Investors are showing renewed interest in Egypt as economic reforms take effect, but the stability that underpins the turnaround is under strain.
President Abdel Fattah al-Sisi’s apparent bid to stifle dissent and intimidate rivals in advance of next year’s election is overshadowing a marked upturn in the country’s economic fortunes.
The latest sign of the revival came last month when foreign reserves, which plunged following the chaos Arab Spring uprising six years ago, hit a record high of over $36 billion, just above the pre-2011 level. But as the fruits of reforms required for last year’s IMF bailout begin to take effect, Sisi’s popularity is on the wane with even onetime loyalists openly criticising his growing authoritarianism.
The President, an army general who came to power in May 2014 after overthrowing Islamist leader Mohammed Morsi, argues his curbs on civil liberties, which have been stepped up over the last few months, are necessary to counter the security threat posed by Islamic insurgents. Some critics see a barely disguised attempt to neuter the opposition in advance of next May’s presidential election in which Sisi is widely expected to run.
The disaffection at home contrasts markedly with investor sentiment, which has become increasingly upbeat since late last year when Sisi, who had been struggling to re-energise the moribund economy, began implementing substantial reforms in order to secure the IMF’s three-year, $12 billion loan, the second instalment of which was approved last month.
A devaluation of the Egyptian pound, the removal of most currency controls and cuts to deficit-bloating energy subsidies have been music to the ears of investors who had been giving the country a wide berth. They have been snapping up Egyptian debt and equities – the latest bond issue was nearly four times oversubscribed – while foreign direct investment rose about 25 percent to $8.7 billion in the last financial year. Furthermore, the introduction of a long awaited investment law – including tax incentives and a speedier project approval process – will likely improve the ease of doing business in a country burdened by red tape. Already several big multinationals based in Egypt have announced plans to make sizeable investments with a view to boosting exports, while a survey of local CEOs showed that most took a positive view of the business environment.
But Sisi’s reforms are taking their toll on ordinary Egyptians, nearly a third of whom live below the poverty line. Spiralling food prices have led to simmering discontent. The tensions were heightened by Sisi’s recent controversial transfer of two Red Sea islands to Saudi Arabia, as part of a border agreement. The move, seen by many as undermining national sovereignty, sparked rare protests, despite an effective ban on street demonstrations. Some saw it as a humiliating concession to secure new funds from Riyadh which has recently been bankrolling the country. Dozens of protesters were jailed in May in the aftermath of the affair, joining the thousands of political opponents imprisoned by Sisi since he came to power. The latest incarcerations came as the President blocked access to over a hundred local and international websites, and ratified new laws that limit the activities of civil society organisations and allow him to exert significant influence over the judiciary.
The new wave of repression appears to have cowed the opposition, some of whom are reportedly reluctant to put up candidates for next year’s election out of fear they will be targeted. They are also said to be concerned over the fairness of the poll. Khaled Ali, a prominent human rights lawyer, who had hinted that he was prepared to run, faces trial on what are seen by rights campaigners as trumped up charges related to the handover of the islands.
There are indications that some within the state apparatus are concerned about Sisi’s tactics.
Late last year, it was reported that a faction within the secret service wanted him to step down when his term ends to avoid an Arab Spring-style uprising. In February, the President threatened to purge soldiers, policemen and civil servants who questioned his authority or who belonged to any political or religious groups. More recently, Reuters quoted two erstwhile Sisi allies, Hazim Abdelazim and Nour al-Huda Zaki, who railed against him. Both had played important roles in his 2014 election campaign, with Zaki, a popular writer, saying “the regime’s repressive tools are worse than” those of former President Hosni Mubarak.
But Sisi is said to retain support within key state institutions, and appears more concerned with easing the hardship endured by ordinary Egyptians, in order to avert street protests. In May, in advance of big hikes in electricity and fuel prices, he introduced a host of social aid measures, including increased food subsidies, pensions and public sector salaries as well tax relief. The Central Bank has also sought to soften the impact of the painful reforms. It has raised interest rates in an effort to lower inflation – running at about 30 per cent – as government finances begin improving. The large budget deficit is showing signs of inching down, while the trade deficit is in better shape, amid an uptick in exports and local production. Increased gas output from existing and new fields set to come on stream will provide more financial relief by reducing gas imports.
While the headline economic news gives grounds for optimism, it will be some time before the gains will be felt by the majority of the population. Austerity has led to a decline in Sisi’s popularity. And he will hope that the economy recovers sufficiently before elections next year to give legitimacy to his likely victory. If it doesn’t, the worry for investors is that he may be tempted to start rolling back on his reforms.
Yigal Chazan is an Associate at Alaco, a London-based business intelligence consultancy.