The Economy of Egypt

By | April 26, 2021

we first need to take a look at the

 

country’s history

 

how did egypt’s history shape its

 

economy in the aftermath of the second

 

world war

 

egypt was a monarchy but things would

 

quickly change

 

in 1952 when a coup by military officers

 

established the modern republic up until

 

then the private sector had accounted

 

for

 

97 of gdp and a similar proportion of

 

jobs

 

something which was going to change very

 

quickly

 

you see throughout its history egypt has

 

often found itself

 

a key regional player given its

 

substantial population

 

and strategic location at the core of

 

this is the suez canal

 

initially completed in 1869 it is the

 

fastest way to sell from europe to asia

 

reducing the journey from london to

 

mumbai by four and a half thousand miles

 

or about forty percent arguably making

 

it one of the world’s greatest shortcuts

 

importantly for our story at the time of

 

the revolution

 

it was owned and operated by the sewers

 

canal company

 

whose major shareholders were no less

 

than britain and france

 

yet ownership of the mega project and in

 

fact the whole economic structure of

 

egypt

 

would change through the delivery of

 

another mega project

 

the azwan dam this was an ambitious

 

project

 

to finally control the unpredictable

 

flow of the nile river

 

which supplies a staggering 90 of

 

egypt’s water

 

with approximately 95 percent of the

 

population

 

living by its banks now this crucial

 

project

 

was meant to be funded by the u.s

 

britain and the world bank

 

however following the revolution there

 

were growing concerns

 

over its government’s cold war

 

allegances resulting in funding being

 

pulled

 

in 1956 and in response egypt decided to

 

nationalize the suez canal

 

using the valuable foreign currency

 

revenue it generated to not only finance

 

the new dam but

 

also team up with the soviet union who

 

built it playing one cold war power

 

off against another as a side note this

 

didn’t go unnoticed

 

leading to the suez canal crisis an

 

ultimately failed military invasion by

 

britain france and israel

 

but that’s a different story altogether

 

the key point

 

is that nationalizing the canal was a

 

crucial turning point

 

for egypt’s economy after which the

 

state really started to play

 

a much larger role establishing

 

state-owned enterprises

 

an industrialization plan and even

 

widespread nationalization

 

of foreign property it was the

 

industrialization plan though

 

which proved to be fundamental you see

 

the plan

 

intended for the government to finance

 

heavy industry with the private sector

 

funding light industry

 

yet the results were underwhelming so to

 

help boost investment

 

the government developed an elaborate

 

system of price controls

 

particularly for agriculture using the

 

system to take profits

 

it would use to finance

 

industrialization as well as passing a

 

series of laws

 

forcing companies to buy government

 

bonds these laws were also

 

non-negotiable

 

so when certain banks and institutions

 

failed to deliver on government

 

investment

 

they were nationalized handing further

 

control to the government

 

by the 1960s the country for the first

 

time in its history

 

had developed its own 10-year economic

 

plan aiming to double gdp

 

within a decade split between two

 

five-year plans

 

the first period saw gdp rise by 30

 

percent

 

pretty good until you consider its low

 

starting point and the anticipated 45

 

percent

 

it was meant to achieve in the first

 

five years however

 

when it came to the second five-year

 

plan this ended up being largely

 

sidelined

 

due to conflicts with israel essentially

 

turning its economy

 

into a wartime one with hundreds of

 

thousands of conscripts

 

military spending accounted for a

 

staggering 17

 

of gdp in the early 70s culminating

 

in an economic model which was clearly

 

unsustainable the nation

 

had to open up its economy or face

 

financial oblivion

 

which to be fair it did start to do in

 

the late 70s

 

through the so-called open door policy

 

the trouble though

 

was that open market policies were never

 

truly embraced

 

a theme we’ll see later on in the video

 

realistically speaking

 

the economy of the time did and to a

 

degree still does

 

rely on four main sources of income the

 

