On March 21, 2021, the Egyptian Central Bank oversaw the devaluation of the pound, which subsequently dropped in value by approximately 14 percent. The following day the pound would drop by an additional percentage point amid speculation that the government was preparing to ask for another IMF loan. The head of the Central Bank, Tarek Amer, claimed that the devaluation was a “correction” in response to local and international developments—an implicit reference to the war in Ukraine—and that the devaluation would lead to better export performance. However, this official narrative ignores the fundamental dynamic of state capitalism in Egypt—a model that produces economic growth without an increase in local demand or a sizeable increase in exports and is characterized by a weak private sector. This model has not increased the competitiveness of the Egyptian economy and has only exacerbated already entrenched poverty. Furthermore, without a robust economic base, this strategy—based on the appropriation of public funds and the use of large debts to fuel economic growth—is bound to lead to a fiscal and economic crisis.

Historically, the government has been able to increase rates of economic growth through massive public investments, primarily in infrastructure. For example, the rate of economic growth increased from 2.18 percent in 2013 to reach a high of 5.5 percent in 2019, only dropping to 3.5 percent in 2020 with the onset of the pandemic. This rate of economic growth also coincided with a significant reduction in the fiscal deficit, which dropped from -12.9 percent as a percentage of GDP in 2013 to -7.8 percent in 2020. According to neoliberal orthodoxy, this decline, serving as an indicator of reduced government involvement in the economy, was supposed to stimulate the growth of the private sector. Simultaneously, unemployment also dropped, decreasing from 13.15 percent in 2013 to a low of 7.4 percent in 2021. A closer look, however, reveals that this growth is based almost exclusively on military-dominated state investments and is accompanied by a shrinking local market, a deteriorating external position, and a weakened private sector. 

The failures of the Egyptian model are clearly reflected in the trajectory of the local market and the performance of the private sector. For example, a May 2019 report from the Central Agency for Public Mobilization and Statistics (CAPMAS) showed that national family consumption dropped by 9.7 percent across the country—and 13.7 percent in urban areas—from 2015 to 2018. This was accompanied by soaring poverty rates, which increased from 27.8 percent in 2015 to 32.5 percent in 2018. Subsequently, in October 2021, CAPMAS reported a decrease in poverty rates from 32.5 percent to 29.7 percent. This decrease, coupled with falling levels of unemployment, should have strengthened local demand, but a detailed report issued in December 2020 showed a further 1.8 percent drop in the level of national family consumption. This seemingly contradictory finding indicates that the salaries offered in newly created jobs are either disproportionately low to begin with or unable to keep up with the cost of living. 

This shrinkage in the local market was not balanced by an improved export performance. For example, the Egyptian current account deficit jumped from -2.2 percent in 2013 to -4.6 percent in 2021, reaching a high of -6.1 percent in 2017—ironically, the year after the pound lost half its value in the government’s first devaluation. Furthermore, taken together, the weak export performance and the shrinking local market indicate that the private sector has been underperforming for years. Indeed, as of March 2022, the private sector had shown signs of negative growth for 15 consecutive months, and the level of business confidence was reported at a 10-year low, a sign of continued turmoil. 

Thus, economic growth has not been driven by the private sector, but by massive investments in infrastructure led by the military establishment, which, according to a November 2019 speech by Sisi, reached 200 billion USD between 2014 and 2019. There are two major problems inherent to this policy: the first is the source of financing of these investments, and the second is the rate of return. In terms of financing, these investments were fueled by debt, which increased from 80 percent of GDP in 2013 to 88 percent in 2020, spiking to 103 percent in 2017. The risk, however, is not merely the large debt, but also the interest rates—estimated to be the highest in the world—offered by the regime to attract investors. This high level of interest places significant pressures on the state budget, with an estimated 31.5 percent of state expenditures in the 2021-2022 budget allocated to service the debt. The burden of debt servicing is then transferred to the lower and middle classes through continued cuts to government spending which dropped from 11.35 percent of GDP in 2013 to 7.92 percent in 2020. This, in turn, contributes to weakening local demand and increasing poverty rates. The structure of the debt—with approximately a quarter of the overall debt burden denominated in foreign currency—is also problematic, leaving the economy susceptible to sudden currency shocks if investors decide to pull out of the debt market because of international developments. For example, the war in Ukraine led to an estimated exodus of 3 billion USD from the market. 

The other side of the coin is the expected return on the massive state investment spree. So far, returns have been dubious at best, and the clearest example is the new Suez Canal which, with an estimated investment of 8 billion USD, has seen only a modest 4.7 percent increase in revenue over a period of five years. Other major projects like the New Administrative Capital, which boasts an estimated budget of 58 billion USD, have yet to produce tangible returns.

Beyond these alarming indicators, there is also considerable evidence that the state is using coercive tactics against the private sector to suppress competition in the market. The clearest example is the arrest of Safwan Thabet and his son Seif, owners of one of the largest consumer product businesses in the country, on terrorism charges. The real reason for the arrest, however, is the pair’s refusal to sell Juhayna, their company specialized in dairy products, to the state (which happened to be launching its own dairy brand). These coercive tactics are only one example of a systematic policy of government intervention against the private sector in favor of military-owned commercial enterprises.        

Hence, international dynamics—while a contributing factor—are not the real reason behind the burgeoning fiscal crisis in Egypt. Rather, this crisis is the result of structural issues related to the government’s form of militarized capitalism. Indeed, considering past events such as the 2016 currency devaluation, there is good reason to predict that the most recent devaluation will not lead to a more competitive international position. On the contrary, it will likely act to weaken local demand because of the expected inflationary wave that will follow. Inflation, which already spiked to 12.1 percent in March, will disproportionately affect the poor and the middle class, further weakening local demand. This cycle will only drive the state deeper into debt. Indeed, Standard and Poor’s estimates that Egypt will soon overtake Turkey as the largest issuer of sovereign debt in the emerging markets of Europe, the Middle East, and Africa, with an estimated total of 73 billion USD in 2022. This astronomical level of debt will exert even more pressure on the state budget, leading to more social spending cuts, and thus, increasing poverty rates. 

In response to the burgeoning crisis and the need to bolster hard currency inflows, President Sisi stated the government’s intention to sell 10 billion USD worth of state-owned assets to the private sector, per annum, for the next four years. This plan is coupled with financial support from the Gulf, which includes a 5 billion USD deposit from Saudi Arabia, a 2 billion USD investment from the UAE, and a promised 5 billion USD investment from Qatar. However, these policies are only short-term solutions to the structural problems rooted in the state’s form of state capitalism. In this context, the remedy to Egypt’s economic woes is similarly structural: a radical restructuring of the country’s political economy. Of course, such restructuring can only be achieved through wide-ranging changes to the political system that would see the current model of militarized capitalism discarded in favor of civilian economic control—an unlikely prospect. Thus, for the foreseeable future, it appears that Egypt will remain trapped in a vicious—and state-sponsored—economic cycle that disproportionately harms the poor and the middle class.  

Maged Mandour is a political analyst and writes the “Chronicles of the Arab Revolt” column for Open Democracy. Follow him on Twitter @MagedMandour.