An economy in crisis after 10 years of the Sisi dictatorship

Summary: ten years of Sisi rule has inflicted huge damage on the economy of Egypt while enriching the military elite, decimating the private sector and wrecking the lives of tens of millions of Egyptians.

In the final day of our Egypt week coup coverage we thank Maged Mandour for today’s newsletter. Maged is a political analyst and a regular contributor to Arab Digest and to Middle East Eye and Open Democracy. He is also a writer for Sada, the Carnegie Endowment online journal. Maged is the author of an upcoming book, Egypt Under Sisi (I.B.Tauris) which will examine the social and political developments in Egypt since the coup of 2013. You can find his latest 5 July podcast here.

Maged Mandour is an Egyptian political analyst & author
Maged Mandour is an Egyptian political analyst & author

In the midst of one of the worst economic crises that Egypt has experienced in its modern history, the 10th anniversary of the coup that brought the military to power arrives. Over the past decade the Sisi regime not only presided over a campaign of mass repression, systematic torture, and extrajudicial killings, but it has also constructed a novel form of militarised state capitalism integral to the regime’s overall raison d’être.  Indeed, once in power, Sisi embarked on a vision of the complete militarisation of the state including the political system and the economy with the aim of eliminating all centres of civilian power. The goal was simple and clear, namely, ensuring that the possibility of mass protests is quashed, never to return, and that political and economic power is solely in the hands of the military establishment and the security services. This laser focus birthed one of the most radical and brutal regimes in the Middle East, with an underlying economic model that is prone to crisis while also leading to historic increases in poverty and social deprivation in  a country with a population of 109 million, the largest in the Arab World.

The regime’s economic model is rather simple. Essentially, Sisi embarked on a massive investment spree in the non-tradeable sector, specifically real-estate and infrastructure, fuelled by debt and public funds. The unique element in this model is the role played by the military and the security services who spearheaded the management and the implementation of projects which created a massive windfall in tax exempt profits. The strategy was enabled by the accumulation of political power in the hands of the military establishment, as it proceeded to eliminate all possible rivals, including leftists and liberal allies who were instrumental in legitimizing the coup of 2013 that brought Sisi to power, while deepening its control over the state apparatus. This was reflected in the structure of the political system, which for the first time in several decades, did not have a civilian ruling party responsible for formulating government policy. Indeed, even though the parliament is populated by regime allies and there is a new majority party, affiliated with the security services, dominating the parliament there is no evidence of active participation in policy making. This new method of rule opened up the way for a radical transformation in the modus operandi of economic management of the country in a novel and destructive way.

As a result, the regime  has spent an estimated US$ 400 billion on infrastructure projects over the past 7 years, with dubious economic benefits. The most notable example is the New Administrative Capital (NAC), whose first phase has an estimated budget of US$ 58 billion of which US$ 45 billion has already been spent. This massive outlay is yet to produce any tangible benefits, 8 years after the NAC was first announced to investors in April in 2015. Even though Sisi has claimed that the project is not drawing on the state budget, a recent report reveals a different story. Namely, after the regime repeatedly failed to attract foreign investors, it appropriated public funds and used debt for the required spending spree in a move implemented by the military controlled Administrative Capital For Urban Development Company, in essence funnelling public funds to line the pockets of the military with no oversight.  This is but one example of an economic policy that saw external debt rise from under US$ 40 billion in 2015 to US$ 162.9 billion in December 2022. Indeed, the astronomical rise in debt is crippling the state budget, consuming 56% of the planned expenditure for the upcoming fiscal year. The policy is devastatingly combined with a regressive taxation system, replete with tax exemption for military-owned companies, which saw the burden of the regime spending spree fall on the shoulders of the poor and the middle classes, lowering the standards of living of the mass of Egyptians. This has manifested in the reduction in the level of consumption per household for the bottom 40%, which dropped by -1.75% between 2015 and 2019 with the median income dropping by -1.53%.  This drop in consumption, in the midst of a massive spending spree is an indicator of the rapid transfer of wealth and income from the lower and the middle classes to the military elites, who benefit directly from Sisi’s spending. It also has had a devastating consequences for the private sector which has shown consistent signs of underperformance as local demand shrunk while the sector showed little signs of international competitiveness. For example, as of December 2022 the non-oil private sector had shown signs of shrinkage for 25 consecutive months.  Indeed, as the regime continued its dogged insistence on investment in  the non-tradeable sector, the current account balance as a percentage of the GDP continued to underperform, starting off at -2.2% in 2013, reaching -3.7% in 2022, in spite of a massive devaluation of the pound which lost half its value in 2016 and again lost half its value over the past year.

In essence, the regime opted to create an economic model based on unsustainable debt which has now morphed into a crippling debt crisis. That in turn is devastating an already weakened private sector amid a deepening currency crisis. For example, due to the shortage of hard currency the steel industry has had difficulties operating, with production either being cut or coming to a complete halt due to the scarcity of required imports for the production process. This situation is bound to continue, with the expected external financing needs reaching US$ 19 billion and US$ 22.5 billion in the FY 23 and 24, excluding US$ 8 billion and US$ 6 billion deposits in the Egyptian Central Bank which are likely to be rolled over. This predicament means that pressure on state finances and currency shortages are expected to continue into the foreseeable future, even if the regime fire sale privatization programme is a resounding success. And it will continue to apply pressure on the private sector and push prices upwards, with annual core inflation already hitting 40.3% in May. Even the policy option of currency devaluation is of dubious benefit, due to investors’ reluctance to funnel funds into the country, amidst the regime’s resistance to reform. Indeed, without enough reserves and investors willingness to commit funds, the devaluation of the pound might spiral out of control and lead to hyperinflation with devastating social consequences.

After a decade in power, the Sisi regime has been extremely successful in reshaping the model of capital accumulation for its own purposes. The cost, however, might prove its undoing. The narrow focus on elite enrichment will not only leave millions in poverty but it will also devastate the social lives of everyone outside the regime’s inner circle. The current crisis is both deep and transformative and will have lasting consequences on Egypt’s economic trajectory for years to come as debt consumes the country’s resources and stifles economic development. This does not, however, necessarily mean that the grip of the regime will be weakened, it might even act to increase the military’s economic role as the private sector is further diminished and social deprivation ravages the country. Indeed, the most likely outcome is a more repressive and brutal regime that is willing to follow a maximalist logic of survival doing whatever it thinks is necessary to cling to power.

We will conclude our Egypt week coverage of the 3 July 2013 coup later today with a photo essay by Hossam el-Hamalawy.

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