How Egypt’s charm offensive abroad is in sharp contrast with its domestic politics

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The North Africa Journal – March 8, 2017 – Egypt is working hard to fix its crumbling image abroad. Editorial after editorial, and article after article in the Western press have been critical of the Sisi government. Articles have been showing how the country essentially missed the opportunity of the Arab Spring to get back on the right track, only to sink back into trouble. Seeking to fix this image of a broken Egypt, the government has taken steps to showcase the country as a good destination for both investors and tourists.  But its efforts are likely going nowhere for the time being.  At least until the political environment tilts back to civilian control.

The Egyptian government enlisted a number of foreign media outlets and big foreign stars in its PR campaign, and it is sending millions of dollars it has borrowed to lobby groups in Washington to help sell the Egyptian destination to investors and tourists, and convince Trump to be friendly and helpful.

Is the approach working? A few would think so. Here’s how a major news organization based in New York puts it this week:  “Economic activity for Egypt’s non-oil private sector accelerated the most since 2014, a sign that growth may be recovering after authorities abandoned currency controls and secured a $12 billion IMF loan deal.”  The outlet, which we will not name, goes on to say “The Emirates NBD Purchasing Managers’ Index for the whole economy climbed for the third month in a row to 46.7 in February from 43.3 in January. The New Orders sub-index rose to 44 from 39.2.”  That may be true, but the way the whole thing is phrased shows that the glass is half full, and that optimism is back on track.

A lot more honest, though, is the interpretation of the same data by an Egyptian newspaper, with real reporters living in Egypt and in touch with the reality. The paper says:  “The Egyptian non-oil private sector continued on a downward path in February, as business conditions worsened for the seventeenth straight month, according to an Emirates NBD Egypt’s Purchasing Managers’ Index (PMI) report. The latest downturn was led by sharp declines in both output and new work; however, the respective rates of contraction softened since January… …firms reduced their payroll numbers again due to lower output requirements. Meanwhile, the weak exchange rate relative to the US dollar continued to be a key factor behind steep increases in output charges and cost burdens.”

These are two very different interpretations. The New York outlet, which reaches vast swaths of America’s investment community, speaks of “accelerated economic activity and recovery.” The more honest Egyptian writer talks about “softening contraction.”  Which one should we believe?  Is Egypt really recovering?

To our estimation, sadly, the country remains in an extremely precarious situation. It managed to unchain the currency’s exchange rules by allowing free floatation of the pound, and if you own dollars in investment funds in London, Zurish, Boston or elsewhere and you don’t know what to do with it, that’s good news. If you are an Egyptian business or a household, this is terrible news. Specifically, on November 3, 2016, Egypt tossed out its currency peg of 8.8 pounds per $US1.   After it did this, the IMF jumped in and agreed to lend Egypt $12 billion.  The result of the two led many so-called foreign investors to resume activity in the country.  Of course they would!  Just imagine that what use to be traded at $1 yesterday is now 50 cents, or half the original value. If you are a speculator flush with cash, would you not consider scooping up equities and assets in this context?  I sure would. The country after all boasts one of the biggest Arab and African economy, regardless of how depressed the economy is today, it’s bound to recover at some point.  Buying equity and assets now may be a long-term play.

These investors and speculators are in for more good news.   As of Monday, March 6, 2017 the Egyptian pound continued on its downfall versus the US dollar (about 16.9 pounds per $1, versus about 16 pounds a week earlier) and that means their dollar can buy even more stuff.  Remember that the dollar was less than 9 pounds back in November. The following day, Tuesday, the US dollar exchange rate to the pound exceeded 17.5 pounds, its highest level over the past two weeks, as banks began to declare dollar shortages.

In addition to speculators and people looking to get rid of the pound and replace it with a safer currency, the continued decrease in the value of the pound this week is essentially due to the fact that the Egyptians are preparing for the holy month of Ramadan and importers are increasing their purchases abroad to fulfil a spike in demand for food and other consumer products. Since imports are in dollar, there is huge demand for it, and the pound is pushed aside. That’s what free currency floatation does. The problem is that for the locals, what one used to spend on a product, the price of that product now doubled, and continues to rise. It’s the case for petroleum products, food, clothing, meds, etc. So while currency floatation may work well in mature and advanced economies, there is plenty of doubt that it does in the Egyptian case.

