In May 2020, the European Bank for Reconstruction and Development predicted growth of the Egyptian economy would slow down severely, reaching a mere 0.5 percent for 2020, compared to 5.6 percent in 2019. This economic slowdown is preceded by sustained increases in poverty rates, heightening Egyptians’ social vulnerability.
In 2019, the Egyptian Central Agency for Public Mobilization and Statistics reported a spike in poverty rates, from 27.8 percent in 2015 to 32.5 percent in 2018. The World Bank also reported a similar pattern, observing an increasing from 22.7 million people living in poverty in 2012 to 32.5 million in 2017. In other words, 9.8 million Egyptians fell into poverty in the span of five years. A fiscal and economic policy designed to accelerate the transfer of wealth from the lower and middle classes to the business elites is the main culprit.
This policy is based on several pillars. First, the government relies heavily on loans, in lieu of taxation, to finance government operations and mega infrastructure projects. Tax revenues are instead disproportionately used for loan and interest payments. This leads to a transfer of wealth from the lower and middle classes to the regime’s creditors, both foreign and domestic. Second, the government continues to cut subsidies and social spending. Third, there is the continued use of a regressive tax structure that shifts the tax burden to the shoulders of the middle and lower classes. At the same time, the government continues to pursue mega infrastructure projects spearheaded by the military, acting as a tool for the appropriation of public funds, rather than for social spending and poverty reduction programs.
This rise in poverty rates led to higher levels of social deprivation, as exhibited by an average 9.7 percent drop in general consumption of goods and services, with less spending on items like education, healthcare, and culture. Urban areas are most strongly affected, with the level of consumption dropping by 13.7 percent, compared to 5.1 percent in rural areas. To contextualize this, the level of expenditure per person in urban areas dropped by 1,400 Egyptian Pounds (EGP), decreasing from 10,600 EGP to 9,200 EGP, while in rural areas the decline was only 500 EGP, decreasing from 7,100 EGP to 6,600 EGP.
The first aspect of this policy to be examined is the heavy reliance on debt. The regime relies heavily on borrowing, both foreign and domestic, to finance government operations and infrastructure projects. Borrowing not only insulates the government from public pressure—enabling it to act more autocratically—but also transfers wealth from lower and middle classes to government creditors. In other words, this heavy reliance on borrowing combined with a regressive taxation system means that the taxpayer is obliged to repay these loans plus their interest. The average taxpayer effectively acts as a vehicle for wealth transfer to the upper classes, who can afford to lend to the government, and to international creditors. These creditors include international organizations like the IMF (International Monetary Fund) and the World Bank, regional allies, as well as the international market.
By the end of 2019, the ratio of debt to GDP reached 90 percent, which, while lower than the 108 percent reached in 2017, remains high by regional standards. For example, the same ratio reached 66 percent in Morocco and 76 percent in Tunisia in 2019. The government’s borrowing spree made Egypt the largest African recipient of foreign bonds, borrowing $22 billion through Eurobond between 2017 and 2019 on the international market. The heavy reliance on borrowing has significantly strained the state budget. For example, the 2020-2021 budget earmarked 555 billion EGP for interest and loan repayment. With the complete ratified budget totalling 1.7 trillion EGP, debt spending constitutes 32 percent of the total expenditures. Placing this in context, the same budget allocates only 335 billion EGP to cover public sector wages.
The policy of reliance on debt ensures that those who have enough wealth to lend to the government—meaning owners of domestic debt—benefit directly from this process. It also allows the regime to exempt or grant low tax rates to businesses, especially those controlled by the military, and low personal income rates for the wealthy. Consequently, the reliance on debt enables the regime to negate one of the primary benefits of taxation: redistribution of wealth from the wealthiest.
The second pillar of the government’s approach is the regime’s reduction of social spending and public subsidies. Despite the ongoing impacts of COVID-19 on Egyptian households, 2020 has been marked by dramatic reductions. On August 17, the government introduced a reduction of the size of subsidized bread by twenty grams, the food staple for approximately 60 million Egyptians. On August 16, 2020, the government announced an increase to the price of Cairo metro tickets for the second consecutive year. The cheapest tickets, costing 3 EGP, were eliminated, while the prices of the two remaining ticket classes were raised from 5 to 7 EGP and from 7 EGP to 10 EGP. On August 15, President Sisi issued Law 170, stipulating the deduction of 1 percent from the salary of all workers, and 0.5 percent from monthly pensions for a year. These funds will be used to counter the economic impact of pandemics and natural disasters, another measure shifting the burden of the pandemic to the shoulders of the lower and middle classes. Previously, on June 10, 2020, the government decided to raise the price of electricity by 19 percent, the seventh increase since President Sisi came to power in 2014. This led to a high level of inflation, which heavily affected the poor, for example urban consumer price inflation reached 14.1 percent in May 2019, with basic food inflation reaching 15.1 percent.
