Economic crisis: Is Egypt the 'new Lebanon?'

As the value of the Egyptian pound plummets, grocery shopping has changed for many middle-class Egyptians, becoming a strict exercise in currency control.

"Instead of buying 3 kilograms of rice when we go shopping, we just buy a kilo or a half kilo," explained Ahmed Hassan, 40, an accountant and father of three from the Shoubra neighborhood in Cairo. "We're trying to reduce our expenditures. Unfortunately we can't limit everything because our children need certain things," he told DW.

Egypt's currency has devalued by around one-third since late October and inflation currently stands at over 20%. Some economists suspect it's even worse than that. They put the unofficial rate — which includes Egypt's huge informal economy — as high as 101%.

Food prices have doubled, salaries have halved and banks are restricting how much cash you can take out of your accounts: The financial free fall that many ordinary people in Egypt are experiencing today sounds very similar to the catastrophic economic crisis citizens in nearby Lebanon have been dealing with since 2019.

'Remarkable similarities' between Lebanon, Egypt

In Lebanon, desperate locals have gone so far as to rob their own banks simply to withdraw their savings, cities have been plunged into darkness as fuel for power stations has run out and the country's middle class is being pushed into debt.

Things haven't gone that far in Egypt — yet. But as the bad economic news keeps coming, some are asking: Could Egypt soon become "the new Lebanon?"

"There are remarkable similarities between Lebanon's now abjectly failed economy and Egypt's struggling one," Robert Springborg, an adjunct professor at Canada's Simon Fraser University, wrote in a 2022 report for the Washington-based nonprofit organization Project on Middle East Democracy. "The consequences of the collapse of confidence in Lebanon have been devastating but they would pale into near insignificance if repeated on an Egyptian scale," he warned.

Egypt's current economic problems are the result of a number of internal issues — including political unrest, corruption and government mismanagement — which have more recently combined with external crises, like the COVID-19 pandemic, the war in Ukraine and the threat of a global recession.

Economic mismanagement

The pandemic decimated Egyptian tourism, one of the country's big money earners. Then the war in Ukraine disrupted wheat supplies to the country, the world's biggest importer of wheat.

Since 2014, the Egyptian government, led by President Abdel Fattah el-Sissi, has promoted national "mega-projects" including the world's longest, driverless monorail — at a cost of $23 billion (€21 billion); and a whole new city, the $50 billion (€46 billion) New Administrative Capital, near Cairo. These have artificially driven growth in the country. Many of the projects are also connected to the Egyptian military's vast money-making business network. 

Policies like these, allowing state and military-owned enterprises to dominate the economy, have depressed the private sector in Egypt, discouraged foreign investment and seen the country become more dependent on foreign credit for its survival. Egypt owes over $155 billion (€138 billion), and roughly one-third of its national income goes toward servicing that foreign debt.

Recently all of these factors have come together to put Egypt "on the brink of a financial and economic abyss," Rabah Arezki, a former chief economist at the World Bank's Middle East and North Africa Region, wrote on January 18.

"The reason why the pandemic and the Ukraine war have had such a big impact is because of the investment strategy led by Sissi for nine years: Massive spending on huge projects, some of which were totally unnecessary or poorly conceived," Yezid Sayigh, a senior fellow at the Carnegie Middle East Center in Beirut, told DW. "This made Egyptian finances very vulnerable, without providing the economy with real gains."

International governments, including those of Germany and the United States, are partially to blame, Sayigh said. "He [el-Sissi] couldn't have increased Egypt's debt by 400% without their direct involvement."

Two nations not comparable

There are some similarities between Egypt and Lebanon — Egyptian poverty levels, for instance, are nearing those of Lebanon with at least 60% of Egyptians living in or near to the poverty line. 

"And then there's the willingness of the political elite to callously enrich themselves at the expense of the state and the public," said Timothy Kaldas, an expert on Egypt's political economy and a policy fellow at the Tahrir Institute for Middle East Policy. "That's definitely also something the two countries also share."

"But despite some similarities things like poverty and corruption are common to numerous Arab countries, so you cannot draw simple comparisons," argued the Carnegie Institute's Yezid Sayigh. "Also, the Egyptian government is not corrupt in the same way as Lebanon."

"For all of its problems, Egypt is fundamentally in a much more stable situation than Lebanon," Kaldas continued. "It's not on the verge of total collapse in the way that Lebanon was."

For one thing, Egypt's economy has more potential sources of cash than Lebanon's, Kaldas noted — such as the Suez Canal, the tourism industry and various export industries. Lebanon was more heavily dependent on remittances from its expatriate community for foreign cash; prior to the current crisis, these made up as much as a quarter of Lebanese national income.

Additionally, Egypt's leadership can be negotiated with, Kaldas pointed out. "Whereas in Lebanon they are still struggling to choose a new president," he said.

Egypt, too big to fail?

But perhaps the biggest difference between Egypt and Lebanon is that Egypt is commonly seen as "too big to fail." With around 107 million inhabitants, it is the region's most populous nation. It also has the Middle East's most powerful military.

"What makes Egypt lucky is that external backers place more importance on the viability of the state, irrespective of how badly it's managed," Kaldas explained. "I hate to say this, but from the perspective of key external backers, Lebanon's problems are much more manageable and containable, than if they were happening in a country with over 100 million people." 

In mid-December, the International Monetary Fund approved a $3-billion support package for Egypt. It is the country's third such arrangement with the IMF since 2016, and is supposed to help Egypt attract more investment from abroad as well as further financial aid.

Cairo has promised reforms

To complete the deal, the Egyptian government has had to make several important concessions to the IMF. One involves making its foreign exchange rate more flexible — part of the problem that led to the record-breaking devaluation of the Egyptian pound was the fact that it had been pegged to the US dollar. Another IMF demand involves a promise to send direct cash transfers to 5 million vulnerable Egyptian households by the end of this month.

A further commitment made by Cairo was the promise to rein in the Egyptian military's vast economic empire. The fact that Egypt has finally agreed to do this is, as Sayigh wrote on January 12, "breathtaking." But, he added, "it may also be pure make-believe."

The new IMF bailout may bring Egypt back from the brink yet again but it's hard to say whether it can provide real relief for long-suffering citizens. The government and the country's elites will try to retain their advantages and wealth, all the while seeking to wriggle out of concessions around, for example, decreasing the military's economic power, Kaldas said. 

But even if all the conditions in the IMF package are met, Kaldas said, the country's recovery won't come quickly.

"Egyptians who are already struggling, are going to get poorer still over the coming year," Kaldas said. Egypt is unlikely to become the next Lebanon, he concluded, "but nothing is going to prevent growing economic hardship for Egyptians in the coming year."

With contributions by Mohammed Farhan in Cairo.

Edited by: Jon Shelton