He needs to defeat the Islamist terrorists, while liberalizing the Egyptian economy.

Egypt’s President Abdel Fattah Al-Sisi is taking a huge gamble in his attempt to revive the failing Egyptian economy.  He is doing something his predecessors, Anwar Sadat and Hosni Mubarak, did not succeed in implementing, due to violent public demonstrations, or worse, a revolution that ultimately forced Mubarak out of office.  Al-Sisi is applying shock therapy in a country whose GDP per capita income in 2017 is estimated by Global Finance Magazine to be $12,597.7, and whose unemployment rate, according to the International Monetary Fund (IMF) world economic outlook for 2017 is 12.3%, slightly less than the previous year (12.7%). The same source estimated the inflation rate at 18.2%, (annual inflation rate according to the Wall Street Journal is over 30%) and the public debt at 93.4%.  Standard & Poor’s Egyptian Government Bonds rating is B-; Moody’s rating is B3.  With these stark figures, Al-Sisi is cutting food and fuel subsidies.  Fuel prices went up 50% in June and cooking gas prices doubled.

Al-Sisi sought and received a $12 billion IMF loan to offset the budget deficit.  To acquire the loan, the Egyptian government was obligated to cut food and fuel subsidies and devalue the Egyptian pound.  This is likely to push inflation rates higher.  In the meantime, tens of millions of ordinary Egyptians rely on state subsidized bread.  In January, 1977, Egyptian bread riots erupted after President Anwar Sadat ended subsidies of basic foods, especially bread.  Hundreds of thousands of poor Egyptians took to the streets, with 800 people being killed and hundreds injured.  The Government abruptly cancelled the harsh economic measures as a result of the deadly riots.  Sadat attempted to liberalize the Egyptian economy, much like Al-Sisi is doing now.  Thirty years later, in 2007 and 2008, food prices soared once again and food riots unfolded, resulting in more deaths.

Food prices rose again to a high level at the start of 2011, with crucial staples such as wheat, other grains, and meat rising by more than 20%.  Mubarak was once again constrained by the cost of subsidies which fed about 32 million poor, out of Egypt’s 80 million people (in 2011).  Egypt has been the world’s largest importer of wheat.  Under Mubarak however, small wheat growers were eliminated and crops for exports were encouraged. The shortage of imported (from the U.S., Russia, Canada, and Australia) wheat, due to slow deliveries, prompted hundreds of thousands of demonstrators to gather at Cairo’s Tahrir Square.  They were partially incited by rising food prices, combined with the political frustration due to Mubarak’s corruption and nepotism, which ultimately led to the 2011 “Arab Spring” revolution, and the downfall of the Mubarak regime.  

Al-Sisi is betting on economic growth and big payoffs through new jobs and foreign investments.  It does however come down to timing.  If the economy grows fast, and the economic pain is short in duration, Al-Sisi might salvage Egypt’s economy and his personal political future.  If, on the other hand, growth is tepid, and the duration of the shock therapy is longer than anticipated, it would adversely impact millions of poor Egyptians and turn the middle-class into poor.  This would risk another revolution preceded by a social explosion.

Subsidies on food and energy amount to 18% of Egypt’s budget, or over $11 billion a year. According to Yaroslav Trofimov of the Wall Street Journal (August 7, 2017), “The subsidies are just one obstacle to economic growth, which has slowed in the years since the revolution.  Labor laws make firing workers nearly impossible, the judicial system is unreliable and the government bureaucracy stifles initiative.  Compounding matters, the military essentially operates a parallel and largely unaccountable economy.”  

Mohammed Nosseir, an Egyptian liberal politician, working on reforming Egypt’s liberal values, proper application of democracy and a free market, wrote in Egypt’s Daily News (April 6, 2015), “Egypt has been, and will continue to be, a nation with great potential for investors.  The challenge lies with the actual reality on the ground – government bureaucracy, widespread corruption, time consuming legal procedures and low employment productivity. These challenges constitute the major hindrances facing investors who are willing to bear them, probably due to the good return on investment that Egypt offers. However, as I learned from a former prime minister of Egypt, investors can live with obstacles so long as these are well-defined in advance.  Our real challenge lies in the government tendency to change its mind concerning business opportunity regulations, often even after it has signed agreements with investors.”

President Al-Sisi may not be a full-fledged western democrat, nor is Egypt a democracy yet, but Al-Sisi has done what no other Muslim leader has done.  In a speech he delivered on December 28, 2014, at Al-Azhar, Sunni-Islam’s most prominent religious institution, he urged the clerics to combat extremist ideology and said, “We need to revolutionize our religion.” He called for “religious discourse that is in keeping with its time.”  Al-Sisi warned that “The Islamic nation is being torn apart and destroyed by extremism.”  He went on to say, “We must take a long, hard look at the situation we are in. It is inconceivable that the ideology we sanctify should make our entire nation a source of concern, danger, killing and destruction all over the world… It has reached the point that this ideology is hostile to the entire world. Is it conceivable that 1.6 billion Muslims would kill the world’s population of seven billion, so that they could live on their own?”

In an interview with CNBC (January 22, 2015), at the World Economic Forum in Davos, Switzerland, Al-Sisi was asked, “Now, for your economic plans to work, you’re going to need billions of dollars and investments. Where is that money going to come from? Is it going to come from the Gulf States?” Al-Sisi responded by saying that, “Egypt is the bedrock of stability in the Middle East, and this is the message that the whole world needs to hear and understand.  It (the International community –JP) also needs to help us maintain the cornerstone of stability in the region…We have a very big delegation from the U.S., perhaps one of the biggest ever to come to Egypt.  We also received similar business delegations from European countries.  The message I shared with them very clearly is that when you stand with Egypt, and invest in Egypt, you are not only investing money to try to recover economic wealth, but you are also investing in enhancing the stability of Egypt, and subsequently, in the Middle East, and in the world.”

It is apparent that President Al-Sisi is appealing to western investors to rescue Egypt from another possible disastrous uprising.  Lifting subsidies on basic commodities enacted by previous Egyptian presidents have resulted in violence and ultimate reversals.  Egypt is currently contending with internal (Islamist attacks on Christian Copts) and external terrorism (Islamic State in the Sinai), which does not bode well for investments.  President Al-Sisi cannot count on the humanitarian instincts of western investors, whose main motive is profit.  He needs to defeat the Islamist terrorists, while liberalizing the Egyptian economy, and he must make this happen in the shortest possible time.