Egypt's Failing Economy Is Sisi's Fault

How about building some roads?

Photographer: David Degner

The International Monetary Fund is riding to Egypt's rescue. On Thursday it announced that its staff had recommended a three-year loan package of $12 billion, which is expected to be boosted with many more billions from the Arab Gulf states. Egypt, mired in an economic slump with high unemployment and rising inflation, certainly needs the help. But if recent history is any guide, it's likely to be good money thrown after bad.

The government of Abdel-Fattah el-Sisi, the former general who seized power from an elected Islamist government three years ago, has already received tens of billions in aid. You'd hardly know it from looking at the economy. The official jobless rate is around 13 percent, and the figure for young Egyptians is more than double that. The country has a trade deficit of 7 percent of gross domestic product and a budget deficit of 12 percent of GDP. (Tunisia, which has struggled with similar problems since the Arab Spring, has held its budget deficit to 4.4 percent.)

Some of Egypt's woes can be blamed on the collapse of its tourism industry since the Arab Spring and, especially, the downing of a Russian charter plane over the Sinai by terrorists last year and the mysterious crash of an EgyptAir flight in the Mediterranean in May:

Lonely Times in Egypt
Huge declines in visitors during traditionally heaviest months
 
Source: CAPMAS

To make matters worse, the country has an overvalued currency and is facing a serious shortage of foreign exchange. Official reserves took a beating five years ago and still haven't recovered:

 

A Monetary Exodus From Egypt
 
Source: Bloomberg

But much of the blame can be placed directly on Sisi, who squandered previous aid packages on mega-projects of dubious merit, including a huge expansion of the Suez Canal, leaving less to be spent on vital basic infrastructure. (Fortunately, his dream of building a brand-new, $45 billion capital city seems to have been set aside.)

Sisi's government has also failed to keep promises on economic reform. Cuts to fuel and agricultural subsidies, tax increases and a program to eliminate red tape were all started then stopped. A plan to let the currency depreciate fizzled out -- but inflation took off anyway. Now the IMF is asking Sisi to try again to devalue the Egyptian pound and to impose a value-added tax.

Meanwhile, a quarter of the population of 90 million lives in poverty and about the same proportion of adults is illiterate. Egypt could run out of water within a decade thanks to rapid population growth, wasteful agricultural practices, and a bad deal struck with neighbors upriver. The education system is atrocious: Sisi admitted in 2014 that the nation needed 30,000 new teachers, but didn't allocate the money to recruit them. And 40 percent of the population is between 10 and 20 years old.

IMF officials practically admitted that the new package is mostly cosmetic. The fund and Sisi's friends in the Gulf need to insist on real reform. Egypt should invest in simple infrastructure such as roads, schools and water-supply systems; make it easier for small and medium-sized business to get bank loans; and break up the military-industrial monopolies in everything from washing machines to olive oil. It also needs to end the crackdown on civil society, and move toward a free and fair presidential election.

Egypt can once again be a place worth investing in -- but before that happens, a lot will have to change.

(Corrects date of IMF loan recommendation in first paragraph.)

To contact the senior editor responsible for Bloomberg View’s editorials: David Shipley at davidshipley@bloomberg.net.