Khalid Ikram: Egypt’s Economic Crisis
This transcript is from a CSIS podcast published on October 3, 2023. Listen to the podcast here.
Jon Alterman: Dr. Khalid Ikram is an economist and consultant for over a dozen major international development organizations, following a 25-year career in the World Bank. He's been involved with the Egyptian economy for more than 45 years. He's the editor of a recent book, The Egyptian Economy in the 21st Century, and what I dare call the magisterial, The Political Economy of Reforms in Egypt: Issues and Policymaking Since 1952, both published by the American University and Cairo Press. Khalid Ikram, welcome to Babel.
Khalid Ikram: Thank you very much.
Jon Alterman: As somebody who has followed Egypt's economy for 45 years, how serious are Egypt's problems now in historical perspective?
Khalid Ikram: When you talk to Egyptians about problems, you get a very different answer than you would get from many other countries. I mean, when you talk about my country, Pakistan, sooner or later the question pops up, “Will this country survive?” You never get this kind of flavor in Egypt. “We survived for 7000 years, of course, we'll survive. We may not survive in as prosperous a manner as we would like to, but there's no question of Egypt disappearing.”
There is an underlying sense of confidence in them. They may curse their ruler, they may curse their policymakers, they may have all kinds of criticisms, but they're never afraid that the place is going to disappear.
Jon Alterman: Your introduction to Egypt, in many ways, was the 1977 bread riots. Egypt, of course, had a revolution in 2011. Do you see the situation now approaching the situations before those challenges, or is it somewhat less serious?
Khalid Ikram: In 1977, I actually happened to be in Egypt when the riots erupted, and the World Bank asked me to bring my mission back. I said, "I'll call the mission members and see if they want to go back. I'm not coming back.”
Jon Alterman: You were going to stay in Egypt?
Khalid Ikram: I was going to stay in Egypt. I said, "Frankly, you guys in Washington seem to think that policy advice is scribbling things on bits of paper and handing them over to various ministers over lunch or something." I want the mission to actually see what happens when policy goes wrong. The place goes up in flames, the police go out shooting, and people go out throwing rocks. That is what cockeyed and cocked-up policymaking results in.
I would like them to have a more humble approach to the advice they give. But they always have to temper economic purity with the politically doable. Otherwise, you just get the fire and the burnt-up buses, and you don't get any movement forward.
Jon Alterman: One of the things I found interesting in your book is that you've had a front-row seat to many of the international financial community’s demands on Egypt, and you say that Egypt has a history of responding to International Monetary Fund (IMF) demands to depreciate the pound with temporizing. Where do you think we're going? Do you think now we have a constellation where Egypt is going to have to generally comply with what the IMF wants, or is Egypt going to find another way out?
Khalid Ikram: I think the situation is pretty serious so they will comply, but not entirely. I mean, let’s take one or two examples. Many countries can find backdoor ways of adjusting the effective exchange rate through these things. For example, the Koreans used to do it. They used to keep the formal exchange rate devalued, but they couldn't go beyond a point because the Americans would start howling. So, they would find other ways. Shipping costs for exporters would be reduced. Electricity charges for exporters would be reduced. Exporters could get bank loans at a rate of 4 percent per annum when the market rate was 30 percent an annum.
The nominal exchange rate could remain what it was. But the effective exchange rate could be mucked about in these ways, and I am sure the Egyptians and the Koreans and so on could find many other ways of doing this. The other thing that the IMF, the World Bank, and so on quite reasonably want is a reduction of the army’s presence or the military’s presence in the economy. Basically, this means that there shouldn't be so many state-owned enterprises and, if there are, they have to compete on a level playing field with the private sector and so on, and so on, and so on.
To be blunt, I think that the IMF, the World Bank, and so on are too enamored of the economic textbooks to understand the political economy behind why the Egyptians, the Pakistanis, the Vietnamese, and everybody else are reluctant to close or run down the state-owned enterprises.
And to my mind, the reason is this. Wherever you've got the military with a large presence and effectively able to control things from behind the scenes, the guy who's come to power via a military coup has to keep looking over his shoulder to see whether he's going to be replaced in a similar manner. So, two things happen: first you can't let another general become too popular with the troops, because the general isn't the one carrying the guns.
