By Mahmoud El Ghannam, Special Correspondent, Shottobani
In November 2016, Egypt allowed its currency to float freely causing it to crash by 48% against the U.S. dollar. This finally convinced the International Monetary Fund (IMF) to approve a three-year, $12 billion loan to support the Egyptian government’s plans for economic reform. The devaluation was part of a series of “neoliberal” market reforms aimed at restructuring the Egyptian economy from a state-led economy to a more market-led economy, encouraging policies such as a flexible exchange rate, privatisation and reduced subsidies. However, there is a sense of déjà vu when it comes to Egypt’s experiences with neoliberal market reform and it is fair to say that, the country’s history with neoliberalism has been punishing.
When Egypt first undertook neoliberal market reforms or infitah (the opening) back in the 1970s, it was far from the utopian ideal that was in mind. In December 1976, when Egypt negotiated $450 million credit line with IMF, the government cut $123m in commodity supports and $64m from direct subsidies. What followed was predictable. Two days of bloody rioting. Around 100 protesters died while around 1200 were arrested. Despite this, the neoliberal reform endured. Rural land was privatised and turned into large estates causing 1.3 million peasants to become landless. Workers witnessed a withering away of benefits under neoliberal reforms. Privatised enterprises saw many lose their jobs. Public sector wages stagnated and lost most of their value due to inflation. Infitah as it was called, went hand in hand with public-sector privatisation and erosion of social gains. Therefore, when the social contract was shattered, social hardship was exacerbated with no support from a weak private sector. This left subsequent governments with no option but to gradually increase subsidies, reverting back to state-led development.
So, what happened this time around? A week after the devaluation, Egypt’s government ordered riot police and troops onto the streets, despite the heightened security measures already in place. The U.S. dollar went from 8.8 L.E. to 13 L.E. reaching a high of 21 L.E. in December 2016. Inflation, which was already high, soared and the heavy reliance on imports meant that basic commodities such as sugar became scarce. Among the middle classes, travel abroad has become harder, students saving to study overseas have seen their plans shattered and luxury goods are now out of reach. Public and private debt which were mostly issued in US dollar have now more than doubled causing an inflated debt burden and Egypt’s ability to borrow abroad has been significantly curtailed. Economic forecasts in 2017 are far from encouraging and it is likely that the aftershocks of the decision will be acutely felt.
However, it is too early to say that Egypt and neoliberalism are incompatible. The Egyptian Pound has already shown signs of resurgence, bouncing back to 16 L.E., where it is believed it will stabilise. As with any economic reform, it is a case of “pain before gain” and the benefits are often reaped in the long run. However, there is a feeling in Egypt that when such reforms arrive, they are too abrupt with an absence of adequate contingency plans to support an already ailing economy. This compromises the economy’s ability to see out short term pains. Sudden shifts in the economic paradigm may give way to social unrest and violence in the short run as well as crony capitalism and nepotism in the long run. Therefore, Egypt must ensure it has the necessary plans and institutions in place to be able to cope with this extreme shift in policy.
Mahmoud El Ghannam holds an MSc in Development Management as well as a BSc in Government and Economics from the London School of Economics and Political Science. He is currently an Insight Analyst at a leading health consultancy in London.