Third, a regressive tax system benefits the wealthy in Egypt. In 2017, 44 percent of tax revenue was derived from value added taxes and taxes on goods and services—both are imposed on consumption and are thereby regressive. In context, the average regressive tax income for OECD (Organization for Economic Cooperation and Development) countries is 33 percent. In terms of personal income taxes, the Egyptian parliament approved a new income tax law on April 22, 2020. The new law will impose a 25 percent tax rate on the wealthiest Egyptians, earning 400,000 EGP, the equivalent of $25,000. This is a relatively modest rate for the highest income brackets by regional and international standards. For comparison, Egypt has the seventh lowest rate in Africa, with regional neighbors like Tunisia and Morocco having 35 percent and 38 percent, respectively. In addition, the corporate tax rate stands at 22.5 percent, rendering Egypt home to the fifth lowest corporate tax rate in Africa. Clearly, the tax system succeeds in shifting the burden to the shoulders of the lower and middle classes, rather than the business class.
Furthermore, the policy of subsidizing the expansion of military business enterprises by using public funds puts additional pressure on the lower and the middle classes, who shoulder the bulk of the tax burden. The military’s expanding business empire is subject to a plethora of tax exemptions and it is also shielded from the duties and regulations on procurement that are imposed on civilian businesses. A notable example is the 2016 exemption for military owned business from the VAT tax. The military enjoys tax exemptions on profits generated from military owned hotels, sales of basic food items, and custom duties.
Finally, regime spending prioritizes mega infrastructure projects spearheaded and controlled by the military, effectively acting as a tool for the appropriation of public funds. This policy, combined with the tax breaks received by military owned companies, has allowed them to flourish at the expense of the lower and middle classes, as well as that of the civilian private sector, which is struggling to compete. For example, in November 2019, President Sisi stated that $200 billion worth of military-led national projects were completed over the previous five years. Placing this number in context, the size of the Egyptian GDP was $303 billion in 2019. Examples of these mega-projects include the new administrative capital. With an estimated budget of $58 billion, this endeavour is executed by a company that is 51 percent owned by the military and 49 percent owned by the housing ministry. The military also plays a prominent role in infrastructure building and maintenance. For example, in December 2016, Kamel El Wazeer, then head of the Armed Forces Engineering Authority stated that the military was responsible for road building and upgrade projects that provided employment opportunities for more than two million civilians and business opportunities for more than 1,100 companies. The benefits from these projects are disproportionately internalized by the military rather than the average Egyptian. These projects are used by the military to further penetrate the economy and appropriate public funds.
Hence, the economic and fiscal policies the regime employs are increasing poverty and transferring wealth from the lower and middle classes to the elites. In addition to the regime’s autocratic nature, the international support it receives in the form of capital flows and loans enable the regime’s efforts to enrich the business elite and the military establishments, all at the expense of the citizenry. The government received financial support from regional allies reaching $92 billion between 2011 to 2019 and continues to borrow large sums from international institutions. These funds allow the government to pursue mega projects and maintain a regressive taxation system. This in turn allows military owned business to flourish, thereby increasing the military’s power and patronage network. This external support also shields the military from the public scrutiny that comes with increased reliance on taxation as a source of government income.
The long-term effects of this approach are grave. Beyond the increased poverty and social deprivation of the average citizen, the regime is bound to become more repressive and autocratic as it continues to impose these harsh policies. This in turn will fuel the rise of violent resistance to the state. Even if resistance does not crystallize into a coherent political movement, the level of social violence is bound to rise, leading to long term destabilizing effects. Furthermore, the expansion of military owned businesses leads to increased pressure on the civilian private sector as it struggles to compete with the military behemoth. This will have long term structural impacts on the economy and the political system that will be difficult to reverse, ultimately outliving Sisi and his regime.
Maged Mandour is a political analyst and writes the “Chronicles of the Arab Revolt” column for Open Democracy. Follow him on Twitter @MagedMandour.
