A Financial Sovereignty Strategy for Egypt

By Fadhel Kaboub

Despite all the heated public debates that we have been witnessing in Egypt since the January 2011 uprisings, very little attention has been given to the root causes of the country’s deepest economic problems. Understandably, as a country moves towards democracy, it must address all the concerns about freedom of expression, religious rights, women’s rights, security and justice sector reforms, anti-corruption laws, political pluralism, elections, and constitutional reform. However, it is equally important to recognize that regardless of the political affiliation of the new government (Muslim Brotherhood, secular, or military), it must craft a long-term policy agenda to address the root causes of Egypt’s economic problems. Failure to do so will be catastrophic not only for the economy, but also for the creation of a secure and stable democratic society.

The most obvious sign of Egypt’s economic woes is the rapid decline in its foreign currency reserves, which stood at $36 billion in January 2011 and dropped to their lowest level of $13.4 billion in March 2013. This rapid decline was accompanied by a steep devaluation of the Egyptian pound, which has lost 17% of its value against the U.S. Dollar since January 2011. It is easy to blame the pound’s devaluation on the economic consequences of the 2011 uprisings, but a closer look indicates that the Egyptian pound has actually lost 24% of its value since July 2008 long before this most recent conflict.

These indicators are the symptoms of a much deeper economic problem that has been ignored by the Mubarak regime, the Mursi administration, and the current so-called “caretaker” government. All of the policy prescriptions have been aimed at fixing the symptoms rather than treating the root cause of the problem. Trying to increase Egypt’s foreign currency reserves through IMF loans and financial aid from friendly Arab governments merely provides temporary relief to the country’s perpetual external imbalances.

Egypt suffers from a structural trade deficit problem. In other words, Egypt’s exports cannot generate enough foreign currency earnings to cover the country’s imports and its foreign debt commitments (Egypt’s external debt is about $39 billion, not counting the recent $12 billion in loans and grants from Saudi Arabia, Kuwait and the U.A.E.). Addressing the root causes of this structural trade deficit is Egypt’s most important economic challenge.

Unfortunately, neoliberals have seized the moment to argue that the only solution to this “currency crisis” is to boost free market reforms (through export-led development, privatization of government-owned companies, promoting tourism, and attracting foreign direct investment) and to introduce drastic austerity policy aimed primarily at food and fuel subsidy cuts.

First, the neoliberal reforms that were implemented by Mubarak (and later continued by Mursi) have actually exacerbated economic inequality, unemployment, trade deficits, external debt, socio-economic dislocation, and the concentration of wealth and power in the hands of the elite. Second, the food and fuel subsidies have been used to buy support for the government, and at the same time, to shove serious economic problems under the rug.

Food and fuel are the two main gaping holes in Egypt’s structural trade deficit. Egypt is the world’s top wheat importer (9,000,000 metric tons) and the fifth largest corn importer of the world (4,900,000 metric tons). Furthermore, despite its vast natural gas reserves, Egypt’s growing energy consumption has pushed the country to become a net importer of natural gas and refined oil products.

Egypt could certainly continue to muddle through neoliberal reforms, austerity measures, and more external indebtedness, but this can only contribute to extending economic misery for its people, increasing dependence on foreign aid, and intensifying social and political conflict. Instead, Egypt needs a comprehensive long-term strategy for policy reforms in agriculture, alternative energy, trade, environment, nutrition, education, health, and public infrastructure.

Unfortunately, all of the economic reform debates are sticking to Mubarak’s neoliberal economic agenda and focusing on ‘Band-Aid’ loan solutions to shore up currency reserves and stop the devaluation of the Egyptian pound. It is urgent to put this alternative economic policy framework at the center of the country’s burgeoning political debates; otherwise whatever progress may be made on the democratic transformation front could quickly be undone by the collapsing economic fundamentals.

The good news for Egypt is that a social and political movement is slowly beginning to clearly articulate its economic grievances, reject neoliberal reforms, and demand alternative economic plans. The pro-democracy youth movement and the independent labor unions are starting to mature as political forces after being overwhelmed by the Muslim Brotherhood and the pro-business establishment forces. The challenge for Egyptians today, however, is to convince the military leaders that the path towards stability and prosperity is possible if they reject neoliberal policies and address the root causes of the country’s structural economic problems.

Egypt’s leaders understand the concept of “national sovereignty” (political and territorial sovereignty), but unfortunately they are unaware of the critical role played by financial sovereignty, which Egypt lacks because of its massive external debt (not to be confused with domestic debt denominated in Egyptian pounds).

