Foreign Last year we made this video about the collapse of Lebanon Lebanon was previously a prosperous country, but severe mismanagement by the government and Central Bank caused the currency crisis. in economic collapse. Now, eighty percent of the population lives below the poverty line. Lebanon is a small country of only about 5 million people, but it's looking like Lebanon was a canary in the coal mine.

With other much larger countries now experiencing similar problems. Egypt is the largest country in the Arab world with a population of 109 million people. Its population is also growing very quickly, with a median age of just 24 years. The favorable demographic situation in theory should set up the economy to grow very quickly going forward as the younger generation enters the workforce.

And of course, the Great Pyramids of Giza is one of the world's most popular tourist attractions. Despite all these advantages, the country has been facing an economic collapse over the past year. Since March of 2022, the Egyptian pound has lost more than half of its value versus the US dollar. The inflation rate currently exceeds 30 percent in food prices have increased more than 60 in the last 12 months.

With these price increases pushing tens of millions of people into poverty, the country is struggling under a crippling debt load and is running dangerously low on foreign currency. The situation has gotten so bad that the government has had to secure tens of billions of dollars of bailout money from the IMF as well as their Rich Gulf neighbor States just to keep the economy afloat. In this video, we'll look at the root causes of Egypt's currency crisis and what this means for the 109 million people who call this country home. Egypt isn't the only country facing economic difficulties.

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But thanks to our partnership with Masterworks, viewers of this channel can skip the wait list by clicking the link in the description below. Laughs! From 1981 through 2011, Egypt was ruled by President Ozni Mubarak Mubarak maintained power through a series of sham elections where he was often the only candidate on the ballot and he had routinely win over 90 percent of the vote during Mubarak's Reign Egypt's economy did develop rapidly thanks to the development of oil and natural gas resources as well as increasing tourism around the pyramids and the Nile River. Despite the overall economic growth, the Mubarak regime was notoriously corrupt. most of the economic gains accrued to the wealthy and well-connected businessmen, leaving the vast majority of the population living in poverty.

Income inequality, and political repression eventually culminated in Mass protests forcing Mubarak to step down from power in 2011. Following Mubarak's ouster, Egypt elected Muhammad Morsi Morsi and his conservative Muslim Brotherhood party passed new reforms which made him the de facto dictator, which caused both polarization within Egypt and concerned from the outside world. In 2013, just two years after the previous dictator was overthrown, protesters took to the streets again to call for the overthrow of Morsi. The military organized the coup and the former General and defense minister Abdel Fatah Al-sisi became the new president.

Prior to 2016, Egypt's currency, the Egyptian pound maintained a fixed exchange rate with the US dollar. There are many advantages of holding a fixed exchange rate as it eliminates foreign exchange risk and thus promotes foreign investment in trade. However, with two popular uprisings within two years, foreign investors got nervous and started pulling money out of the country. With foreign currency running dry, the Central Bank had no choice but to abandon the Peg and allow the pound to depreciate by almost 60 percent.

One thing that's important to note is that Egypt has always had massive trade deficits. Since 2014, Imports have exceeded exports by at least 20 billion dollars per year. This is primarily due to the country's growing population, which creates more and more consumer demand each year. Egypt's ability to produce enough food and other basic necessities for this growing population is limited due to the fact that the majority of the country is unarable.

Desert Of course, Imports are not free to maintain their trade deficit Egypt needed to generate foreign currencies through other means. They have two main ways of generating foreign currency. Firstly, the country's large tourism sector brings in billions of dollars every year as foreign tourists have to convert their currency into Egyptian pounds to pay for things within the country. Secondly, a large number of Egyptian workers traveled to richer neighboring countries such as Saudi Arabia and the UAE to work primarily in the construction and energy sectors.

They send money back home to their families, which also supports the Egyptian pound. When Egypt depreciated the currency by 60 in 2016, this hurt consumers by effectively doubling the price of imports overnight. However, it also made Egyptian holidays 60 cheaper for foreign tourists and also made their exports of oil and gas more competitive. So, while it was a tough pill to swallow, it was a necessary measure and helped the tourism sector recover.

