What Caused Egypt’s Economic Tailspin?

Welcome to Foreign Policy’s Africa Brief.

The highlights this week: The IMF steps in as Egypt’s currency collapses, a sanctioned Russian yacht heads to South Africa, and Senegal’s secret arms deal.

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Egypt’s currency hit record lows against the U.S. dollar last week after the Central Bank of Egypt implemented a flexible exchange rate to secure a $3 billion loan with the International Monetary Fund (IMF). The Egyptian pound fell to 24 pounds against the dollar for the first time, with analysts predicting a further depreciation.

As Egypt prepares to welcome global leaders next week as the host of the 27th United Nations Climate Change Conference, or COP27, the country’s beleaguered economy is faltering, having been battered by the COVID-19 pandemic and then commodity price shocks following the Russian invasion of Ukraine. Foreign investors are now fleeing the country.

Long a top choice for emerging market investors, Egypt had become heavily dependent on hot money. “When you have a global downturn like what we are seeing now, the first thing that fund managers do is move their money from developing countries to developed countries, which are seen as more stable,” said Mirette Mabrouk, the director of the Egypt program at the Middle East Institute. “There were already a series of structural reforms that Egypt had to do, and it was slow on them.”

There were no buffers put in place to mitigate against an overreliance on overseas financing. At the start of the war in Ukraine, foreign investors pulled around $20 billion out of Egypt between February and March. As Yehia Hamed warned in Foreign Policy in 2019, the majority of Egypt’s public funds went to facilitating payments on debt. Financial institutions such as the IMF continued to post growth rates for the economy, yet, as Hamed argued, these were “exaggerated by levels of debt in the same way that one might exaggerate their income by borrowing beyond their means.”

Allowing the value of the pound to be determined by market forces is part of the fiscal reform package demanded by the IMF. But that will increase inflation and the costs of imports in the short term, causing hardship in a country where 60 percent of the population is poor or vulnerable. Heavily dependent on wheat from Russia and Ukraine, Egypt is already battling an inflation rate of 15 percent.

The “move to a flexible exchange rate regime is a significant and welcome step to unwind external imbalances, boost Egypt’s competitiveness, and attract foreign direct investment,” the IMF said in a statement. In addition to the $3 billion deal, Egypt will receive $5 billion from unidentified international donors and potentially $1 billion from a newly created IMF resilience and sustainability fund.

However, the loan package agreed last week is the country’s fourth since Abdel Fattah al-Sisi took power in a coup in 2013, making Egypt the IMF’s second-largest debtor after Argentina. In total, Egypt owes multilateral institutions about $52 billion. In the past 10 years, Egypt’s external debt has climbed from $37 billion in 2010 to nearly $158 billion as of March. Economists believe it will top $190 billion by the end of the year.

As part of the IMF deal, Egypt has agreed to make a series of changes aimed at increasing investor confidence, including removing import restrictions introduced in March to protect its foreign reserves. To help with rocketing prices, Cairo also announced a rise in the minimum wage and pensions for public employees. Some of Egypt’s poorest citizens have some protection due to the government’s cash transfer programs and subsidies for staples such as bread. In Mabrouk’s view: “The people who are squeezed most are the middle classes. They are the ones who don’t have enough money to cushion themselves, but they are not poor enough to qualify for government aid.”

To further boost financing, Sisi announced on Saturday that his government would grant “golden licenses” to all investor applicants for three months. The licenses grant approval for investors to buy or rent lands and operate and manage projects without the need to gain approval from multiple government bodies. These licenses can then be extended a further three months. The Arab League summit concludes Wednesday, and the hope from Egyptian officials is that aid and investments from Gulf allies will bring further economic stability. An earlier Gulf bailout saw $22 billion in pledges from the United Arab Emirates, Qatar, and Saudi Arabia.

According to the World Bank, Egypt’s economy has grown, but that expansion has largely been driven by state infrastructure developments overseen by the military. From pasta production to roadwork, the Egyptian military is involved in almost all sectors of the economy. There has been heavy criticism of vanity projects undertaken by Sisi, including $60 billion for a new administrative capital. As Steven A. Cook wrote in Foreign Policy in August, “a new city from scratch should be in the category of ‘would be nice to have’ as opposed to ‘we need to break the bank to get it.’”

In August, researchers at Human Rights Watch argued that Cairo should be forced to implement structural reforms before receiving any bailout package. “The military’s heavy-handed involvement in the economy, which is shielded from civilian oversight,” is a major part of the country’s governance problems, Amr Magdi and Sarah Saadoun argued. “That the government is once again asking for a bailout after the IMF and other institutions have been pouring money into its economy for years makes it clear that until these problems are addressed, the IMF is pouring sand into a sieve.”

Facing pressure from the U.S. Congress and rights groups, Washington in September withheld $130 million in military aid to Egypt. In order for private sector businesses to survive, observers note that Cairo will have to reduce the military’s monopoly. Sisi has made those promises, including privatization of state-owned enterprises. “It can no longer be business as usual,” Mabrouk said.

But financial analysts worry whether Cairo can adhere in the long term to its own fiscal measures. Egypt previously agreed to float its currency in 2016 when it secured a $12 billion loan from the IMF. In that year, the Egyptian pound lost half its value, and Cairo subsequently reverted to controlling the exchange rate. And as the Egyptian publication Mada Masr explains, shares in some state-owned companies rolled out in 2018 ended up later being packaged and sold off to Saudi Arabia, the UAE, and Qatar.

Wednesday, Nov. 2: The Arab League summit, hosted by Algeria, concludes.

