Egypt must face reality and reform to build on its success stories

In October of last year, it looked like Egypt was embarking on an economic reform programme to bring north Africa’s largest economy out of a growing crisis that had started in early 2022.

This included a new agreement with the IMF, the devaluation of the Egyptian pound by 50 per cent, announcing a new policy to reduce the role of the state in the economy, and earmarking 32 state-owned companies for divestiture. These measures were met with some — albeit not overwhelming — enthusiasm that Egypt was finally taking the bold steps needed to embark on a growth trajectory.

But, several months later, local and foreign investors alike, as well as rating agencies and international financial institutions, had become increasingly sceptical that the promised reforms would ever materialise — and the key economic indicators remained far from reassuring.

Thus, early this month, Egypt was downgraded by Fitch Ratings — for the first time in a decade — on the basis of what the rating agency deemed to be a lack of significant reforms. It also cited the country’s high external financing requirements, combined with constraints on obtaining future funding, as well as the deterioration of public debt “metrics”. So, why have the reform efforts not materialised, nor brought about the anticipated recovery? For one thing, the denial factor continues to hamper progress. In a statement issued by the Egyptian government to rebut Fitch’s pessimism, the economic crisis was mostly attributed to the Covid pandemic and, additionally, to Russia’s war on Ukraine.

This is no longer accepted by most independent analysts and observers. They worry about denying the additional, and significant, impact of other self-inflicted causes of the crisis: the excessive spending on long-term infrastructure projects; the lack of prudence in borrowing locally and internationally; the unprecedented growth of the state’s role in the economy; and the highly bureaucratic environment facing private sector investors. This is not a debate about the past but about the future. Recognising previous policy mistakes is a necessary precondition for embarking on an all-out reform path and turning around an economy that has seen official inflation reaching 40 per cent, the currency black market thriving, import constraints harming productive capacities, and Egypt’s debt burden reach new and alarming heights.