lost around a third of its value since the end of October 2022. Inflation is currently over 20 percent. In fact, some economists suggest the real rate is even higher: they put the unofficial rate – which includes Egypt’s vast informal economy – at 101 percent.

Banks are now limiting the amount of cash withdrawals. The free fall that Egypt’s economy is in has similarities to the catastrophic economic crisis that citizens of Lebanon have been grappling with since 2019.

“Remarkable Similarities” between Lebanon and Egypt

In Lebanon, some citizens have stormed their banks to get their own savings. Whole cities are dark because the fuel for the power plants has run out. And the country’s middle class is being pushed further and further into debt.

In Egypt this is not yet the case. But as the situation worsens, some are wondering: could Egypt soon become “the new Lebanon”?

“There are striking similarities between Lebanon’s now miserably failing economy and Egypt’s struggling economy,” said Robert Springborg, associate professor at Canada’s Simon Fraser University. in a 2022 report for the Washington-based non-profit organization Project on Middle East Democracy (POMED). “The consequences of the collapse of confidence in Lebanon were devastating, but they would become meaningless if the same were repeated on the Egyptian scale,” he warned.

Egypt’s current economic woes are the result of a number of internal problems – political unrest, corruption and government mismanagement. But external crises have recently joined them: the COVID-19 pandemic, Russia’s war against Ukraine and the threat of global recession.

Several crises overlap

The corona pandemic has hit tourism, which is one of the country’s most important sources of income, hard. Since the Russian war of aggression has been raging in Ukraine, wheat deliveries from Ukraine have also stopped. Egypt is the largest wheat importer in the world.

Since 2014, the Egyptian government, led by President Abdel Fattah al-Sisi, has promoted national “mega-projects”. These include the world’s longest driverless monorail, worth the equivalent of 21 billion euros, and the construction of a completely new administrative capital near Cairo for 46 billion euros. These projects have artificially boosted the country’s growth. Egyptian military are also involved in many of these lucrative deals.

However, such policies, which allow state and military companies to dominate the economy, weaken the private sector. As a result, foreign investment has been deterred, so that they hardly want to invest anymore. The country is increasingly dependent on foreign loans. Egypt has a debt of over 138 billion euros; about a third of its overall economic income has to be used to pay off foreign debt.

Pandemic and the war against Ukraine

This mixed situation brought Egypt “to the brink of a financial and economic abyss,” Rabah Arezki said in early January. Arezki is a former World Bank Chief Economist with responsibility for the Middle East and North Africa.

“The reason why the pandemic and the war in Ukraine had such a big impact is because of the investment strategy that (Egypt’s President, editor’s note) al-Sisi for nine years: massive spending on huge projects, some of which were completely unnecessary or ill-conceived,” said Yezid Sayigh, Senior Fellow at the Carnegie Middle East Center in Beirut. “This left Egyptian finances very vulnerable , without bringing real benefits to the economy.”

Foreign governments, including those of Germany and the US, are partly to blame, Sayigh said. Al-Sisi, he says, “could not have increased Egypt’s debt by 400 percent without their direct involvement.”

Two nations – not comparable

There are some similarities between Egypt and Lebanon – Egypt’s poverty rate is approaching that of Lebanon, for example. At least 60 percent of Egyptians live in poverty or on the poverty line.

“And then there is the willingness of the political elite to enrich themselves at the expense of the state and the public,” says Timothy Kaldas, an expert on Egypt’s political economy and fellow at the Tahrir Institute for Middle East Policy (TIMEP). “That’s definitely something the two countries have in common.”

“But despite some similarities, things like poverty and corruption are common to many Arab countries, so you can’t make easy comparisons,” argues Yezid Sayigh of the Carnegie Institute. “Furthermore, the Egyptian government is not as corrupt as the Lebanese.”

“Despite all the problems, Egypt is in a much more stable situation than Lebanon,” continues TIMEP’s Timothy Kaldas. “It’s not on the brink of total collapse.”

On the one hand, the Egyptian economy has more potential sources of money than the Lebanese, according to Kaldas – for example via the Suez Canal, the tourism industry and various export industries. Lebanon is more dependent on remittances from Lebanese abroad, which before the current crisis accounted for up to a quarter of Lebanese national income.

There is also an Egyptian leadership with whom one can negotiate, Kaldas said. “In Lebanon, on the other hand, the election of a new president is still being fought over.”

Perhaps the biggest difference between Egypt and Lebanon, however, is that Egypt is commonly viewed as “too big to fail.” With around 107 million inhabitants, it is the most populous country in the region. It also has the strongest military in the Middle East. “Egypt is fortunate in that external financiers value the viability of the state, no matter how poorly run it is,” explains Kaldas.

Promised Reforms in Egypt

middle of December the International Monetary Fund (IMF) approved an aid package in the amount of three billion US dollars for Egypt. It is the country’s third such deal with the IMF since 2016 and is expected to help Egypt attract more foreign investment and financial aid. In order to complete the deal, the Egyptian government had to make several major concessions to the IMF. One of them is the flexibilization of the exchange rate – the subsequent record-breaking devaluation of the Egyptian pound is partly due to the previous peg to the US dollar.

Another request from the IMF is a commitment to send direct cash transfers to five million Egyptian households in need by the end of this month. Another commitment made by Cairo was a promise to curtail the Egyptian military’s vast economic empire.

The new IMF bailout package could bring Egypt back from the brink, but it’s hard to say whether it will bring real relief to its suffering citizens. Kaldas anticipates that the country’s government and elites will try to secure their advantages and wealth while trying to shirk concessions, such as when it comes to curbing the military’s economic power.

But even if all the conditions of the IMF package are met, the country will not recover so quickly, Kaldas said. “The Egyptians, who already have problems, will become even poorer in the coming year,” he says. Egypt is unlikely to become the next Lebanon, he concluded, “but nothing will prevent the Egyptians’ growing economic hardship in the coming year.”

Cooperation: Mohammed Farhan, Cairo