Debt on the Nile
How do Egypt's President Abdul Fattah al-Sisi and his generals view the Egyptian economy?
Yazid Sayegh: Sisi and the army are basically working on the assumption that the more new projects they initiate, the better it will be for the whole economy. And in this, they are ignoring not only the reciprocal relationship between these projects and the economy, but also the question of whether the right things are being prioritised in the right places, and whether these projects are actually having any impact downstream.
They aren't asking whether a project is setting processes in motion by which new economic, industrial and other activities will be triggered as a result. A project should not be limited to simply establishing a new business that is capable of producing something. Rather, this business should trigger further economic activities down the line.
Economic benefits only arise when there is interaction between the specific project and downstream activities launched by individuals and the private sector on their own initiative. It isn't wrong, of course, to launch a lot of new projects, as long as the country's economy and infrastructure benefit from them. They do not, however, boost the real economy in the manufacturing and agricultural sectors.
Currently, the focus of economic policy in Egypt is on large-scale projects, while no smaller pilot projects exist. In the case of some schemes, there have also been no feasibility studies to prove whether and on what scale they are actually needed.
Can you give us an example to explain the course the economy is taking?
Sayegh: When President Sisi likes a project, he tends to multiply its production capacity, instead of starting small with one or two production lines. The Bani Youssef factory is a perfect example. According to the army, only two production lines were needed.
But Sisi insisted on six assembly lines – substantially expanding production capacity in a way that bore no relation to the actual requirements of an already saturated market. As a result, the military had to finance the extension of a factory that ran at a permanent loss, since it was producing three times what was actually needed. This example can be applied to Egypt’s national economy as a whole.
Egypt nearing economic collapse
What has caused the current economic and financial crisis in Egypt?
Sayegh: Before we talk about the cause of the crisis, we need to be clear that the main problem affecting Egypt's economy is the hasty implementation of Sisi's prestige projects, designed to serve his propaganda needs and political goals: the new administrative capital, the extension of the Suez Canal and other projects. The enormous cost of these schemes is in no relation to their economic benefit, thus prompting higher borrowing at a domestic and international level. That's the real problem.
The economic and financial crisis that has gripped Egypt for the past twelve months is due first and foremost to a policy of excessive borrowing, which Egypt’s real economy can't sustain. With the exception of the energy sector (oil and gas), the Egyptian economy doesn't currently create sufficient added value to cover these high-capital investments.
Of course, there are also some investments that only require low levels of capital. But all the investments preferred by Sisi – the building and residential projects, the new smart cities and the administrative capital – require huge quantities of capital, which the Egyptian economy is unable to raise on its own. Another factor is that the involvement of Egypt's private sector in such investments is at its lowest level since the 1960s.
President Sisi's focus is on new large-scale projects and gigantic real-estate schemes – targeted at high earners to bring in the greatest possible sums of money. If this gamble had paid off, then it is my belief that the national budget and other stakeholders such as the army would have seen a return on their investment. It would have covered outgoings, and debts could have been settled, with interest to boot.
What has actually happened is that the scale of the debt, the speed of implementation and the size of the projects has become so inflated that the gamble couldn’t possibly pay off and achieve the desired effect.
As a result, the Egyptian economy has fallen prey to external shocks such as the war in Ukraine and the COVID crisis, both of which struck devastating blows. In the aftermath, Egypt's economy and its national budget have been incapable of meeting the country's needs. Here lies the central problem, and it has exposed all the weaknesses of this economic system.
"There is no more money for all these major projects"
When is the Egyptian regime going to change its economic policy? At what point does a course correction become unavoidable?
Sayegh: Theoretically, the economic and financial crisis should effectively prevent the regime from continuing on its current course, because there is no more money for all these major projects. There are neither dollars nor new sources of foreign currency, and in fact Egypt's regime could well reach a point at which it is no longer able to finance its economic activities. Although I doubt the regime is going to fundamentally re-think its investment policy on those grounds – the political consequences of this economic policy have so far been ignored.
On top of this, there is the fact that in the past, when it came down to it, the IMF has always closed its eyes to Egypt's economic policy. And so Sisi and the military establishment will work on the assumption that foreign powers will continue leaping to the Egyptian regime’s aid in future as well.
The background to this is the widespread international concern that not intervening could lead to Egypt's social and economic collapse, which would result in a wave of hundreds, thousands, or even millions of migrants making their way to Europe. This blackmail will see Europe, the West, the USA and even the Gulf states forced at the last minute to keep refinancing the Egyptian budget.
These assumptions could prove false, however: increasing discontent is emerging in the Gulf states over Sisi’s economic and investment policy.
For all the support from Europe, the willingness to back the Egyptian regime is evidently declining in the Gulf States – despite the difficult economic situation. Why is that, and how do the Gulf States view their economic and political relationship with the Sisi regime?
Sayegh: I think that the Gulf States and even the West will continue their support for a few more years, despite the overriding feeling that they are being blackmailed and forced into financing Egypt – and despite the effect that will have on how the system of government performs, especially in terms of its economic and investment model. Objections will be raised around freedoms or human rights, of course, but for the lenders, such concerns are far from being a priority.