While President Sisi has been widely criticized for his authoritarian tendency sees as a former General, he has a full support of the military. This makes the chances of him being overthrown like his two predecessors extremely unlikely. With this newfound political stability, foreign investors finally gained the confidence to start investing in the country again. However, given the massive depreciation in 2016, most investors were understandably unwilling to buy Bonds in the local currency.

So, the majority of the Egyptian government's debt is either denominated in U.S dollars or if it was denominated in Egyptian pounds. It would be accompanied by swap agreements that would compensate for any movements in the exchange rate, with the economy stabilizing in foreign Capital Once again available, the CC government started a number of ambitious economic reforms and investments in public infrastructure. Due to the rapidly growing population and the fact that most of the country's territory is uninhabitable deserts, Egypt's major cities have become extremely overpopulated. The capital city of Cairo alone has over 20 million residents when you include the surrounding Metro areas.

This has caused massive problems with congestion and threatens to overwhelm the city's limited water supply. To alleviate this problem, the government has borrowed tens of billions of dollars to develop entirely new cities where Cairo residents can move to. While this did cost a lot of money, the Egyptian economy was also growing very rapidly. So, the debt to GDP ratio actually decreased from 97 in 2017 down to 80 in 2019.

So things were looking pretty good until 2020.. Foreign Pandemic in 2020 was a complete disaster for Egypt. Due to travel restrictions and general safety concerns, the number of tourists visiting Egypt declined by 70 compared to 2019.. Also, oil and natural gas prices decreased substantially, which is their main export.

Given the deterioration of the country's balance of payments, you would normally expect the value of the currency to decrease, but inexplicably, the Egyptian pound depreciated slightly versus the US dollar from the beginning of 2020 through March of 2022. This was purely the result of manipulation by the Central Bank. In an attempt to prop up the currency, the Central Bank started selling its foreign currency reserves. The idea was to keep the currency strong so people could still afford imported Necessities like food and Medicine While this put the Central Bank in a vulnerable position, they were hoping the pandemic would end and the tourism sector could recover before they ran out of cash in 2021.

Things were gradually recovering, but in 2022, the war in Ukraine brought a whole new source of economic headwinds. Prior to the war, almost one-third of of all tourists traveling to Egypt came from either Russia or Ukraine. Egypt has long been an attractive destination for Russian Ukrainian tourists because of its relatively close Geographic proximity and abundance of cheap airline flights. Also, the warm climate in Egypt provides a welcome contrast to the harsh Russian and Ukrainian Winters.

Due to the economic reasons and sanctions, the number of tourists from these two countries fell to almost zero in 2022. Egypt is also a major importer of Wheat and other staple crops due to its large population relative to the amount of arable land. With Russia and Ukraine being major wheat exporters, prices on International markets skyrocketed. While this was problematic for many we importing countries, it was especially catastrophic for Egypt.

For decades, Egypt has operated a subsidy system where people can buy loaves of flatbread for the equivalent of about one U.S Cent Needless to say, this is well below production cost. The government compensates The Bakers for this difference. This is considered to be a key part of Egypt's social safety net. Removing the subsidies would be politically untenable.

The bread is so cheap that is often used to feed goats and other animals. This is incredibly inefficient from an economic perspective and results in massive costs for the government. Because of these subsidies, Egypt is the single largest importer of wheat in the world. Higher prices cause the government's total spending on food subsidies to Surge to a record of 5 billion dollars in 2022.

With the Central Bank exhausting its foreign currency Reserves an alarming rate, the situation was clearly unsustainable. In February of 2022, Egypt instituted a policy whereby companies are only allowed to pay for imports with letters of credit. A letter of credit means the Importer does not directly transfer money to the exporter who they're buying the product from. Instead, they deposit their funds into an escrow account at the bank.

The bank will in turn issue a letter of credit to the exporter. When the product arrives, the bank will pay the exporter from the escrow account. Letters of credit are widely used in international trade to mitigate the risk that the Importer doesn't pay. However, it is highly unusual for a government to mandate that All Imports must be settled by letters of credit.

Applying for a letter of credit is a long and complicated process and they are not always approved. It can be a prohibitively costly process for small and medium-sized businesses. Because of this, many retailers simply weren't able to import products. While food and other necessities were.

