The unrest following the removal of Former President Mohamed Morsi has heightened the post-revolution impact that declining tourism revenue and decreasing foreign investment have had upon Egypt’s economy. In the wake of Morsi’s ouster, and sensing both Egyptian need along with a broader political or economic opportunity, three Gulf countries pledged billions of dollars in aid.
Details of the Aid
A total of USD 12 billion has been pledged to Egypt. Five billion came from Saudi Arabia, four billion from Kuwait, and three billion from the UAE. This aid is composed of six billion in interest-free deposits, three billion in grants, and three billion in petroleum products. By mid-September, USD seven billion had already arrived. Amazingly, this recent Gulf aid amounts to 5% of Egypt’s GDP. However, it is far less than the country’s budget deficit, which the Ministry of Finance currently estimates to reach USD 27 billion in 2013/14.
Since the removal of President Mubarak in 2011 the Egyptian economy has obviously been on a downward spiral characterized by rising inflation, falling government revenue, and dwindling energy supplies. Amidst this rapidly deteriorating economic situation, the Morsi administration was not at all shy about soliciting support from regional governments and international entities such as the IMF. Last November for example, the EU pledged USD 6.4 billion for Egypt over several years on the condition that the transition towards democracy continued. Similarly, Qatar supported Morsi’s government with USD 7.5 billion.
Opinions regarding the underlying motivations of neighbors and international organizations are numerous. “I think the main reason that Arab countries give aid to Egypt is that they do not want to see instability in Egypt,” said Haider A. Khan, Professor of Economics at the University of Denver. “They perceive that they have political interests in keeping the country afloat financially and they hope to exercise leverage over Egyptian leadership” added Dalibor Rohac, a Policy Analyst at the Cato Institute. Of course, it is important to note that, with the exception of Qatar, the aid announcements came almost immediately after Morsi’s fall. According to John Salevurakis, Associate Professor of Economics at AUC, “This is likely related to Gulf States being quite anxious over the rise of political Islam and recognizing that the Muslim Brotherhood as a broader political entity could potentially threaten long standing domestic monarchies.” Supporting a post-overthrow government, ensuring a ready supply of fuel and other necessities, and smoothing over the international concern relating to the Egyptian Pound’s stability therefore makes a great deal of sense to the Gulf governments.
Qatar is of course the exception as the country continually supported the Muslim Brotherhood while in power. Even post-overthrow however, Qatar fulfilled its pledge to provide five cargo ships full of LNG to Egypt despite simultaneously condemning the Egyptian military for its violent crackdown on the Muslim Brotherhood and its supporters. Recently however, numerous media outlets reported that negotiations between Egypt and Qatar had halted amidst political tensions. Talks to buy an additional 13 ships full of LNG have stalled. Further, on September 19th it was announced that Egypt planned to return USD two billion worth of aid to Qatar due to a lack of agreement between the governments regarding proper “securitization” of said aid. Of course, whether this is actually the case is not clear. It is entirely possible that political disagreements rather than financial realities ensured that the aid would be returned.
Use of the Aid
The Egyptian government plans to use this Gulf aid to boost the economy rather than directly filling contemporary budget gaps. “We will seek to pump more new funds into the economy and not follow austerity measures,” explained Finance Minister Ahmed Galal in a July interview with Reuters. He further noted that, “We do not want to increase taxes sharply…and we do not want to lower spending in a way that will slow a revival of the economy.” Simultaneously, Egypt has announced that it plans to increase the minimum wage for the huge population of public sector workers by more than 40%. Further, on August 28th the government approved additional domestic fiscal policy totaling USD 3.2 billion.
According to the Deputy Prime Minister Ziad Bahaa el-Din, it will focus on labor-intensive projects and services that help the poor. Transport infrastructure as well as water and gas supplies are among the fields that will benefit from the new investments. Planning Minister Ashraf El Arabi stated in a press conference that a portion of the Gulf aid would also be invested in housing, education, and health.(1) It is quite frankly, not clear how this is all possible while also meeting forecast reductions in the budget deficit to 9% of GDP from 14%.(2) It is however clear that different segments of the Egyptian political and economic spheres have very different needs and that the longer term economic objectives in Egypt do not necessarily exist in concert with short run necessities.
