A country entangled in an economic crisis as a result of complete ignorance towards structural reforms, coupled with a fascination with infrastructure development and real estate projects, struggling with stagnating growth and endemically low productivity. What does not help either is the concentration of wealth in the hands of a few, and dozens of state-owned enterprises that are perpetual loss makers. This country is none other than Egypt.
While reading the statement above might give readers the impression that the point of reference is Pakistan, the North African state can be used very accurately as a proxy to map the trajectory of the looming crisis in Pakistan.
A country of almost 100 million people, Egypt is a classic example of elite capture and misaligned priorities. The country’s economy continues to be in a feeble state, and since Abdel Fattah El Sisi came into power in 2013 through a military coup, Egypt has entered into four IMF programs and is currently the second largest borrower from the institution after Argentina.
Though the state has found itself at the door of the international lender quite a few times, more recently in 2016 it came to the IMF after succumbing to a serious balance of payment crisis. While the loan of $12 billion was approved, the IMF demanded that Egypt adhere to its commitment of no interference in the currency market and implementing austerity measures.
Yet, much like Pakistan, it went back on many of its commitments, including providing food and energy subsidies, holding back on the privatization of state owned enterprises and after 2020, it also actively tried to artificially appreciate its currency.
The need for Egypt to frequently resort to lending stems from a weak economic structure where elite-captured industries are rent-seekers that drive out private competition. Furthermore, an excessively import driven consumption economy, fueled by indulgence in extravagant expenditures like the one for building its new capital city has accelerated the pace of reserves depletion.
The Uncanny Resemblance
Egypt, like many other low-income nations has been badly affected by the Russia-Ukraine war. However, this effect was augmented by the fact that these two countries were a major source of tourist revenue for its economy, while it was also heavily dependent on wheat imports from Ukraine and Russia. This also led to massive capital flight from the country, leaving behind an enormous gap in the national treasury.
Following the onset of the crisis, the Egyptian president has sought assistance from multiple avenues, including strategic partners like Saudi Arabia, UAE and Qatar. More recently, it has also entered into a $3 billion loan program with the IMF in December 2022.
Subsequently, the Egyptian government had to take some preventive measure to mitigate the situation, including a depreciation of more than 40% of its currency over the course of the last year, and introducing import restriction which were later lifted as part of the deal with the IMF.
Yet, there was no respite as consumer price inflation clocked in at almost 25% in December 2022. This has pushed nearly 60% of the country’s population below the poverty line, and has given rise to multiple sectoral crises, like a shortage of poultry as the government ran out of dollars to pay for feed, and investors losing confidence in the currency, leading to soaring gold prices.
One will find the sequence of events quite similar to what is transpiring in Pakistan. “The IMF’s recipe for economic redemption is the same for emerging markets. It is quite evident from the case of Egypt where the Fund has asked the government to cut back on subsidies, increase energy prices and devalue the Egyptian Pound,” says Dr. Aqdas Afzal, economist and faculty member at Habib University.
Economist Dr. Fahd Ali opined, “there are lots of similarities in terms of the socio-economic structures across the Global South and this explains why many countries like Pakistan and Egypt depict similar characteristics when faced with economic crises.”
The similarities are almost striking. The Pakistani Rupee lost more than 20% of its value against the dollar in 2022, and the government imposed a whole host of import restrictions to preserve dollars, all the while, commodity prices kept climbing and monthly inflation crossed the 20% mark.
“Pakistan today is experiencing a rising rate of inflation. This is the highest inflation after 1973-74 and 1974-75 when it rose to 30% and 27% respectively, in the aftermath of the quantum devaluation of the rupee from Rs 4.77 to Rs 11.00 per US dollar,” wrote former finance minister, Dr. Hafiz A. Pasha, in an article for Business Recorder.
However, there are some fundamentals where Pakistan fares better than Egypt which explains why the Asian nation perhaps is not as deep in trouble as its African contemporary. The most notable one is the debt profile.
As per the Arab Center DC, “Egypt’s external debt stood at $155 billion, with total debt predicted to reach $557 billion by 2026. According to the Central Bank of Egypt, of the $52 billion the country owes to multilateral institutions, 44.7% is owed to the IMF. Egypt’s other top foreign creditors include the UAE, Saudi Arabia, Kuwait, Japan, Germany, France, the UK, the US, and China.”
However, for Pakistan, the situation looks manageable at least for the time being. “We think Pakistan is less likely to default due to three key factors. a) Less reliance on external borrowing b) Lower dependency on Eurobonds and c) manageable external financing gap of FY23,” read a report by Ismail Iqbal Securities.
“Pakistan has a lower external debt to GDP of 31%, compared to our sample of default countries (where the average external debt to GDP ratio is 59%). High external debt exposes the country’s public finances to exchange rate shocks whereas dependency on the Eurobond market makes refinancing debt very challenging. Absence of both factors make Pakistan’s debt mix less vulnerable,” the report further added.
Though the ability to pay back their loans is comprised for both nations, Egypt triumphs over Pakistan on that front. “Egypt has got a high debt load and arguably it is more vulnerable relative to Pakistan in terms of debt payments as a share of revenues," said Renaissance Capital's chief economist Charlie Robertson in a comment to Reuters.
While the situation is not as critical here in Pakistan yet, Egypt is a stark reminder of what could transpire if our country’s economic elite is not able to set the course of economic policy right.
“Celebrating on securing a loan or pledges won’t help, it will just kick the can down the road. A deeper introspection is required, otherwise economic crises will become a recurring feature of life in Pakistan,” says Idrees Khawaja, an economist at the Pakistan Institute of Development Economics.
