Under the government of President Abdel Fattah al-Sisi, Egypt has undertaken a large number of ostensibly impressive infrastructure projects, the most notable of which has been the building of the New Administrative Capital (NAC) to which government ministries are supposed to relocate. However, these projects have come at a cost to Egypt's economy, which is facing a crisis of foreign debt accumulation and inflation that will require a restructuring of the economy. It is only through progress on reforms that the country can prove attractive again for foreign investment.
Sisi's Vision of Development
Since assuming control of the presidency in 2014, Sisi has primarily focused on modernising infrastructure and the construction of large-scale projects. Indeed, he emphasised this approach as part of his candidacy for the presidency back in 2014. In keeping with his own background in the military and predictions at the time that his policies would reflect a statist vision, the various infrastructure initiatives have been spearheaded by military-owned companies, contrasting with the influence that private businesses had enjoyed during the later years of former President Hosni Mubarak.
Prominent examples of these projects include the aforementioned NAC that has come at an estimated cost of $58 billion and is partly intended to reduce congestion in the existing capital of Cairo that had more than 10 million inhabitants as of late 2021, the "Iconic Tower" as part of this NAC (which constitutes Africa's tallest building at a height of 393 metres), a memorandum of understanding signed with the German company Siemens in January 2021 for a high-speed railway to link Egypt's Mediterranean and Red Sea coastlines at a cost of $23 billion, and a major expansion of the Suez Canal in 2015 at a cost of $8 billion, which the government projected would expand Suez Canal revenue from $5.3 billion to $13.2 billion a year by 2023.
Heavy Costs with Little Returns
While there was a case to be made for development and expansion of the country's infrastructure, especially in light of the population that is estimated to exceed 112 million people and the resultant need to reduce issues of overcrowding and traffic congestion, the problem is that these projects have come at a high cost and bring little economic return, with the problems being masked in previous years by the growth rate figures(more than 4% between 2015 and 2019, and more than 3% during the years of the coronavirus pandemic that caused global economic disruption). For example, the Suez Canal only generated $8 billion in revenue in 2022, far short of the government's targets. To finance the projects, the government has resorted to heavy external borrowing (which increased four-fold in the past eight years, from less than $40 billion in 2015 to $162.9 billion in December 2022).
In addition, these infrastructure projects have not done anything to reduce the country's heavy reliance on imports for foodstuffs and fuels- a vulnerability that was exposed by Russia's invasion of Ukraine beginning in 2022, which drove up prices of fuels and commodities globally. Indeed, the country depended on Russia and Ukraine for more than 80% of its wheat imports. The country has thus seen a sharp increase in inflation rates, reaching an annual urban inflation rate of 32.7% in May 2023, well above the level of 13.6% in June 2022 and far above the 5-9% target range set by the central bank. Since March 2022, the country has devalued its currency by more than half, and foreign assets in the banking system have decreased by more than $40 billion as the government has sought to support the national currency. The devaluation took place on three main occasions, and a shortage of dollars has seen the rise of a black market for foreign currency. In turn, uncertainty over the exchange rate is proving a deterrence to investment, as investors do not know which exchange rates to go by.
The Difficult Way Forward
The Egyptian government has hardly remained oblivious to the deterioration of the economic situation and has accordingly sought assistance from the International Monetary Fund (IMF), which in December 2022 approved a disbursement of $3 billion over 46 months, but stipulating structural reforms and changes that are likely to alienate some of Sisi's core supporters (especially in the military).
In particular, the IMF is asking the government to implement "a permanent shift to a flexible exchange rate regime" and "reduce the state footprint, level the playing field across all economic agents, facilitate private-sector-led growth, and strengthen governance and transparency in the public sector." In effect, the IMF is calling on the government to devalue the Egyptian pound further and rein in what has been a key policy of Sisi: infrastructure projects led by military-linked companies. It is also calling on the government to reduce the size of the military involvement in the economy, a commitment that could be met by selling off military-owned business assets and companies to private investors, which would also secure much needed funds for the government.
On the subject of the currency, it would seem that the government is reluctant to allow for further devaluation and is still dragging its feet. As for privatisation, some more serious effort seems to have been made in recent months to push in this direction, as the government seeks to sell or list partially 32 state-held firms. The most tangible result so far has been the selling of a 9.5% government stake in Telecom Egypt for $121.6 million in May. Even so, there is still much work to be done, and it is only through stepping up privatisation and seriously committing to the IMF's stipulations that Egypt has a chance of escaping the economic crisis, even if there might be a political cost for Sisi. In turn, increasing privatisation in particular can offer potential opportunities for renewed foreign investment in the country