Apparently, the recent Gulf aid will also be utilized to boost Egypt’s foreign currency reserves. In 2011 Egypt’s reserves stood at USD 36 billion. At the end of June 2013, they stood at USD 14.9 billion. After receiving aid from the Gulf countries in September, the Central Bank of Egypt sold USD 1.3 billion from its foreign reserves at auction to local banks to help pay for strategic imports. This is the highest amount sold since the auctions started last December.(3) There have also been reports that the Gulf aid will help Egypt pay its dues to foreign oil companies. On September 12th, Prime Minister Hazemel-Beblawi said that Egypt is close to agreeing on a schedule for repayment of its six billion dollars in outstanding debt to foreign oil firms.(4) Both of these impacts of Gulf aid are, of course, positive in that they serve to enhance the reputability of Egyptian business in the latter case and present an image of macro-level stability in the former. It remains to be seen however, if these perceived improvements in image are permanent and tangible.
Impact of the Aid
It is also important to note that the influx of aid from the Gulf has had a positive impact upon Egypt’s stock market and currency. As of mid-September, the stock market was up 15% and the pound had strengthened 1.9% since Morsi’s exit. Egypt has also enjoyed lower interest rates since some of the aid arrived. This has reduced the government’s debt servicing costs by 2-2.5%. Despite such positive indicators, Egypt’s credit rating has not improved. On July 24th Moody’s affirmed Egypt’s CAA1 government bond rating (very high credit risk) and reasserted its negative outlook. According to analysts, this negative view is due to the fact that the Gulf aid offers only temporary relief to Egypt’s economy, which still requires thorough reforms.(5)
Experts also debate the utilization of the Gulf aid and the role it might serve in the sphere of public investment. “I think this is a fatal mistake,” said Rohac. “First, Egypt’s economic problems are structural, not cyclical. The country does not need to be ‘stimulated’ with more spending; rather it needs a predictable institutional environment, stable public finances, and more market flexibility. It would make sense to use aid to buy popular support for the difficult economic reforms Egypt needs –that way employment can be generated and sustained even after the aid money disappears.” It seems to Dr. Salevurakis at AUC however, that “buying popular support is something best done with employment and that employment can in turn generate a stable and predictable institutional environment.” He makes the assertion that “structural change can only really happen by first solving apparently cyclical problems and improving the immediate welfare of the citizenry.” However, Rohac argues that, “Aid from the Gulf is hardly a substitute for the damaged economic ties with the West – both trade and tourism have been heavily affected by the political events and that’s something that aid will not fix. Unless significant reforms are adopted, the prospects remain grim.” He does not however, specifically address the nature of these reforms and the short run political and social cost that such economic manipulations might have.
Conversely, Associate Professor of Economics at Indiana State University Bassam Youssif, believes that the investment package is “a reasonable stimulus to overcome an economic slump.” Nevertheless, he also cautioned that, “The strategy may prove to be unsustainable so long as the political impasse and instability continues. It does not, by itself, tackle some of Egypt’s long-term structural issues.” He continues to note that the aid could be harmful if it serves as a short-term measure, which effectively delays necessary reform. Youssif concludes by asserting that there exists little chance for reforming the subsidy system “especially as the Arab spring brought forward more, not fewer, populist economic demands and also because economic liberalization is associated with crony capitalism among large sections of the population.” The issue of subsidies is of course, always of primary concern in Egyptian economic circles. They are considered by many to be an element of the society that Egypt cannot economically afford and simultaneously something Egypt cannot politically afford to eliminate.
More Aid or Successful Reforms?
Naturally, the motivation of the Egyptian government to implement painful but necessary reforms may depend upon how long Gulf states are prepared to keep Egypt’s economy afloat. Fortunately, there are signs that they are willing to provide more aid. The Saudi Foreign Minister Prince Saudal-Faisal noted in August that, “Muslim nations are wealthy with their people and resources and will not shy away from offering a helping hand to Egypt.” However, Dalibor Rohac cautions that Gulf countries have been unreliable donors in the past. He added that, “The amounts already promised are quite extraordinary, so I would be surprised if the inflow of aid and short-term loans on this scale continued beyond a year or so.”