This is an open invitation to all the progressives who care about Egypt’s future to focus on restoring financial sovereignty by developing a series of 5-year plans with the following core features:

  1. Leverage domestic labor resources to be the engines of sustainable growth and development (a Job Guarantee program, rather than welfare and subsidies programs): focus on youth employment and university-sponsored R&D.
  2. Renegotiate dollar-denominated debt: Convert loans into bonds and allow investors to use bonds to pay taxes and fees owed to the government (i.e. convert foreign debt into domestic debt).
  3. Crackdown on domestic speculators who profit from Egypt’s foreign debt (capital controls).
  4. Leverage the Suez Canal importance in global trade to negotiate debt cancellation and technology transfer.
  5. Invest in renewable energy (both in rural and urban areas), sustainable agriculture, sustainable public transportation, and sustainable urban development.
  6. Use export revenues to fund import priorities that will maximize domestic production rather than consumption.
  7. Cancel Egypt’s odious debt.

I have intentionally left out “food and nutrition policies” from this 5-year plan because it requires an entire generational and cultural shift. This is more of a 50-year plan to introduce a popular gastronomy and nutrition culture that is less dependent on imported wheat products (bread and pasta), corn, sugar, and other imported carbohydrates of lower nutritional value; and to promote domestically produced food products with higher nutritional value. The resulting health benefits will also translate into lower healthcare costs and higher productivity in the long run.

The Job Guarantee program can be adopted through the democratic process as an overarching plan to restore financial sovereignty, promote full employment, sustainability, higher quality of life, and long-term prosperity. All of this is desirable, feasible, and affordable.  Those who think otherwise and yet still aspire for a democratic society in Egypt will by sorely disappointed to know that there can not be true democracy without full financial sovereignty to deliver social and economic justice for its people.


Dr. Fadhel Kaboub is an Assistant Professor of Economics at Denison University (OH) and a Research Associate at the Levy Economics Institute (NY) and the Center for Full Employment and Price Stability (MO). His research focuses on job creation programs, monetary theory and policy, and the political economy of the Middle East. For more on his work, visit www.kaboub.com

7 responses to “A Financial Sovereignty Strategy for Egypt

  1. financial matters

    Excellent shift in focus. Financial sovereignty is often sidelined to the detriment of the general populace and enrichment of the elite.

  2. Many of those problems seem to echo with what I have heard in Greece. I was wondering how many of the above policies could be also used for a country without its own currency.

    The neoliberal economic agenda always argues that privatizations enhance the “competitiveness” of the economy. However, the austerity programs caused great upheaval. They hardly addressed the root causes.The country lost its financial sovereignty while accumulating tremendous external debt. And it is hard to change people’s consumption which is so dependent on imports.

  3. Dr. Kaboub,

    I can see that you are trying to do the right thing.

    Pat Wells

  4. Items #2 and #7 seem to propose different treatments for the same problem. Is there a distinction between dollar denominated debt and odious debt that is not apparent, or is Dr.Kaboub classifying debt that cannot be converted from loans into bonds as “odious”?

  5. Egypt should just let the currency float. Dwindling reserves are just a sign that authorities are trying to prop up exchange rate to unsustainable levels. Same thing causes these “structural” current account deficits, which are result of buying and selling of currencies in the forex markets. Current account imbalances are always and everywhere monetary phenomenom.

    When underlying inflation dynamics are more rubust in Egypt than in ROW it just seems cracy to try to keep exchange rates at some nominal level. If that were to ever work egyptians would gain more purchasing power in foreign good just by the way of inflation making nominal incomes higher in Egypt. Obviously that is impossible.

  6. Eric Zoetmulder MA MBA

    Dear Dr. Fadhel,
    Interesting approach, this macro economic sledge hammer you propose, but to find a root cause, one has to drill very deep and I do not think you go deep enough. I believe your approach the be flawed on two, very Egyptian, counts.

    1- Underneath any macro economy, you need a complex patchwork of micro economies; businesses, farmers, ordinary people, who with their work and effort make the whole macro thing possible. In Egypt, the intent is usually there, the work less so and the output disappointing. Just like in a family at home, everybody has to pitch in to pay for family expenses and Egyptians do not do so enough. Return on investment in Egypt ( local or foreign and corrected for underpaid labour, corruption and state freebies like tax and duty freedom or cheap land) is just dismal. If Egypt business had any true domestic competition in the private sector (which has to compete against lots of State and Army owned players) the entire Egyptian industrial and service sector would be bust and all our household expenses would go to “made in China”
    2- In a culture which discourages accountability and encourages continuous denial, causes of problems and their solutions never lie with the individual and Mother State is again supposed to pull everybody’s fat out of the fire. Where the Egyptian private sector is inefficient and wasteful, the public sector is worse and even succeeds in regular asset destruction. Label me neo-liberal or “feloul”; I have no trust that the civil servants and politicos of any colour who made a 2 generation career of screw-ups can fix the current problems irrespective the method they choose to employ.

