Today marks almost three months of a global shutdown to curb the spread of the COVID-19 pandemic, and the Middle East and North Africa (MENA) region faces a double whammy from the resulting economic fallout and the sharp decline in oil prices this spring. While Egypt is rightly focused on its short-term response to the crisis, the pandemic is changing the global landscape both geopolitically and economically. The “Great Decoupling” between the U.S. and China looks like a reality. Economists support increasing government spending to save the economy, and state-backed enterprises — so-called national champions — are likely to be the coming trend. As a prominent emerging market, Egypt should take advantage of the international and regional shock caused by the pandemic to change its growth model for the longer term and implement much-needed structural reforms to the economy on a variety of fronts.
The immediate shock
Within the MENA region, Egypt is better positioned than most countries for a rapid recovery because of its government-led economy and the reforms implemented under its 2016 deal with the International Monetary Fund (IMF), such as floating its currency, gradually phasing out subsidies, and removing capital controls. Despite suppressing already-weakened local consumption and increasing poverty levels, the IMF-backed reforms boosted the international debt market’s confidence in the country and eventually strengthened Egypt’s financial position to be sufficiently robust to withstand the short-term shocks arising from the outbreak of COVID-19 as well as its wider impact. However, the economy has many underlying vulnerabilities, in particular high debt levels and fragile consumer sentiment. Additionally, key economic sectors also face major challenges: tourism will take years to bounce back because of global fears over travel in general, and remittances will see a long-term hit as well.
Creating financial buffers
COVID-19’s impact will likely widen Egypt’s current account deficit to unprecedented levels, and this explains its move to secure more financial buffers amid the global uncertainty. First, Cairo signed a deal with the IMF to secure $2.8 billion in emergency cash. It then took a $5.2 billion, one-year standby loan from the IMF under a separate arrangement, and it is hoping to secure another $4 billion in concessional funding from other sources. The IMF funds will help make Egypt’s case to the international bond markets, where it still needs to fill a $10 billion financing gap in 2020 through the anticipated sale of short-, medium-, and long-term bonds. This combination of new funds will strengthen Cairo’s standing and better position it to manage the impact of COVID-19 in the short term.
Big governments are back
COVID-19 has reinforced the conventional wisdom that big governments with expansive powers are needed in times of crisis. Egypt, therefore, should embrace big government and expansionary fiscal policy to scale up its cash transfer programs.
First, Cairo should leave behind unproductive investments and the misallocation of capital that only aims to boost GDP figures. It can do this by redirecting its finances from the current government’s infrastructure projects into labor-intensive industries that could provide opportunities for those who have lost their jobs and repatriated workers returning from the Gulf Cooperation Council countries. The list of industries should include infrastructure for health, energy, emergency supplies, logistics, water and irrigation, and tech.
Second, the government should expand the base of beneficiaries for its existing cash transfer payment program, Takaful and Karama (“Solidarity and Dignity”), which targets families in need. The program currently serves 3.5 million households, which tend to spend the money received on essential services, food, and products. Expanding the program will eventually boost demand for these in low-income communities.
Embracing national champions
COVID-19 is challenging norms. Developed and emerging countries are shifting gears to support their homegrown industries. Cairo can utilize its gigantic domestic market to support emerging national champions, drive growth, create jobs, and reduce imports; however, the government should not stifle competition or threaten foreign investment. It should identify strategic industries to support, and not own, by offering direct investment or favorable regulation. In order to avoid a backlash similar to that of the 1990s and 2000s, when the Mubarak government privatized many state-owned enterprises (SOEs), the current administration recently established a private sector-minded sovereign wealth fund in charge of some promising state assets, thus far focusing on real estate and energy. Egypt should expand the mandate of its wealth fund to invest and manage other key industries, like vehicles, hardware, medical supplies, pharmaceuticals, food products, and textiles.
From globalization to regionalism
Globalization as we know it is in retreat and leading powers are seriously considering undoing the decades-long process of building efficient global supply chains in order to avoid another COVID-19 shock, embracing protectionist measures and eschewing the concepts of open trade and markets that have predominated since the fall of the Soviet Union. As a lower-middle-income economy with excellent demographics and a central location, Egypt could benefit from the current shift toward regionalism. Egypt is well-positioned to be a primary manufacturing hub for the Middle East, North Africa, and East Africa and could accommodate European needs for near-shore industries. In addition, Cairo should try to ensure Egypt is included in the “Economic Prosperity Network,” a proposed Trump administration initiative that aims to convince U.S. firms to relocate from China to a member state of the network. Egypt could join the list of U.S.-friendly states, like India, Vietnam, and Thailand, that would benefit from the relocation of supply chains from China. Unlike during the Cold War, however, today’s emerging markets do not want to be forced to choose between the U.S. and China. Given its centrality to regional geopolitics, Egypt should strive to maintain political and economic balance between the two global powers.
The informal economy
Between 2011 and 2014, Egypt’s informal economy helped the broader economy absorb the political shock and provided the country with more space to navigate the resulting economic fallout. In 2020, however, amid the pandemic, members of the informal economy are the most vulnerable to becoming infected with COVID-19, the first to lose their jobs, and the least likely to access health care services. Egypt has 12 million daily workers who lack social benefits and health coverage and were struggling to make ends meet even before the pandemic. To slow down the spread of COVID-19, Egypt implemented typical lockdown measures that left millions without assistance, eventually pushing hunger and poverty levels up nationwide.
Egypt needs to utilize the COVID-19 crisis to regulate the informal economy. Past solutions were centered around asking informal businesses to register in return for tax exemptions. Given the number of informal businesses that still remain, this approach clearly did not work. The government should instead offer unemployment benefits and financial support to informal business owners to help them navigate the current COVID-19 crisis. This would provide real incentives for them to register and enable the state to regulate businesses, allowing the government to finally get an accurate map of the economy.
Egypt’s economy is vulnerable to an immediate shock from COVID-19 because of its impact on the key economic sectors of tourism and remittances. Thus, the government has utilized Cairo’s strong macroeconomic standing to create financial cushions that could help public financing. However, Egypt needs to keep the big picture in mind. By focusing only on the current crisis, Cairo could lose sight of the medium- and long-term strategic objectives. The country has a real opportunity to position itself as a manufacturing hub for Europe and the U.S., if it were to offer incentives to national champions in innovation and tech-related industries. Finally, Egypt could offer financial support to the informal economy to help navigate the COVID-19 pandemic, providing assistance while also furthering its aim of regulating the activities of this essential part of the economy.
Mohammed Soliman is a non-resident scholar at MEI. His work focuses on the intersection of technology, geopolitics, and business in the Middle East and North Africa. The views expressed in this article are his own.
Photo by Xinhua/Wu Huiwo via Getty Images