While reading the statement above might give readers the impression that the point of reference is Pakistan, the North African state can be used very accurately as a proxy to map the trajectory of the looming crisis in Pakistan.
A country of almost 100 million people, Egypt is a classic example of elite capture and misaligned priorities. The country’s economy continues to be in a feeble state, and since Abdel Fattah El Sisi came into power in 2013 through a military coup, Egypt has entered into four IMF programs and is currently the second largest borrower from the institution after Argentina.
Though the state has found itself at the door of the international lender quite a few times, more recently in 2016 it came to the IMF after succumbing to a serious balance of payment crisis. While the loan of $12 billion was approved, the IMF demanded that Egypt adhere to its commitment of no interference in the currency market and implementing austerity measures.
Yet, much like Pakistan, it went back on many of its commitments, including providing food and energy subsidies, holding back on the privatization of state owned enterprises and after 2020, it also actively tried to artificially appreciate its currency.
A country of almost 100 million people, Egypt is a classic example of elite capture and misaligned priorities.
The need for Egypt to frequently resort to lending stems from a weak economic structure where elite-captured industries are rent-seekers that drive out private competition. Furthermore, an excessively import driven consumption economy, fueled by indulgence in extravagant expenditures like the one for building its new capital city has accelerated the pace of reserves depletion.
The Uncanny Resemblance
Egypt, like many other low-income nations has been badly affected by the Russia-Ukraine war. However, this effect was augmented by the fact that these two countries were a major source of tourist revenue for its economy, while it was also heavily dependent on wheat imports from Ukraine and Russia. This also led to massive capital flight from the country, leaving behind an enormous gap in the national treasury.
Following the onset of the crisis, the Egyptian president has sought assistance from multiple avenues, including strategic partners like Saudi Arabia, UAE and Qatar. More recently, it has also entered into a $3 billion loan program with the IMF in December 2022.
“The IMF’s recipe for economic redemption is the same for emerging markets. It is quite evident from the case of Egypt where the Fund has asked the government to cut back on subsidies, increase energy prices and devalue the Egyptian Pound,” says Dr. Aqdas Afzal, economist and faculty member at Habib University.
Subsequently, the Egyptian government had to take some preventive measure to mitigate the situation, including a depreciation of more than 40% of its currency over the course of the last year, and introducing import restriction which were later lifted as part of the deal with the IMF.
Yet, there was no respite as consumer price inflation clocked in at almost 25% in December 2022. This has pushed nearly 60% of the country’s population below the poverty line, and has given rise to multiple sectoral crises, like a shortage of poultry as the government ran out of dollars to pay for feed, and investors losing confidence in the currency, leading to soaring gold prices.
One will find the sequence of events quite similar to what is transpiring in Pakistan. “The IMF’s recipe for economic redemption is the same for emerging markets. It is quite evident from the case of Egypt where the Fund has asked the government to cut back on subsidies, increase energy prices and devalue the Egyptian Pound,” says Dr. Aqdas Afzal, economist and faculty member at Habib University.
Egypt is a stark reminder of what could transpire if our country’s economic elite is not able to set the course of economic policy right.
Economist Dr. Fahd Ali opined, “there are lots of similarities in terms of the socio-economic structures across the Global South and this explains why many countries like Pakistan and Egypt depict similar characteristics when faced with economic crises.”
The similarities are almost striking. The Pakistani Rupee lost more than 20% of its value against the dollar in 2022, and the government imposed a whole host of import restrictions to preserve dollars, all the while, commodity prices kept climbing and monthly inflation crossed the 20% mark.
“Pakistan today is experiencing a rising rate of inflation. This is the highest inflation after 1973-74 and 1974-75 when it rose to 30% and 27% respectively, in the aftermath of the quantum devaluation of the rupee from Rs 4.77 to Rs 11.00 per US dollar,” wrote former finance minister, Dr. Hafiz A. Pasha, in an article for Business Recorder.
However, there are some fundamentals where Pakistan fares better than Egypt which explains why the Asian nation perhaps is not as deep in trouble as its African contemporary. The most notable one is the debt profile.
As per the Arab Center DC, “Egypt’s external debt stood at $155 billion, with total debt predicted to reach $557 billion by 2026. According to the Central Bank of Egypt, of the $52 billion the country owes to multilateral institutions, 44.7% is owed to the IMF. Egypt’s other top foreign creditors include the UAE, Saudi Arabia, Kuwait, Japan, Germany, France, the UK, the US, and China.”
However, for Pakistan, the situation looks manageable at least for the time being. “We think Pakistan is less likely to default due to three key factors. a) Less reliance on external borrowing b) Lower dependency on Eurobonds and c) manageable external financing gap of FY23,” read a report by Ismail Iqbal Securities.
“Pakistan has a lower external debt to GDP of 31%, compared to our sample of default countries (where the average external debt to GDP ratio is 59%). High external debt exposes the country’s public finances to exchange rate shocks whereas dependency on the Eurobond market makes refinancing debt very challenging. Absence of both factors make Pakistan’s debt mix less vulnerable,” the report further added.
Though the ability to pay back their loans is comprised for both nations, Egypt triumphs over Pakistan on that front. “Egypt has got a high debt load and arguably it is more vulnerable relative to Pakistan in terms of debt payments as a share of revenues," said Renaissance Capital's chief economist Charlie Robertson in a comment to Reuters.
While the situation is not as critical here in Pakistan yet, Egypt is a stark reminder of what could transpire if our country’s economic elite is not able to set the course of economic policy right.
“Celebrating on securing a loan or pledges won’t help, it will just kick the can down the road. A deeper introspection is required, otherwise economic crises will become a recurring feature of life in Pakistan,” says Idrees Khawaja, an economist at the Pakistan Institute of Development Economics.