You can't have them building up loyalty to a particular general. The guy in power does two things. One is that he rotates the commands around. You know, you’d have General X in charge of the eastern command and two years later, he's moved to the western command. Two years later, he's moved to some administrative job, and three years later, he becomes an ambassador. Keep him moving around. You de-fang him. But there are only so many ambassadorships, so you put them in state-owned enterprises (SOE). You make them presidents of that, and chairmans of that, and board members of that because there, they’re harmless. You put them out of your harm's way.
I think that what will happen is that as far as the SOEs are concerned, you'll see quite a lot of ingenuity at play to comply in formal terms with what the World Bank and the IMF want, but the reality may be substantially different.
Jon Alterman: In both of the books I mentioned, you argue that small firms in Egypt don't grow. In your edited volume, there's a chapter by Atiyas and Diwan that talks about the problems that face medium-sized enterprises, which are sort of squished between government enterprises on the top and small folks who evade scrutiny and regulation on the bottom. Your book cites a World Bank study that calculated that the possibility of a firm with 6 to 10 workers would have more than 20 workers in 4 years was only 3.3 percent.
You talk a lot about the lack of domestic investment in Egypt. But one of the things I keep hearing from friends in the business community in Egypt is that you can't have the government as a partner because they'll squash you. You can't have the government as a competitor because they'll squash you. And the phenomenon you've described with the state with its fingers in a lot of places is that it keeps the small and medium enterprises, which could be drivers of employment growth, from doing exactly what you want them to do.
Khalid Ikram: You're quite right. You see that the government starts off with having a number of aims, and frequently those aims are in conflict. Employment is a government aim. But giving preference to state-owned enterprises to enable them to do all the other things that the government wants done is also an aim, and that aim seems to trump the efficiency and growth aim.
Jon Alterman: You've written that consistently, regime survival has trumped economic vulnerability among policymakers. Can you help us understand what you mean?
Khalid Ikram: Yes. Let me take Korea as an example because it was, in the 1970s, a good comparison for Egypt. When they started their independence in 1945, they had a president who followed this usual import substitution strategy delivered by crony capitalists. Then in 1961, he was overthrown by General Park Chung-hee, who for the first year, followed the same policies, but then he came under the influence of a group of advisors who made the following argument to him. They said, "Mr. President, your primary responsibility is for the security of Korea. And we are now beginning to feel increasingly insecure. The security has been provided by the Americans, but that protective umbrella is beginning to fray, because they're pulling troops out from here and shoving them into Vietnam. We are threatened by North Korea." Remember, the North Korean economy was doing better than South Korea's at that point. They said, "We have this threat. And security requires technology, which we don't have. We've got to get it from abroad, which requires foreign exchange, which we don't have. The only way we can get it is through exports. If you want Korea to be secure, you have to export. It is export or disappear."
What happened over here was that the advisors were smart enough to align the president and the army's main priority, which was regime survival, with economic survival and economic prosperity. But this has not happened in Egypt. Nobody has said to the Egyptian army that wars these days are fought by the long purse rather than the long sword. If you guys want a decent army and a decent air force and whatever, you have to start with building up your economy, otherwise you can't fight.
Jon Alterman: You've said, and I think it’s certainly accurate as far as I know, that for the Egyptian government, external financing has been consistently preferable to policy reform.
I suppose the question is, is the external financing option still available? Certainly, there was the hot money that came in that helped support a number of President Abdel Fattah el-Sisi’s mega projects, but it also seems to me that there's a unique alignment between the Gulf Cooperation Council (GCC) states and the IMF on the need for policy reform. There’s a sense that el-Sisi has burned them time and time again, and they're not going to be fooled again. Instead, they're going to force Egypt to change. You certainly don't see the United States with the same focus on Egypt that it had in the past. The European Union is preoccupied with other things. The Chinese are quite judicious where they put money—certainly more money—in Egypt, but they're not interested in financing Egypt and walked away from the new administrative capital for some time.
So, understanding that as you say, there's always a sense that external financing is preferable to internal reform. Is external financing on the table at this juncture?
