Can Egypt’s economy afford a military adventure in Libya?

Anyone who has followed Egypt’s economic trajectory in recent years, would be uneasy at the remarks President Abdel Fattah el Sisi made over the weekend about sending troops into Libya in support of General Khalifa Haftar’s retreating forces.  

The fallout of the coronavirus pandemic on travel and consumption, has hit developing countries on an unprecedented scale - and Egyptians are already feeling the pain. 

From falling remittances, vacant tourist locations and a decline in income from the Suez Canal, Cairo has multiple problems to deal with at the moment. 

Egypt’s real GDP growth rate for the fiscal year - which ends this month - is expected to drop to 0.4 percent compared to an earlier forecast of 5.5 percent, says Callee Davis, an economist at NKC African. 

“Recent global developments do not bode well for Egypt’s current account as Egypt’s main forex earners - tourism, remittances and petroleum and non-petroleum exports - will be hard hit by the global pandemic,” she told TRT World. 

The foreign reserves which were at a comfortable $45 billion before the pandemic struck, have since been on the slide. In just two months, they dropped to $37 billion in April as loan repayments were made and foreign investment flowed out. 

The reserves will hit a low of $31 billion this year, according to rating agency Fitch. 

Egypt is among those cash-strapped countries rushing to avail the International Monetary Fund’s (IMF) emergency loans, signing a deal last month to borrow $2.8 billion to boost its rapidly falling foreign currency reserves. It’s also in talks to take an additional $5 billion in a standby IMF loan. 

Problems on multiple fronts 

Even before the pandemic struck, Egyptians were feeling the pain of austerity measures implemented after a 2016 loan deal with the IMF. 

Nearly one third of the people in the Middle East’s most populated country live below the poverty line - many dependent on government handouts. 

Anger and frustration over a lack of jobs, political repression and corruption erupted into scattered protests late last year when reports emerged that Sisi and his aides spent money on luxuries while their people suffered. 

Egypt has devalued its currency, increased taxes and raised the price of electricity as part of the austerity drive. 

The corona effect

The pandemic has hit key drivers of the Egyptian economy. 

For instance, the tourist industry, which employs 1 in 10 Egyptians, has almost come to a standstill and there’s little hope that Europeans will flock back to the pyramids anytime soon. Last year, tourism accounted for $13b billion or five percent of its GDP. 

Gas exports, which have helped fuel economic growth, have taken a hit. Prices have now crashed with little recovery in sight and this jeopardises Sisi’s grand ambition of making Egypt an export hub. 

The World Bank has already indicated that remittances will slow down as people lose jobs as a repercussion of the shutting of businesses. 

Even though Egypt doesn’t rely as much as other countries on remittance income, expats sent home $27 billion last year, making up nine percent of the GDP.

What should be concerning for policymakers is the fact that more than 50 percent of the expat workforce is employed in Gulf countries where widespread layoffs have been reported. 

Informal sectors make up nearly half of the economy, employing millions of people at construction sites and farms. The extent of the fallout of the pandemic on this vulnerable segment from the reduction in both trade and purchases, remains unclear - but it certainly will not be positive.

Income from the Suez Canal, which brings in around $6 billion a year, is going to decline as international trade has slowed. Also, cheaper fuel means ships are taking the longer route around Africa. 

All of these difficulties will put pressure on Sisi’s government to raise adequate funds to support an already agitated population.  

“Government spending will rise considerably in coming months given the recently announced stimulus and bailout package of approximately 100 billion Egyptian pounds,” says Davis. This will increase the fiscal deficit, she says. 

Next year’s economic growth is expected to be a negative 4 percent. 

“Although we expect the slow easing of restrictive measures in coming weeks to support the economy, the upward trajectory of coronavirus cases, coupled with policy uncertainty, poses a significant risk to our outlook,” says Davis.