Less than a month after the Russian invasion of Ukraine, on 21 March 2022, faced with an exceptional rise in food and energy costs, Cairo’s Central Bank raised its base interest rate by 100 points, devalued the Egyptian pound by some 15% after having spent several days wasting more than 10 billion dollars trying to prop up its money. Two days later, the Prime Minister sent an urgent appeal to the IMF for “consultations” on a new program of economic and structural reforms. According to Reuters, over 10% of the foreign capital invested in Egyptian bonds took flight in three short weeks. And the worst is yet to come.
In its latest report, the IMF estimates that foreign financing for emergent economies will fall by an average of 30% with a corresponding rise in their external debts. The increase in US interest rates, plus the security afforded by the greenback in these troubled times explain why investors are pulling out of the Nile Valley. In March, according to Standard and Poor, the US credit-rating agency well known in Cairo, Egypt has lost twenty billion dollars, i.e., half of the Central Bank’s reserves!
That vanished currency must be replaced post-haste, in Egypt as well as the other emerging economies and the international finance institutions are busy doing just that. The World Bank for example has promised 170 billion additional dollars over the next six months and the Fund has announced an “RST” (Resilience and Sustainability Trust) of 45 billion dollars to be made available starting in May and which will serve to top up two other special funds already constituted to counter the Covid 19 pandemic. The United Arab Emirates, Qatar and Saudi Arabia have deposited an emergency fund with the Egyptian Central Bank and have promised considerable investments.
A “detail” however is likely to complicate these generous gestures: the treatment of the huge Egyptian military sector. In its annual review of the Egyptian economy published in June 2021, the IMF1 noted, for the first time, that all public companies, including those held by military officers – mentioned here for the first time – must be privatised if they are profitable, shut down if they are operating at a loss or amalgamated if their situation is uncertain.
A tentacular sector
In principle, this would mark the end of an historical exception, if that demand were to become a new condition attached to an IMF loan. An exception which is costly for the Egyptian treasury and generous for the hundreds of generals who feed on the beast. No one knows the extent of the galaxy of public companies and their subsidiaries2. Officially, there are over 300 under three different statutes: the public business sector companies (PBSC), the public sector companies (PSC) and the military firms. Besides which there are more than 645companies in which part of the capital belongs to the State. All these supervised, from afar, by 53 regulatory authorities which are supposed to keep tabs on them.
The military sector itself is of a rare complexity. First, there are the two-line ministers, of National Defense and Military Production, whose management involves special rules. The National Service Projects Organization (NSPO), has another supervisory function, overseeing 32 companies. A good third of these, set up after Sisi took power, have nothing to do with armaments manufacture but compete with private industrials in some fifteen activities which include food processing, the media, car manufacture, tobacco and pharmaceuticals.“Most of them make very little money while others benefit from advantages that are inaccessible to other economic agents,” the IMF observes3. Their private competitors had best behave! On 21 April 2022, the British weekly The Economist, generally more indulgent towards Cairo, reminded its readers what all this means in the daily lives of Egyptians:
Juhayna, (is) the country’s largest dairy and juice maker. Its troubles began when the State wanted to take it over. Its founder, Safwan Thabet, after he refused to give over a controlling share, was thrown into a prison notorious for its torture. His son turned down the same offer and found himself in prison as well. Ramy Shaath, a high-tech specialist, refused to share his research with a military company. His customers cancelled their contracts, and his company went bankrupt. In December, three businessmen declared before President Sisi and on TV, that they agreed to accept delays in payment of the money which the Government owed them for public works. Clearly with no signs of enthusiasm. And no one was taken to court…4
How to pay the officers?
Can the regime make its generals toe the line, at least economically? We have our doubts… No more than any other Egyptian retirees do these generals have a decent pension. The last known increase dates from July 1, 2018, and hardly covers the inflation due to the previous deal with the IMF in December 2016. The 45% of the national budget swallowed up by the payment of the interests due to more than 345 billion dollars of internal and external debt, plus the inflated price of grain (Egypt imports more than any other country), leave little leeway… The country must find other ways to survive. The executive boards and management of the military companies are occupied by former high-ranking officers who need those fees to maintain their standard of living. Neither social ethics nor the national economy benefit from this system.
President Al-Sisi saw the coming tide. Since the summer of 2021, he has been vaunting in his speeches the efficiency of the private sector as opposed to the public. At the end of April, he promised to take part in a future “national dialogue” dealing with reforms and announced an “association” between private interests and 10 billion dollars’ worth of public interests. But how? And in what form? Sherin Abdel-Rezack, a journalist with Ar-Alhram Weekly5 claims to know that the companies “belonging to the armed forces” will be sold off by the end of the year. This remains to be seen. Between the pressure from his friends in Washington and the defence of their lifestyle by his backers in uniform, the President must paddle cautiously.
1Second and final review of Egypt’s economic reform program supported by a 12-month Stand-By Arrangement (SBA).
2Yezid Sayigh, « Throwing Down the Gauntlet: What the IMF Can Do About Egypt’s Military Companies », Carnegie Middle East Center, 7 April 2021.
3Creating Markets in Egypt: Country Private Sector Diagnostic, International Finance Corporation, 21 December 2020.
5“Reasons behind Egypt’s debt”, 28 April 2022.