Khalid Ikram: That question has more politics than I understand. Previously, when Egypt recognized Israel, there were a lot of Middle East countries, Arab countries, that said, "This is horrible, and we will cut our financing, and we'll do this that and the other."
Jon Alterman: And the United States stepped in with billions of dollars, which represented a significant part of the Egyptian economy.
Khalid Ikram: Yes. But at that time, the Saudis had deposited $3 billion in the Egyptian Central Bank. And the other Gulf countries had deposited another $2 billion. Saudi Arabia was also one of the countries I was responsible for, and when I was there, I asked their governor of the Central Bank, “Are you going to withdraw your deposits?” And he said, “Of course not. There are things that we have to do for optics and there are things that we have to do for survival. While we want to give everybody a signal that we don’t like what Egypt has done vis-a-vis Israel, we can't afford to have Israel toppled because we don't know what kind of government will come. If it's a totally republican government, it might take a nasty view of all the kingdoms in the Middle East."
So, you see, again, I don't know the politics of what goes on. And again, where the United States is concerned, I'm puzzled when I read that “We've given billions of dollars. Why don't they listen to us?”
It would be a fair question if properly posed. We've given billions of dollars, and the Egyptian response is, "But we gave it to the office. I mean, the deal was you give us billions of dollars, we recognize Israel, and we don't make a nuisance of ourselves to impede the West's access to Middle East oil. We've delivered on that. Now, if you want us to wear yellow shirts and drink coffee instead of tea, cough up more money." When American aid started in a big way after the Camp David agreement, the deal was that the Egyptians got $1.3 billion as a grant for military aid and $815 million as a grant for economic aid. That's $2.15 billion.
At that point, the Egyptian GDP was $23 billion, so this was 9 percent of GDP. Now, 9 percent of GDP buys you a comfortable sofa at any table. Over the years, economic aid to Egypt began to be cut by $40 million a year, and today it is about $250 million. Military aid remains at $1.3 billion. Total U.S. aid to Egypt today is $1.5 billion. In the meantime, Egypt's GDP has grown, and the economic aid from the United States is now half of 1 percent of GDP. While 9 percent of GDP would buy you a comfortable sofa at the table, half of 1 percent doesn't buy you a three-legged stool.
So, they look for other sources of aid. I mean, I put the screws on the Arabs and the other Gulf Arabs for a while, go to Saudi Arabia for a while, do all these kinds of things. And I think you're right, that these countries are becoming reluctant to be as liberal as they were.
Jon Alterman: And they're moving from supporting the Central Bank to supporting individual projects, and there's been a lot of reluctance to invest in Egypt in companies where they're just not happy with their financials. I mean, my experience with the Saudi Public Investment Fund is they pride themselves on being shrewd investment bankers, and they say, "We just don't see the upside in the businesses and the shares we're given under the terms available."
Khalid Ikram: I totally agree with your assessment of that, and I totally agree with the assessment of the Saudi bankers. A lot of these projects, I don't know how many of them will ever pay you back or how many of them are even furthering Egypt's goals. Take this new capital, it's a huge capital-intensive kind of place.
Jon Alterman: Something on the order of $50 to $60 billion in initial phase.
Khalid Ikram: What are the employment figures that it has generated? What are the exports it has generated? Zilch. It's not furthering Egypt's aim, which above all is employment. You can think of many aims that a government should have. And I think one should whittle them down as far as possible because you can't fight this battle on so many fronts.
That's why in the book, I basically chose two. One was a better life for its citizens, and that has a number of implications. And second was to reduce the ability of external agents, whether they are other governments or whether they are international organizations like the World Bank, the IMF, the Islamic Development Bank, or whatever, to exert pressure on Egypt, to make it accept terms that it considers onerous.
Jon Alterman: Although you've argued that really the fundamental goal of the regime is regime preservation at the expense of everything.
Khalid Ikram: Yes. And these two are in line with regime preservation. I mean if people have full stomachs, they're not going to be concerned with overthrowing the government. If outsiders are not able to say, "You guys better devalue, you guys better wind up your public enterprises, that also helps the regime. The trouble is that since these two are good for the regime's survival, why does the government not do it?
