BPR statement on George Floyd’s death, police violence:


George Floyd’s life mattered. Like Ahmaud Arbery, Breonna Taylor, Tony McDade, and too many others whose names we don’t know, Floyd was stolen from friends and family members who loved him and cared about him. His murder cannot be undone, and it is our most recent reminder of the fact that white supremacy, police violence, and racism are dangerously prevalent forces in America today… Read Full Statement

Egyptian Debt-Driven Development–Bold Strategy or Unnecessary Risk?

Last August, Tarek Amer, the polished head of the Central Bank of Egypt, received the IMF’s MENA Central Banker of the Year award. And he is not resting on his laurels; indeed, he has been proactive in attracting foreign funds to his country by overseeing both institutional reforms and interest rates hikes. Amer and other members of government have big ambitions: they see foreign bonds and investment as powerful spurs that can stimulate Egypt’s ailing economy, which has been in limbo ever since the political upheavals triggered by the Arab Spring. Nevertheless, the price of this simulative policy is an increasing government debt, as well as associated structural reforms that may prove to be pernicious.

One portion of these funds comes in the form of loans from international organizations, such as the IMF  and the World Bank; the second portion comes from foreign money directly invested in Egypt (i.e. FDI); and the final portion is composed of private investor loans, such as Eurodollar bonds issued by the Egyptian government in international capital markets. Amer boasted, as reported in the New York Times, that “investors are feeling good … the money is pouring in.” And he is not lying: foreign direct investment in Egypt in the 2016-17 fiscal year jumped by 27.5 percent from the previous year.

In Amer’s defense, Egypt is a majority-poor nation, with one fourth of its population living under the poverty line, and conventional economic wisdom argues this paucity of domestic borrowing opportunities is harmful for growth opportunities, forcing an overreliance on debt. Furthermore, the global financial context has made Egypt an increasingly popular investment destination: with seemingly no end in sight for quantitative easing in the West, emerging market bonds—with their higher interest rates—have become the latest craze for foreign investors.

The growth of foreign interest in Egypt is also tied to its political situation as of late. While we will never know whether the Muslim Brotherhood would have marched towards moderation or full-blown Islamism had they retained power, there was always the fear that religious restrictions might have curtailed certain sectors, such as banking (interest rates are technically against Islamic law, although of course there are ways around this) and tourism (since restrictions on alcohol and attire might have scared off international tourists). The rise to power of Abdel Fattah el-Sisi gave international investors more peace of mind, since it can be argued that he and his key allies, such as Saudi Arabia and the UAE, are more firmly entrenched in the global financial establishment. Therefore, in a way, it seems like there is no better time for leveraging.

Yet, despite the frosting, systemic issues are bottling up and are threatening to implode. Firstly, the experience of the late 80s Egyptian sovereign debt crisis is still fresh in the country’s memory. Additionally, since a significant portion of this debt is being used to service government deficits rather than long-term infrastructural investment, it is unclear whether this gamble will be worth it.

Furthermore, the funds that have been set aside seem to have been diverted to flashy projects unnecessary for economic development. The delayed building of a new administrative capital, and especially the government’s plan for a new space agency, are both emblematic of this issue. Furthermore, while el-Sisi has clamped down on opponents harshly, political instability is still endemic (Egypt is a country in which almost half of the electorate voted for the now outlawed Freedom and Justice Party in the parliamentary, shura and presidential elections). Plus, terrorism has always been a bane of Egypt’s existence. Just this past week, 305 individuals died in an brutal attack on a Sufi Mosque in Sinai. With more of the same, it is hard not see a full-blown debt trap triggered.

International capital is notoriously fickle, and if an adverse shock triggers its desertion, it will precipitate a currency devaluation and make rolling-over debts harder. And, if we are to believe economists Joseph Stiglitz and Barry Eichengreen, IMF-esque capital liberalizations only increase the risk of a debt-trap. Reflecting on the Asian Financial Crisis of the late 1990s, Stiglitz remarked that “the most important lessons of the crisis have not been absorbed. The first is that capital market liberalization—opening up developing countries’ financial markets to surges in short-term “hot” money—is dangerous.” In essence, if Egypt were to encounter troubles in the future, foreign money would be the first to flee, leading to even more problems.

A currency crisis, debt crisis, and banking crisis build on and exacerbate one another. If the Egyptian pound devalues, these foreign bonds will be harder and harder to service, as they must be paid in foreign currency. Those fancy Eurodollar bonds are, unsurprisingly, denominated in Euros.

"With the fragility of the financial system, elite capture of spending, and endemic political instability, it seems unlikely for debt-fueled growth to be the path to prosperity for Egypt."

Furthermore, tourism, a historically very important source of revenue for Egypt, is known to be very receptive to political instability too. Egyptian tourism has rebounded impressively the past year, but political instability could scare off tourists, as has happened not only in the aftermath of the 2011 revolution, but also when el-Sisi deposed Mohammad Morsi in 2013. This would make Egypt’s budgetary situation even worse.

Some action has been taken to protect the economy against these shocks: Egypt has low levels of short-term debt, which should provide robustness to short-term shocks. Additionally, Amer has stocked up on foreign currency reserves, perhaps in a bid to stall any sort of potential currency crisis. Yet this has caused inflation, since in part imports were restricted to freeze currency outflows.

It is true that Egypt has posted relatively impressive growth rates in the past year, boosting Amer’s standing. But accompanying this growth was the aforementioned inflation, which has been hovering around the 30% mark the past year. Food and fuel prices are said to have increased even further, as the government has been cutting their subsidies, which is a key ingredient for unrest in any developing country.

As mentioned previously, the Egyptian government, in a dual bid to attract foreign investors and slow inflation, has also hiked interest rates. However, this has contractionary effects: as it will make the domestic cost of borrowing higher, which will make businesses leverage and expand less.

Debt is now also soaring out of sight, as the government’s foreign obligations are currently around $67.3 billion dollars, while its domestic obligations number $168 billion. These are large numbers when you consider that Egypt’s GDP is merely $336 billion. And levels of short-term debt are increasing.

With the fragility of the financial system, elite capture of spending, and endemic political instability, it seems unlikely for debt-fueled growth to be the path to prosperity for Egypt. But in an intriguing NBER paper by Eswar S. Prasad and Raghuram Rajan, it is argued that the benefits to capital liberalizations are not economic growth per se. Rather, the benefits are indirect: capital liberalizations help build other institutions in society. Given the poor prospects for growth, this may be the best Egypt can hope for.