Human Rights Watch is due to publish a report on the closure of camps for internally displaced people fleeing terrorism in Borno state, Nigeria.

Wednesday, Nov. 2, to Friday, Nov. 4: Tanzania’s president, Samia Suluhu Hassan, visits China.

Friday, Nov. 4: The trial of former Liberian rebel commander Kunti Kamara is set to conclude in Paris.

Sunday, Nov. 6: The COP27 summit opens in Sharm el-Sheikh, Egypt.

Wednesday, Nov. 9: Finance ministers convene at COP27.

Burkina Faso army drive. Burkina Faso’s ruling junta has launched a drive to recruit 35,000 civilians into a new force called Volunteers for the Defense of the Homeland. It comes in addition to a previous announcement looking for 15,000 civilian volunteers, who will receive just two weeks of training before going to battle against Islamist militants.

Beyond volunteer recruits, the military is also looking to hire 3,000 additional professional soldiers to boost its ranks. Ibrahim Traoré, who seized power in September in a coup, has assured U.S. diplomats that he will not recruit Russian mercenaries in the fight against jihadis, according to Victoria Nuland, the U.S. undersecretary of state for political affairs, who visited the country last month.

Tanzania water shortage. Government officials on Thursday imposed water rationing in Tanzania’s largest city, Dar es Salaam, to cope with water shortages that officials blamed on drought and a drop in the level of the city’s main water source, the Ruvu River.

Water supply from the Ruvu has dropped from 466 million liters a day to around 300 million liters a day, according to figures released by the Dar es Salaam Water Supply and Sanitation Authority. However, the city consumes about 500 million liters a day. The city’s water authority said it would shut off piped water to the city’s 6 million residents for 24 hours every other day until water levels recover.

The luxury megayacht Nord, owned by sanctioned Russian billionaire Alexey Mordashov, is seen anchored in Hong Kong waters on Oct. 7.ISAAC LAWRENCE/AFP via Getty Images

Russian yacht heads South. A 465-foot megayacht belonging to the Russian steel and mining tycoon Alexey Mordashov has been granted permission to dock in Cape Town, South Africa.

Geordin Hill-Lewis, Cape Town’s mayor and member of the country’s main opposition party, the Democratic Alliance, had urged the South African government to deny entry to the yacht. South Africa should not “welcome an accomplice to state terrorism,” he wrote in a letter addressed to South Africa’s foreign minister, Naledi Pandor.

Following Russia’s invasion of Ukraine, Mordashov was sanctioned by the European Union, the United Kingdom, and the United States over his links to Russian President Vladimir Putin. However, “South Africa has no legal obligation to abide by sanctions imposed by the U.S. and EU,” a spokesperson for South African President Cyril Ramaphosa told reporters in a statement last Tuesday.

The yacht, which is estimated to be worth more than $500 million, left Hong Kong on Oct. 20. It is expected to arrive in South Africa between Nov. 8 and 9.

“Next time, send the real Mr. Bean.” Zimbabwe’s one-run win against Pakistan in their T20 World Cup cricket match on Thursday was not the only talking point over the weekend. Prior to the match on Thursday, Zimbabwean citizen Ngugi Chasura recalled on Twitter an unfair trick played on Zimbabweans and accused Pakistan of sending a Mr. Bean impersonator named “Pak Bean” for an agricultural show in 2016 instead of the British comedian Rowan Atkinson.

“As Zimbabweans we wont forgive you … you once gave us that Fraud Pak Bean instead of Mr Bean Rowan … we will settle the matter tomorrow,” he wrote in a viral tweet.

Heads of state then got involved in the social media fray. After congratulating his nation’s team for their win in Perth on Twitter, Zimbabwean President Emmerson Mnangagwa added, “Next time, send the real Mr Bean.” In response, Pakistani Prime Minister Shehbaz Sharif noted: “We may not have the real Mr Bean, but we have real cricketing spirit … and we Pakistanis have a funny habit of bouncing back.”

Egypt is the second-largest debtor by value to the IMF, with an outstanding balance of nearly $14 billion. Critics of Sisi’s leadership argue that the state has been more focused on crushing dissent than putting in place structural reforms that would enable the Egyptian economy to thrive.

• Iran Is Now at War With Ukraine by John Hardie and Behnam Ben Taleblu

• Russia’s Recruiting Afghan Commandos by Lynne O’Donnell

• Russia’s Ukraine Disaster Exposes China’s Military Weakness by Tai Ming Cheung

Senegal’s secret arms deal. Chikezie Omeje for the Organized Crime and Corruption Reporting Project uncovers details of a contract not disclosed to the public in which Senegal’s environment ministry bought $77 million worth of assault rifles, ammunition, and other weapons this year from a notorious Nigerien arms dealer named Aboubakar Hima. Senegal has been fighting a decades-long conflict with separatist rebels in the southern Casamance region. Rebels often finance themselves through timber logging. To counter this, Senegalese forest rangers overseen by the environment ministry have armed themselves.

The government of Niger has previously accused Hima of brokering corrupt arms deals worth $240 million, and he is wanted by Nigeria’s anti-graft agency for his role in $400 million worth of similar fraudulent arms contracts.

Sudan’s pro-democracy activists persist. One year after Gen. Abdel Fattah al-Burhan led a military coup, the Sudanese people continue to protest and demand civilian control of the state. At least 119 protesters have been killed and more than 7,000 injured in a brutal crackdown. In a photo essay for Foreign Policy, Ela Yokes argues that while Western governments advocate for a new power-sharing agreement, “many protesters and opposition groups continue to push for a solution that would limit the scope of the military’s role.”