The conclusion I come to is that again, it's a political economy issue. Understanding that the Egyptian economy needs these reforms is not rocket science. As Sinclair Lewis said, "It's very difficult to make a man understand something if his income depends upon his not understanding it." And what happens is that the man in question is the policymaker. And he does not want to take a gamble on economic reform. At the present moment, you've got a certain distribution of winners and losers in the economy. The winners are winners because they have access to power through a variety of means. They are either in the armed forces, or they are associated with religious forces, or they are powerful commercial forces.
But these guys like the status quo. Why would they take a gamble on changing it? Because if they change it, they may end up being losers. They're not confident of what the status quo will bring. I've argued this several times with Egyptian policymakers, who, I must say, have been very open in their discussions with me. And I’ve said, "Look, you guys have got to say that the present winners will not be losers. It's just that the gap between how much they win versus how much the losers lose will become smaller.
It’s always a "Yes, but..." response I get. I mean that, "Yeah, we agree with what needs to be done. Yes, we agree that income distribution and these things have to be looked at. And yes, what you say makes sense. We should not be content with that kind of difference. But we don't know who will do it. And we don't know at what point it will stop."
Jon Alterman: Ultimately, it seems to me that Egypt has been in a position where, for the last 75 years, it's instrumentalized its foreign policy to support its domestic environment. At the same time, its ability to continue to do so is running out of steam. The great powers have changed their view. The Great Powers have changed their view of the Middle East, the Gulf States have felt burned that they tried to help Egypt for 10 years, and the Egyptians just pocketed the money and didn't make the necessary reforms. The IMF now has Egypt as the number two debtor state in the world and feels it can't go further. It does feel to me like the situation you're describing depends on some external donor to make the Egyptians whole, and the Egyptians have seemed to run out of external donors because the external donors are tired of the direction in which Egypt's gone. Am I missing something?
Khalid Ikram: You are seeing this through the lens of a rational political scientist and economist. The Egyptians are seeing this through a different lens, one of, "We are too big to fail."
Jon Alterman: Does everybody agree with that, do you think?
Khalid Ikram: A lot of Egypt laymen don't agree with that. The opposition doesn't agree with that. But the opposition doesn't carry the guns. The guys making the policies are the ones who believe that. You see, the thing is that in the present history of Egypt, let's say since 1975, nobody has ever said that if you don't do this, the consequence will be X, Y, Z and gone even as far as X. I mean, why would the Egyptian DNA change when it's never been subjected to anything else? In 1977, just when the riots were taking place, the U.S. ambassador in Egypt was Hermann Eilts.
He invited me to a one-on-one dinner at the height of the riots. Over dinner, he said to me, "What is needed is that the World Bank holds the Egyptians' feet to the fire, that if you don't reform, you have to do X, you have to Y.” I said, “Herman let me say this. The World Bank is disbursing between $50 and $60 million a year to Egypt, and they are nowhere near the $600 million that you are disbursing. Why would an Egyptian policymaker turn his economy upside down for the sake of $50 million? Can you give me any assurance that if the bank tries to hold Egypt's feet to the fire, President Anwar Sadat will get even one penny less of U.S. aid?”
That was in 1977, and I can quote verbatim what Herman’s reply was. After a pause, he said, quote, “We believe that President Sadat is a force for moderation in the Middle East. And so long as he continues to be a force for moderation, he deserves to be supported.” End quote. I said, “Herman, translated into plain, Anglo-Saxon language, it means he gets the $600 million no matter what.”
Jon Alterman: I guess the difference is that this was in an age when the United States, in a Cold War context, was preoccupied with the Arab-Israeli issue, when Egypt and Israel did not have independently excellent relations as they do now.
Khalid Ikram: I don't disagree at all with what you're saying. But what I'm saying is that the lens through which they were seeing it is still a lens where people made noises but ultimately, they got, one way or another, the money. It's only if they get a jolt that they’ll realize things are serious.
Jon Alterman: And your judgment is, in fact, in reality, nobody will be willing to pull the trigger?
Khalid Ikram: They'll pull the trigger with a lot of caveats, and it'll be drools and dribbles.
Jon Alterman: Khalid Ikram, thank you very much for joining us on Babel.
Khalid Ikram: Thank you very much.