When coups succeed: Egypt’s collapsing economy has lessons for Turkey

The Sisi regime’s lack of accountability towards Egyptians has engendered an unsustainable economic situation that almost exclusively benefits foreign investors and regime insiders. Turkey’s government, on the other hand, is ultimately accountable to Turkish citizens to deliver on policies designed to maximize public benefit and continues to pursue economic transformation by way of a production-based industrial policy. If it were not for the determination of the Turkish people to resist the attempted coup on July 15th, 2016, Turkey’s economy may have been subject to a similar fate to that of Egypt’s for years to come.

The commemoration of the attempted coup on July 15th, 2016 represents an opportunity to reflect on Turkey’s future and what could have been if things had unfolded differently that night. Thanks to the ordinary citizens who took the streets, Turkey was spared from a bleak future, if present day examples are to be taken into consideration. This is as true for economic development as it is for politics. Needless to say, those who sacrificed their lives on July 15th, 2016 were fighting for a much greater cause than the economy, however, their determination arguably helped Turkey escape a scenario that may have crippled Turkey’s economy for years to come.

The case of Egypt bears witness to this. The military coup of July 2013 – three years before the attempted coup in Turkey – led by general Abdel Fattah al-Sisi, arguably tipped Egypt into an economic deadlock. According to a recent World Bank report, around “60% of the Egyptian population are either poor or vulnerable and inequality is on the rise”. It is not so much the political uncertainty that is impacting the Egyptian economy today as it is the policy paradigm which has taken Egypt captive since the coup. Sisi follows what has rightly been called as almost a caricature of the IMF program. The IMF-prescribed policies that are designed to attract foreign capital, have benefitted international investors and the elite but caused nothing but pain for ordinary citizens.

The IMF’s blueprint is hardly nuanced; keep your interest rates high so as to attract capital inflow and minimize government spending and fiscal deficit so you can maintain public capacity to overturn country’s external debts. The IMF’s prescriptions in Egypt also came with a $12 billion loan amounting to an injection of life to the Sisi-led regime.

Accordingly, in an attempt to please foreign investors (and the IMF), Egypt has implemented harsh austerity measures and has hiked interest rates. Millions have been drastically affected, but lacking true political pressure, the government pays little attention to the plummeting living standards of the ordinary Egyptians. The gradual dismantling of official energy subsidies led to sharp increases in prices for all goods, followed by a surge in the price of food products. By the end 2017, inflation had peaked at an unprecedented 30% and is currently still nowhere near normal levels.

Egyptian officials claim all of this suffering is not for nothing. Budget deficits have been declining in recent years while the growth rate has been stable at around 4-5%. Egypt has been deemed the hottest emerging market by international investors and, consequently, foreign capital is pouring in. So, the plan must be working. At least, this is what the IMF has promised.

Egypt has indeed became a favourite destination for investors, however, what they are investing in is not Egypt’s promising future. Ultimately, they continue to be attracted by high interest rates, which means more profit, and improving macroeconomic conditions, which means less risk. However, most of this finance qualifies as short-term capital inflows or what economists call Hot Money.

To put it differently, foreign investors continue to line their pockets with easy money – thanks to high interest rates – that does not really amount to what economists refer to as productive investments. The so-called Hot Money is, by definition, designed to acquire quick and easy profit rather than for real investments that create environments for the growth of businesses and employment.

In the process, Egypt is accumulating enormous debt. The country’s external debt stock more than doubled from US$41 billion in 2014 to US$96 billion in 2019. Debt servicing has skyrocketed from US$3.4 billion in 2013 to US$6.6 billion in 2018. Despite the potential of a painful financial burst, investors remain confident because government policy effectively ensures that they receive a good return on their investments. Subsidies that directly impact the lives of many Egyptians continue to be cut in the interest of servicing the debt.

Currently, 58% of the entire government budget is spent on debt servicing, which means that Egyptians get less out of their government’s budget than foreign lenders. Furthermore, high interest rates have undermined the real economy for locals as well. Given consistently low levels of investments rate in recent years, Egypt’s local businesses have little room to expand their production without further credit. However, they cannot afford to borrow at such high costs. As the government continues to dismantle subsidies for fuel, electricity and natural gas, inflation is unlikely to be reduced in the near future, making it unlikely that the Central Bank of Egypt will lower interest rates any time soon.

For those who follow Turkish politics closely, Egypt’s story is disturbingly familiar, except that Turkey has consistently been on the other side of the fence. After the attempted coup, Turkey also experienced increasing economic risks and continues to deal with its own economic rebalancing. However, Turkey’s decision makers have taken a very different stance than Egypt’s.

The ruling AK Party government takes pride in refusing to follow IMF policies and is fighting to reduce interest rates without derailing the economy. Turkey is gradually transforming to production-based industrial policies while Egypt is going further down the path of financial liberalization. An interesting element in Turkey’s economic troubles is that Turkey has repeatedly found itself in conflict with the EU and the US over geo-political issues, while Egypt’s military government has been strongly supported by the Western governments and international institutions.

Arguably, the divergence between Egypt and Turkey began when the coup attempt in Turkey unfolded very differently than that in Egypt. Turkey’s elected government has both the privilege of its people’s support when facing external pressure and the burden of delivering what is best. This keeps the government on a fine balance between a sense of power towards foreign governments and a sense of responsibility towards its people.

Egypt’s is the opposite case. Sisi’s deep trust in the IMF-prescribed policies is embedded in his dependency on the external legitimization of his hold on power. In need of international support, financial or otherwise, Sisi has little choice or intention to do what is best for Egyptian society. Those who sacrificed their lives on the night of 15 July made sure that the same does not happen in Turkey.


Disclaimer: The viewpoints expressed by the authors do not necessarily reflect the opinions, viewpoints and editorial policies of the TRT World Research Centre.

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