While speculators are happy with what’s going on, the Egyptian government is seeing an eroding social-economic environment that it will have to tackle urgently if it wants to avoid another revolution. The middle class has lent some support to Sisi and the military in an effort to oust the very unpopular Muslim Brotherhood regime of President Mohamed Morsi. It later gave Sisi some green light to fight the Islamist insurgencies, while tolerating a great deal of abuse from the police and the military.  But the middle class is now being challenged directly.  Not only the lawyers and journalists have been sent to jail in droves, but now Sisi is hitting the middle class in their pockets. The President already set the tone of what’s to come when the IMF loan was announced. In clear terms in a televised speech, he pleaded with the Egyptian people to be patient and be willing to suffer a bit before things get better.  And he was not kidding! This week, the Egyptian Minister of Supply, Ali Moselhy, has been pushing for a proposal to limit the share of subsidized bread per person from five to three loaves a day. There is no doubt that Moselhy is in charge of a ministry that has seen its sources of funding dwindle, but if you are a household accustomed to many more loaves of bread, you are bound to feel the pain. On Tuesday, March 7, thousands of Egyptians, many women and heads of households that don’t get involved in politics, took to the streets to protest the government’s intention to cut supplies and subsidies of bread.  This situation is not just affecting the bread market. Shortages of hundreds of medicines are affecting Egyptians who are suffering different types of illnesses.  The government admits that as many as 282 drugs used to stop bleeding and to treat colds and ulcers could not be found anywhere on the market. Although most are said to have alternative drugs that patients could use, 42 have no alternatives, a figure that has been growing month to month, including drugs to treat diabetes, liver diseases, cancer, and extending into contraceptives, anesthetics and antibiotics. Authorities and industry sources blame speculators and traffickers for the shortages, but the reality is all about policy-making and money.

So as the Egyptian people brace for very hard spring and summer seasons, the Egyptian government is investing in an international campaign to try to stimulate interest in Egypt. Tourists, companies and governments are the target.  For the tourists, Egypt got two mega stars, one from Europe, football giant Leo Messi of FC Barcelona who recently went to Egypt presumably as part of a domestic health campaign to fight Hepatitis C. More recently, Egypt welcomed American actor Will Smith, with widely published photos of the Hollywood star in front of pyramids.  These are obviously necessary marketing campaigns to lure much needed tourists. After all, Egypt’s tourism sector collapsed after a series of attacks put Egypt on the list of high-risk countries.  With the military largely in control of the situation and foreign governments beginning to allow their nationals to travel there, reminding foreign tourists through an aggressive marketing campaign makes sense. But will that work and is that good enough to sway foreign media’s negative stance on Egypt?

Elsewhere, the Egyptian regime is spending money on lobbying foreign governments, in particular the new Trump administration in a bid to improve its image and strengthen ties. With the Trump administration, the Egyptians want to make sure that the US foreign aid allocation to Egypt is not challenged. There is indeed great uncertainty going forward as the new American President may be making substantial cuts, including cutting funding of the US State Department’s international aid budget. Over the past days, there has been widespread reporting that Egypt will be paying hundreds of thousands of dollars to public relations firm Weber Shandwick and lobbying firm Cassidy and Associates as part of a charm offensive directed to the new US administration. There is nothing wrong with that, except that this time the bill is to be paid by the Egyptian intelligence services (General Intelligence Service).  For observers in the West, it is bizarre that those paying for lobbying are outright identified as “intelligence services,” but the reality nothing is done in many, if not most Arab countries without the approval or even direct participation of the security and intelligence services. In normal circumstances, a civilian administration, housed in the foreign ministry would take the lead on such initiative. In fact, the Egyptian Feign Ministry has its own $2 million budget it spends each year in the US, and so the move from the intelligence service suggests that the foreign affairs ministry is not doing enough.

Regardless of the inner workings of the Sisi administration, Egypt is firing up on all cylinders. It wants to see some stability so badly that it is doing whatever it takes to please the foreign sources of money. Sadly, these initiatives may not have a trickling down effect and will not likely generate the intended outcome as Egypt needs first to handle its internal crises, starting with domestic politics. And on that, there is no sign of a Sisi government ready to revisit its positions.

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Arezki Daoud is The North Africa Journal Editor and MEA Risk LLC’s Chief Executive and Lead Analyst. At the North Africa Journal Arezki oversees content development and sets the editorial policies and guidelines. Arezki is an expert on African affairs, with primary focus on the Maghreb, Sahel and Egypt. His coverage of the region spans from security and defense to industrial and economic issues. His expertise includes the energy sector and doing business in the region. At MEA Risk, Arezki overseas all aspects of the company’s development, from the research agenda to growth strategy and day-to-day business activity. Arezki brings a wealth of skills. After college, he worked for oil company Sonatrach, then held research, forecasting and consulting positions for the likes of Harvard University, IDG and IDC. Arezki can be reached at daoud@north-africa.com, at US+508-981-6937 or via Skype at arezki.daoud