The Ras Al-Hekma deal: solution or sedative?

Solving a problem entails solving root causes, not symptoms.

Solving a problem is reliant on accurate diagnosis.

Missing the big picture hurdles accurate diagnosis.

Economics is never separate from politics.

The symptoms of Egypt’s economic woes are obvious: hard currency shortages, high inflation, and mounting pressure on the poor. But what are the root causes?

On one level, there is a chronic trade deficit that Egypt has been reporting for many years. For most of the past 30 years, the government has officially reported a deficit in the balance of payments that reaches 20%. Deficits, which naturally deplete hard currency reserves, get soothed by borrowing to replenish those reserves the economy needs for imports. A few years down the road, the deficit happens again, so the government borrows again, and so on. A dynamic that has led to a foreign debt of $164.5 billion (as of September 2023), and counting.

Scarcity of hard currency means higher import bills and that, inevitably, means higher prices and inflation. Raising interest rates to combat inflation eventually leads to printing more money, which, again, exacerbates inflation, reduces the value of the EGP, and causes the situation to spiral from bad to worse. Additionally, the declining hard currency revenues, whether from the Suez Canal, tourism or exports; in addition to reduced remittances from Egyptians abroad, leave the government with the solution of liquidating its assets, especially to pay the expected $51.5 billion due within the coming couple of years fromthe Ras Al-Hekma agreement, and other public sector companies (specifically 14 companies that have already been sold for $5.6 billion.) This demonstrates a consistent policy to liquidate assets in return for immediate hard currency to fulfill expected obligations. If a man needs to sell his assets to pay debt, that is bad enough. Let alone a country.

These economic troubles are not new. They have been chronically prevalent for decades. When I moved to Egypt in 1993, the USD was worth EGP 3.3 and has been rising against the EGP ever since a devaluation to EGP 5 in 2003, and then another to just under EGP 17.4 in 2018, and today as it stands at EGP 50 in the parallel market. The jumps in devaluation mimic an exponential curve if we consider the timeline extending from the early nineties till today. The right way to read these patterns is to acknowledge that we’ve had the same predominant ills for decades. We cannot restrict our outlook to the few years in which the USD goes up, a black market emerges and then eventually goes down after yet another IMF loan; that would be a deliberate neglect of the truth: that rampant destructive dynamics within the economy prevail and reproduce the same pains we are currently experiencing and will continue to experience.

The hard currency problems ultimately can be relieved with increased exports. Egyptian exports are not where they need to be to bring in much-needed hard currency and create a much-needed balance of trade. But why is that? Are Egyptian companies simply incompetent? Are Egyptian products not in demand? Is red tape a significant barrier to reach international markets? Are foreign direct investments (FDI) levels sufficient to stimulate the right investments in the right sectors? Is there confidence in the economy, conformity to law, availability of needed infrastructure and hard currency reserves to attract sustainable FDI?

Boosting Egyptian exports and attracting FDI are not purely economic mandates. They are, in fact, political. Creating an atmosphere conducive to business growth and investment is a matter of generating positive dynamics that will reverse the current negative ones and yield a complete turnaround. Ultimately, this is a matter of public policy not economics, and our enduring troubles are primarily political, not economic. if we recognize this fact, then we can begin the road to recovery.

This article was written by Omar Kandil, adjunct faculty, department of management, AUC School of Business

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