first is oil revenues through its

 

state-owned companies

 

the second the development of its

 

tourist sector certainly not a pyramid

 

scheme

 

the third being traffic flowing through

 

the sewers canal

 

and finally remittances from egyptians

 

working abroad

 

but what about local businesses with

 

global ambitions

 

well whilst open door policies existed

 

on paper

 

the finances didn’t always lend support

 

exports

 

were largely hampered by an overvalued

 

currency

 

making international competitiveness

 

even more difficult

 

a factor making a big appearance later

 

on as well back in the 1970s if you looked at the

 

economic growth data

 

this was somewhat misleading the devil

 

was in the detail

 

economic issues were reflected through

 

its high level of international debts

 

balance of payments problems and rising

 

unemployment

 

so in order to solve this the government

 

decided to change strategy

 

it resorted to old habits

 

re-implementing five-year plans

 

with a focus on those core income

 

generating strategies

 

we mentioned earlier unfortunately for

 

the nation

 

this failed to remedy its underlying

 

structural issues

 

abandoning them for a much more

 

market-orientated approach

 

during the 90s and 2000s yet it’s

 

important to stress

 

how the economy’s structural issues were

 

never fully addressed in the process

 

sure over the decades egypt did make

 

some progress

 

with the share of agriculture falling

 

from 28

 

in 1974 to 11 today and services

 

rising to more than half of gdp though

 

largely low skilled ones

 

with the majority of the labor force

 

working in the informal sector

 

in fairness though industrialization did

 

occur

 

but was dominated by the extraction of

 

natural resources

 

as opposed to the much prized heavy good

 

industries

 

reflecting issues which all fueled

 

2011’s revolution

 

leading us on to the next section how

 

did the arab spring

 

impact the economy like many countries

 

in the region

 

there were high hopes that 2011 would

 

lead to a brighter economic future

 

unfortunately the political instability

 

in the process

 

dealt a huge blow to the tourist sector

 

a key source of foreign currency

 

tourism wasn’t the only sector to suffer

 

foreign direct investment

 

also collapsed and whilst it did begin

 

to recover

 

progress was slow a common trend as most

 

economists have highlighted

 

the slow place of economic reform

 

representing factors

 

which failed to improve the chronically

 

high unemployment and rapidly rising

 

costs of living

 

leading to a further change in

 

government as the military took control

 

though despite the change in government

 

egypt’s macroeconomic outlook

 

continued to decline for years the

 

country had run huge deficits

 

to compensate for its underperformance

 

poor results

 

partly driven by an overvalued currency

 

one the central bank had been defending

 

through its ever-dwindling foreign

 

currency reserves

 

by 2016 the country’s debts had reached

 

such unsustainable levels

 

it was forced to turn to the imf for a

 

12 billion dollar bailout

 

raising an important question what

 

economic impact

 

did egypt’s imf bailout have as is

 

typical with imf loans

 

this was conditional upon a series of

 

structural forms

 

perhaps the greatest being the floating

 

of its currency

 

which immediately declined by a shocking

 

50 percent overnight

 

now to be fair this decline was in the

 

official exchange rate the majority of

 

egyptians had been using the unofficial

 

black market one

 

for a very long time a product of a dire

 

shortage of foreign currencies and heavy

 

restrictions

 

on their use way before such a

 

significant decline

 

even in the official rate had severe

 

consequences

 

for example the rate of inflation rose

 

and eye watering 30

 

the following year with interest rates

 

rising to almost 20 percent in response

 

representing a huge blow to the cost of

 

living so why undertake the devaluation

 

well it helped increase exports and

 

improve the nation’s balance of payments

 

both fundamental to avoiding further

 

bailout egypt’s inflation

 

is also looking a lot better compared to

 

where it was just a few years ago

 

declining to its lowest level in more

 

than a decade as well as other

 

macroeconomic indicators

 

showing positive signs despite saying

 

all of this

 