Despite the current situation, Europe and the USA are likely to maintain a strategic perspective. They want a stable Egypt, which guarantees security and peace for Israel and with it the validity of treaties, especially the peace treaty with Israel. They are keen to prevent any threat to the security situation in the Middle East from arising, and that includes the security situation in the Gulf, which of course is also a matter for the Gulf States.
How much longer will the Gulf States pick up the tab?
The Gulf States need Egypt as a safety valve against Libya, Sudan and to a certain extent also against the Red Sea. For that reason, they continue to allow themselves to be blackmailed. In my opinion, Sisi is relying on this kind of political and strategic blackmail, so that allies will be forced to keep giving financial support to Egypt in the short or long term, out of fear that the country is going to collapse.
I know from verified private sources that in some of the allied Gulf States, and among the most import allies of the Sisi administration, there is a view that he has abused their support. People have actually begun to call into question the very concept. But it's hard to predict when exactly Egypt will overstep the mark, i.e. when the tipping point will be reached.
The Gulf States have already begun to delay further investment. Moreover, they have made clear they are no longer prepared to make further contributions without some accountability. They are now refusing to give freebies to a regime that hasn't implemented the bare minimum of changes and reform.
The same can be said of the IMF: the most recent agreement for a new loan saw the IMF grant only the minimum amount of three billion dollars to Egypt, and even that was almost refused. This shows the IMF and the countries behind it are no longer in a position, or are no longer prepared, to grant unlimited financial support to the Egyptian regime without accountability and controls. But more significant and critical still is the IMF’s statement that this basic loan should put Egypt in a position to raise a further seventeen billion dollars of new credit from other international lenders.
The problem is that these hoped-for international loans have stalled due to hesitant support from the Gulf States. And so it is extremely unlikely that Egypt will receive another seventeen billion dollars in new borrowing or new loans from international sources such as the Gulf States.
Sisi needs allies in the current crisis
How do you see the political situation in Egypt today? What political consequences will the economic crisis bring?
Sayegh: After 2013, the regime managed to do away with or marginalise all political and social forces that might represent potential competition, or could have become potential allies during the transformation phase necessitated by the economic situation.
Every system of government in the world that has to overcome a major crisis, as in Egypt currently, needs civic and political alliances to maintain social peace and political stability. But the Egyptian government has successfully neutralised all possible and potential partners.
As a result, those forces that might have served as allies to the regime when required also no longer exist. And that is a major problem: the vagaries of a peaceful transformation of the Egyptian economy require diverse civic and party-political actors and bodies to enter into alliances or coalitions to manage this process, whether in the economy or the political system.
At this point, apart from the forces represented in the ruling alliance – the presidency, the army leadership, the Ministry of Interior and some high-ranking judges and state officials – Egypt has no other organised, functioning actors. With whom, then, could the government negotiate transformation or crisis management in a way that includes another party in dialogue and understanding?
In my view, the political system in Egypt faces a colossal problem. Potentially this could lead to violence and to the army finding itself at a point where its only escape from this dilemma lies in opting to relinquish power voluntarily. But to whom? Herein lies the next, and to my mind the most serious challenge currently confronting Egypt.
In 2011, the chance of establishing a new, democratic or semi-democratic regime was very real – either through a negotiating process within a coalition, with an alliance, or with other forces, as was the case in Tunisia, for example. But in today’s Egypt, that isn’t very likely.
"Germany is playing a negative role"
What role does Europe, or more specifically, Germany, play in stabilising Egypt's current regime?
Sayegh: Both Germany and Europe are playing a negative role, one that is hindering real reform. And I'm not just talking about the areas of democracy and human rights. Germany and Europe's acceptance of the Sisi regime's positive media narrative has bolstered Sisi and reinforced him in driving forward a particular economic and investment model to excess.
It is not only his undemocratic, despotic and repressive policies within Egypt; it's also about his economic agenda, which totally contradicts the German and European claims of wanting to support the establishment of a free market economy.
Right now, Sisi is resurrecting Egyptian state capitalism and absorbing the economy into the Egyptian state, with the full knowledge and support of European politicians – at the level of both the EU Commission and the EU – and of other individual governments, first and foremost the UK, France, Germany and Italy.
Occasionally, when I talk to European businesspeople, diplomats or government experts, they share my view of Sisi’s economic and investment model behind closed doors. They are not, however, prepared to pursue a policy based on their real convictions, for political reasons.
Instead, they talk about the path to democracy, which Sisi is supposedly on, and about economic reforms. They praise Egypt’s economic growth, although they know very well that in the real economy, in manufacturing, in agriculture and in the service industries, productivity is very low and there is little investment. They all know these facts, but they press on with their rhetorical discourse and continue to call on Western investors to invest in Egypt.
Interview conducted by Mahmoud Hussein
© Qantara.de 2023
Translated from the German by Ruth Martin
Yazid Sayegh is an economist at the Malcolm H. Kerr Carnegie Middle East Center in Beirut.