    Neo-liberal thought may have a bad rep in Egypt, but assuming that neo-Nasserites will do any better is naïve. At the very core lies the problem that Egypt does not produce enough “stuff” that importers want to exchange for foreign currency. There’s your structural trade deficit and the root cause of falling reserves and the decline of the Pound. Simply put, in free currency markets, the exchange rate of the currency of an economic island nation like Egypt is like a price ticket to express overall confidence in the underlying economy. The Pound may not be fully convertible, but the market always has the option not to buy or not to invest. The biggest losses in the currency reserves came from the CBE’s futile efforts to intervene in the markets and support the Pound.
    In a textbook economy, investments come from saved profits and Egypt does not make a lot of these. Foreign direct Investment (FDI) can plug some of the holes, but foreign capital suffers just as much from the terrible ROI in the Egyptian economy. The Cairo stock Exchange with just a handful listed companies is no indication of ROI in Egypt.
    Simply put, Egypt needs to concentrate on improving quality and quantity of its outputs and better use of its inputs. For example, enforcing current laws on flood irrigation in “new lands” (memnoua) and illegal urbanization would make the Ethiopian dam issue look like a drop in Lake Nasr. The eternal stop-gap by the tourism industry is no better and Egypt actually has one of the lowest tourist-return rates in the world. You come to see the pyramids once in your life, than you need a holiday to recover from the traffic, crap service and petty thievery.

    As for your recommendations con and pro, Dr. Fadhel, will that really solve the problem? I do not disagree that we have seen a rush in economic inequality, unemployment, trade deficits, external debt, socio-economic dislocation, and the concentration of wealth and power in the hands of the elite. None of them good news. But are these arguments to close the markets and go back to a bureaucracy of amateurs whose main claim to fame is spending “aid” money?
    Robert Kyosaki in his “rich dad, poor dad” spoke of assets as things that make you money and liabilities as things that cost you money. Until the uncountable employees of the Egyptian state learn these basics, I would not want to entrust them with the economic future of the nation.
    • Austerity measures? If that means that we finally get to chop dead wood and clear up subsidies, long overdue!
    • More external debt? If the dept buys assets that yield a good return, no problem, if the debt pays for the follies of amateurs in positions of power, you have a crisis indeed.
    • Increasing dependence on foreign aid? May I suggest you have a good look at the specific nature of such aid over the last two decades? Cash gifts have almost disappeared and the number of white elephants has also gone down. If you think that, for example, major works on irrigation and sewage systems in Sharkeya and Beheira are not necessary, please say so.
    • As for a comprehensive long-term strategy for policy reforms in agriculture, alternative energy, trade, environment, nutrition, education, health, and public infrastructure, I do not think anybody will disagree. The questions that must be asked though, is whether these long-term plans will be any smarter and better executed than the umpteen plans of the past. The global success record of 5-year plans is not very encouraging. I’d rather put my trust in individual Egyptians, make it possible for them to better their lives and then get out of their way.
    About your specifics;
    • Job Guarantee program; you seem to have more confidence in Mr. Randall Wray than I do. Seems a little like moving unemployed graduates from the campus pavement to the factory canteens. A job is not only about a living wage, it must also give pride in work and help jack up that sinking ROI.
    • Renegotiate dollar-denominated debt. Egypt is awash in EGP liquidity, all under the mattress. What few State bonds Egypt has issued are all bought by financial institutions who cherish the high coupons as a buffer to inflation and devaluation. The real challenge is to convince the man in the street to put his savings in his own country.
    • Capital controls. We have a saying that those in their 20s who are no socialists lack a heart and that those still a socialist at 40 lack a brain. Capital controls are last Century’s purely demagogic instruments. Economically they are the noose to hang yourself with.
    • Leverage the Suez Canal importance. Wow, that sounds like Mubarak who wanted to bomb Addis Ababa. International blackmail does not make you any friends.
    • Invest in sustainability. Yes! But integrate this with the economy, stay away from fancy fashion projects that do not inter-connect. And, avoid falling in love with the technology. Remember that nuclear power plant plan that rears its head every few years ?
    • Use export revenue to fund import priorities. Please read well known manuals like “das Kapital” to learn how to use this thinking to ruin a national economy. That is, if the country has something to export in the first place.
    • Cancel debt? Ok, nice idea in your letter from 2011, but I’d say that willingness in the West to agree to this must be earned and I do not see anything in that direction coming from Morsi, Al-Sisi even Shafiq or Sabahi . Comparing with Saddam in Iraq, I seem to remember he did not loose his job the way Mubarak did. Should we ask these scary evangelical xenophobes in the USA to include boots on the ground with the next gift shipment of M1 tanks?
    Dear Dr. Fadhel, after spending nearly half my working life with Egyptians, I have total trust in individuals, but none in Egyptian institutions or other collaborate forms. One of the shocking discoveries in my research in entrepreneurship and SMEs is to learn that fights between the partners are the most common cause of business failure. What do you think would have happened if the Constitution allowed for bankruptcy of governments ?

    Egypt’s future must be crafted by its people, making goods and services customers want to buy for the value they contain. Governments do best to get out of their way.
    Tahia Masr!

  7. All the three types of sovereignties; political, territorial and financial; will be affordable when the political sovereignty ie representative character of governance is ensured in Egypt. So General Al- Sisi should be in a pack up mood.