substantial issues remain what are

 

egypt’s

 

main economic challenges even before its

 

bailout

 

the country was struggling with high

 

rates of poverty an

 

estimated quarter of the population live

 

on less than 3.20 per day

 

austerity cuts particularly to food and

 

fuel subsidies

 

have hit the poorest hardest you see

 

for decades egypt has directly

 

subsidized food

 

more than 60 of the population received

 

bread rations

 

in the form of something called baladi

 

bread at a fixed price

 

which has been unchanged for decades

 

although the size of the bread has

 

recently shrunk

 

in fact egyptians consume more bread per

 

capita

 

than anyone else in the world at an

 

estimated 180

 

to 210 kilograms per year

 

compared to the 60 to 70 kilogram global

 

average

 

levels many people take to be a sign of

 

financial distress

 

lacking a balanced diet this is also

 

linked to why egypt

 

is the largest importer of wheat in the

 

world to give you some context

 

the cost of bread and food ration cards

 

half percent of gdp

 

with subsidies in general accounting for

 

a quarter of government spending

 

in recent years however a big strain on

 

government spending

 

has also been rising interest rates

 

repayments on its debt

 

equate to more than a third of

 

government revenue raising questions

 

over whether egypt

 

has actually fallen into a classic debt

 

trap unable to ever earn enough

 

to fully pay off its debts in addition

 

to this

 

the improvements seen in its foreign

 

reserve currency levels have been

 

criticized as being misleading

 

whilst it’s true they have increased a

 

large proportion of this

 

is actually borrowed money questioning

 

how much of a benefit this really is

 

but perhaps its biggest challenge lies

 

in its geography

 

unlike microstates which are swimming in

 

oil egypt has the largest population in

 

the arab world

 

almost entirely restricted to the banks

 

of the river nile

 

with 95 percent of the country living on

 

four percent of the land

 

the remainder being largely desert with

 

a rapidly growing population

 

already crowded cities are continuing to

 

expand

 

so does egypt have a plan well

 

yes for all its economic problems it’s

 

currently planning or building including the new administrative capital

 

intending to house the new parliament

 

and most government agencies its central

 

business district

 

will also be filled with skyscrapers

 

including the tallest building in africa

 

iconic tower to be honest it’s fair to

 

say that the country is going through a

 

construction boom

 

at least concerning skyscrapers

 

according to a 2019 deloitte report

 

it had the highest number and value of

 

construction projects of

 

any african nation creating hundreds of

 

thousands of jobs

 

and attracting much needed investment

 

though one mega project

 

may also be its biggest economic threat

 

the grand renaissance dam of ethiopia

 

is set to slow the flow of water through

 

the nile as it fills a reservoir

 

larger than the size of greater london

 

posing a risk to egypt’s water security

 

over the estimated four to seven years

 

it will take to fill

 

on the other hand the hydroelectricity

 

generated is aiming to offset chronic

 

power shortages

 

in both ethiopia and its upstream

 

neighbors presenting if nothing else

 

just one other challenge egypt will have

 

to overcome if it is to ever truly

 

thrive so overall

 

we can’t help but notice that egypt has

 

experimented with more than its fair

 

share of economic policies

 

shifting from a private to a state-run

 

development model in the 50s and 60s

 

attempts to open its economy were often

 

disjointed

 

resulting in an underwhelming

 

performance a common theme through all

 

of this

 

has been its macroeconomic instability

 

one which revolutions

 

largely failed to address whilst the

 

country’s more recent performance

 

has shown some positive improvement deep

 

structural flaws remain

 

including concerns over its governance

 

and levels of corruption

 

ranking 117th out of 180 countries on

 

the corruption index

 

a sign of the significant issues the

 

nation needs to address

 

to unlock its true potential and now

 

it’s over to you do you think egypt’s

 

economy shows promising signs

 

has its imf bailout set it on a better

 

path can it continue to diversify its

 

economy

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