Preliminary thoughts on our economic crisis

I don’t think anyone denies that Egypt is going through a severe economic crisis.

Compounded by the global upheaval of recent years brought by the COVID-19 pandemic, and now more recently the Russian invasion of Ukraine – all alongside various local and regional developments.

Our government did well in informing the public early on that difficult times are ahead, preparing Egyptians in advance for a wave of price hikes. Denying the reality of the economic crisis only exacerbates and encourages rumors and ill-considered advice which harms everyone.

I hope this openness persists, and is not replaced by the usual tendency towards premature optimism or hasty declarations of improvement until there is indeed concrete justification for making such an announcement.

This particular crisis is thorny and dangerous because it is multifaceted. The changing exchange rate, current and anticipated price increases, declining tourism revenues, soaring wheat prices, the immediate consequences of an expected IMF agreement, rising national debt—all of these happening in conditions that make additional international borrowing and assistance more difficult.

But as we are still in the eye of the storm, with new developments unfolding daily, I will offer three preliminary observations in an attempt to understand what is happening and prepare ourselves for the future.

Firstly, there is a widespread perception, particularly visible in official discourse, that the current crisis began with the Russian invasion of Ukraine and that prior to that, the economy was proceeding on the right path –

This idea should be reconsidered.

Early signs of the crisis were already apparent from international economic reports since at least the final quarter of last year. And this is not merely an academic point. Practically speaking, policies and preventive measures being taken now to address the crisis must be based on an accurate analysis of its causes – otherwise, they will have little to no positive impact.

Secondly, numerous comparisons have been drawn between the first float of the pound in 2016 and the recent devaluation two weeks ago.

What concerns me, is that although the former entailed a much larger devaluation, higher energy prices, and the imposition of the VAT, the decision to float the pound then was taken in a decisive way that prevented further apprehension and speculation.

This time, in contrast, the situation seems less stable and definitive – whether we are talking about import measures, the exchange rate, or anticipated inflation, or the kinds of protective policies the state can pursue. Swiftly clearing away any ambiguity as well as contradictory messages by the relevant bodies will avoid an extended period of speculation, uncertainty, and, in turn, market instability.

Thirdly, we should think about why, after the corrective measures of 2016, we did not benefit from the macroeconomic improvements achieved then in order to avoid falling into the same trap. The measures taken then were indeed corrective, resulting in genuine, significant improvements in major economic indicators.

Citizens paid the price of this in inflation over the next two years, but in return, the correction was supposed to result in a different economic climate that would pave the way to making major strides in investment, tourism, manufacturing, and exports, from which the people would reap a developmental dividend that would compensate them for the cost.

What happened instead was that fiscal and monetary reforms were not followed by the necessary reforms on the ground in various industrial, productive, and service sectors. The benefit to the national economy thus did not outweigh the hardship, and we’ve found ourselves again in the same spiral.

This fact must be addressed, not to score points in a debate, but because it is necessary in order to pragmatically meet the current challenges and learn useful lessons from the past.