Exempted. It became almost impossible to buy luxury items like imported clothing or automobiles. The goal of this policy was to reduce the level of imports, which will improve Egypt's balance of trade. However, this policy completely backfired with Egyptian manufacturers being unable to secure imported component parts and thus decreasing the country's exports.

In the summer, the government loosened the import restriction rules and in December they got rid of them altogether. But the damage was already done and they were forced to depreciate the currency multiple times, with It ultimately losing half its value by the end of the year. By the middle of 2022, the monetary and financial situation within the country was reaching a crisis. Point Following the disastrous import restrictions, Ford investors started pulling their money out of the country, hand over fist.

By June of 2022, the balance of net foreign assets held by both commercial Banks and the Central bank was negative: 20 billion dollars. Remember that the majority of the government's borrowings was either denominated in foreign currencies or tied to swap agreements that adjust for exchange rate fluctuations. The government generates tax revenue in Egyptian pounds. As the currency depreciates, the interest payments become more expensive.

In real terms. In 2021, interest payments alone represented 40 four percent of government revenue, and with the depreciation of the currency, this number will likely be even higher in 2022.. the depreciation of the pound has caused the inflation rate to Skyrocket to over 30 percent. Imported food prices have increased by over 60 in 2022, and with 30 percent of the Egyptian population living below the international poverty rate, the results of this inflation have been catastrophic.

Foreign: In March of 2022, when the currency problems were starting, some of the wealthier Gulf States including Saudi Arabia and the UAE deposited 13 billion dollars into the Egyptian Central Bank to help them Shore up their currency. By the end of the year, Egypt needed even more money. However, their neighbors would not agree to further bailouts unless Egypt was prepared to commit to meaningful economic reforms. The main problem with the Egyptian economy is its large and persistent trade deficits.

While they can sometimes get away with this thanks to currency and flows from tourism and remittances, it puts them in a precarious situation. One key reason for Egypt's lack of trade competitiveness is that large portions of the economy are controlled by state-owned Enterprises Egypt also follows the practice of allowing the military to engage in commercial activity. The military's involvement in the economy started in 1956 with the nationalization of the Suez Canal which was previously owned by private investors in Britain and France. Given that the canal had both economic and security significance, it makes some sense of the military would play a role in its maintenance and operation, but the Suez Canal is just the tip of the iceberg.

The military would build factories to create weapons and other military equipment. Over time, they expanded to making and selling civilian products and services. These military-owned companies became lucrative sources of income for high-ranking officers. Military-owned companies have benefited from preferential government contracts and exemptions from certain taxes.

With President Sisi being a former General and having come to power through a military coup, the military's role in the economy increased further during his. Reign. For example, Arab Contractors, which is one of the largest engineering and construction companies in Egypt is fully owned by the military. The military also owns Safi foods, which is the largest producer of milk and yogurt in the country.

Military-owned companies have long been criticized for operating inefficiently and the only reason they are able to survive is because of the unfair advantages they receive from the government. The dominance of these inefficient Enterprises makes Egyptian industry uncompetitive on the global stage and contributes their chronic trade deficits with the government on the brink of sovereign default. Egypt Had no choice but to go to the INF in December who approved a three billion emergency loan as a condition of the bailout. Egypt agreed to drastically reduce the role of the military within the economy by privatizing military-owned companies.

President CeCe announced that they would sell 10 billion dollars of shares in state-owned Enterprises every year for the next four years, which would cover their expected budget shortfalls and allow them to pay back the Imf's bailout. Loan In fact, they have already identified 32 government and military-owned companies which they plan to sell. While Egypt is desperate for cash, their wealthier Arabian neighbors including Saudi Arabia and the UAE have surpluses of cash they are looking to invest. With Egypt running its privatization campaign.

the Saudis and Emiratis have the opportunity to buy up Egyptian companies at fire sale prices. Alright guys, that wraps it up for this video. What do you think about Egypt's currency crisis? Do you think the privatization of state-owned Enterprises will be enough to turn the situation around? Let us know in the comments section below. As always, thank you so much for watching and we'll see you in the next one.

Wall Street Millennial Signing out.