Why Egypt keeps getting international bailouts
James Rogan
Another currency crisis beckons for Egypt. The North African nation lacks the necessary foreign currency reserves to finance essential imports, including wheat, other food stuffs, and machinery for its textile industry. Yet again, the International Monetary Fund is set to provide a bailout.
Since 1977, Egypt and the IMF have entered into nine financial assistance agreements that included promised economic reforms. Since 1977, few promised macroeconomic reforms have been implemented in Egypt. Don’t be surprised.
I worked in Egypt as a regional legal adviser for the United States Agency for International Development. The members of the USAID Mission, especially the director, knew that nothing in Egypt would change until the country abandoned its top-down economic model and embraced free markets. Most particularly, a free market in the Egyptian currency, the Egyptian pound. An overvalued currency and the economically pernicious effects of the politically dominant military are at the center of Egypt’s decadeslong economic malaise.
With an overvalued currency, Egypt’s exports are less competitive in international markets. That uncompetitiveness leads to an inadequate supply of hard foreign currency reserves. At the moment, billions of dollars of necessary imports, including food, are stranded at Egypt’s ports because Egyptian merchants do not have access to the necessary hard currency to make payment. The current IMF loan is intended to unlock those desperately needed food imports. But even after the current currency crisis passes, another financial crisis will be brewing. The Egyptian military is the country’s dominant economic, political and social institution.
Following the Suez crisis of 1956, Egypt turned to the Soviet Union for military and economic assistance. That was a catastrophic policy choice. The former Soviet Union distrusted markets. Today, Egypt’s military distrusts markets. The Egyptian military controls up to 40% of the Egyptian economy. The military is an autonomous actor in allocating capital, especially hard currency capital in the country. An overvalued Egyptian pound serves the military well. Because of its power in Egypt, the military always has favored status in gaining access to hard currencies. The military can import luxury goods. The military can ensure that the businesses that it controls have favored access to hard currency for necessary imports.
The people of Egypt might go hungry because of inadequate foreign reserves, but the military never does. Until the Egyptian military recognizes that its well-being and the well-being of the people of Egypt are connected, then promises of economic reforms are hollow.
The U.S. faces a challenge here. Since 1978, Washington has provided over $80 billion in economic and military assistance to Egypt. The U.S. should use the leverage of financial assistance to nudge the Egyptian military to become more democratic and to allow pro-free market policies to be implemented in the country. Still, U.S. leverage is limited given the strategic importance of Egypt. The U.S. will not abandon Egypt. The Egyptian military knows that its strategic importance is the ace card in any negotiations with external actors.
Egypt controls the Suez Canal, a vital transit point for the global economy. Political stability in Egypt is critical to stability in the Middle East and Africa. Political stability in Egypt is critical in the war against Islamic terrorism. Political stability in Egypt serves as a buffer against the political violence endemic to the countries that neighbor it, including Libya, Sudan, and Ethiopia.
In short, Egypt gets away with its utter failure to reform because it knows the world needs its stability.
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James Rogan is a former U.S. foreign service officer who later worked in finance and law for 30 years. He writes a daily note on finance and the economy, politics, sociology, and criminal justice.