To at least partially counter this argument, the Assistant Expert at the Office of the Minister of Planning, Marwa El Arif, stressed that Egypt will seek future Arab investments rather than aid. In keeping with this, Egypt recently offered the Saudis investment opportunities valued at USD 4.8 billion in a wide range of fields.(6) El Arif went on to diminish the significance of the IMF in the Egyptian economic landscape noting that, “For Egypt, the amount of loan is not important, but the IMF loan gives a certificate of trust in the Egyptian economy and its capacity to overcome the current challenges.” Ahmed Galal took this assertion a step further on August 28th noting that Egypt does “not currently have the desire or the need to ask for assistance from the IMF.”(7) Given the impact that the IMF refusals had during the Morsi era, this seems a very bold assertion.
Such an aggressive stance could only be justified (and such lofty goals as described above could only really be met) with some economic austerity, which, in and of itself, is a politically bold and possibly dangerous course of action. Nonetheless, the government does plan to go ahead with its subsidy reform… but moderately. “I promise to lay down a program for partial rationing of subsidies before the current cabinet’s term comes to an end,“ said el-Beblawy. He continued to note that, “It shall be carried out over several years after which subsidization would not disappear completely, but rather be affordable for the state.”(8)
In Haieder Khan’s opinion, it is obviously a good idea to implement any reform gradually. “Shock therapy doesn’t really work,“ he said cautioning that, “Not being committed also doesn’t work. The government should be firm but tactical, very specific about what is the timetable for the reform but also flexible.” Nevertheless, some doubt if the reform will go far enough. “I do not really see the current reform attempts in places like Egypt or Morocco as fundamentally different from the previous – half-baked and ultimately failed – attempts to reform subsidies,” said Dalibor Rohac. “A successful reform of the subsidy system will have to be, in my view, fairly radical, quick, and simple to implement.” Dr. Salevurakis disagrees noting that, “Subsidies are a fixture of the Egyptian economic landscape that, while they must be made more efficient over an extended time period, cannot be eliminated quickly without generating social and/or political instability that ironically will only increase the need for the subsidies themselves. The options faced presently are actually quite simple… embrace this substantial inefficiency or ultimately expect even greater and more unpredictable forms of inefficiency and economic stagnation as a result.”
The manner in which all of the above realities properly mesh is difficult to imagine. There is no doubt that Gulf aid provides a vital lifeline for Egypt’s economy and that fundamental reforms are still needed to avoid the economy collapsing in the longer term. However, there do exist shorter-term concerns. First, if this “aid” is to be redefined as “investment”, that investment must be made attractive with a stable and credible political environment and a socioeconomic sphere that is predictable and ordered. It seems that this is possible, but not terribly likely if the Egyptian government is quibbling with the Qataris over the terms of “securitizing their assistance.” Further, it seems that highly necessary government investment in infrastructure and employment is a bit incongruous with attempts to decrease the budget deficit. Simultaneously, reducing the budget deficit might necessitate even moderate tax increases that will depress the economy even further. Simultaneously, even moderate rationalization of the extant subsidy system seems dangerous when tourism is still substantially unrecovered from 2011 and broader macroeconomic concerns have a great portion of the population on the edge of desperation. It would therefore seem that a good many ministries have their own individual objectives and that these do not necessarily exist in concert with one another. These arms of government of course form a whole political body engaging in a juggling act hoping to keep the economic, social, and political spheres in the air simultaneously. These are of course all objects that have been dropped before and we all sincerely hope that history does not repeat.
Bloomberg, “Egypt Bets on Persian Gulf Aid to Boost Economy as IMF Shunned.” August 29, 2013.
Reuters, “Egyptian Cabinet Approves USD 3.2 Billion Economic Stimulus Plan.” August 28, 2013.
Aswat Masriya, “Egypt: Foreign Reserve Reaches USD 18.9 Billion.”
Reuters, “Saudi Arabia studies report on Egypt’s financial needs.” August, 29 August 2013.
Bloomberg, “Egypt Bets on Persian Gulf Aid to Boost Economy as IMF Shunned.” August 29, 2013.
Daily News Egypt, “Egypt’s Budget Deficit to Decline in 2013/2014 Fiscal Year.” July 31, 2013.
By Laura Raus and John Pastrikos