Egypt Is in Serious Trouble Seven Decades after Its Free Officers Revolution

Arab Center Washington DC

Jul 25, 2023 Imad K. Harb

Seventy-one years after its July 23, 1952 Revolution, organized by the Free Officers Movement, Egypt’s difficult economic conditions threaten to unravel the veneer of stability in the Arab world’s most populous country. The Sisi regime is continuing to seek financing for its grandiose megaprojects and to avoid fully implementing necessary structural reforms demanded by lenders. Operating under conditions of budget deficits, high national debt and debt-service demands, rising inflation, and increasing poverty, the Egyptian government is racing to halt further deterioration of its financial portfolio, a decline that could easily lead to socioeconomic unrest and popular demands for change. Indeed, if no remedies are implemented in the way that President Abdel Fattah el-Sisi’s regime faces the coming economic meltdown, the 2011 wave of protests that toppled former autocrat Hosni Mubarak may be seen as mild in comparison to what is possible more than 12 years later.

Egypt’s potential collapse would not be felt solely within the confines of its own borders but would have regional and international repercussions as well. At a time when Sudan is experiencing what could become a protracted civil war led by two unaccountable military officers, and when Libya is continuing to look for a stabilizing political compromise to end its divisions, an Egyptian eruption would not be easily contained. Nor would security along the Red Sea coast running all the way down to the Bab al-Mandab Strait and extending to the Horn of Africa. But as with other examples of economic collapse, ameliorating current conditions to secure domestic peace and regional stability cannot happen without concomitant political reforms to address widespread repression and unencumbered autocratic rule in the country.

Destabilizing Economics at Play

Egypt’s economic troubles are not new, and certainly did not commence in just the past decade following the July 2013 coup by then-Defense Minister and now President Abdel Fattah el-Sisi against the first democratically elected president of the republic, Mohamed Morsi. To be sure, in addition to stresses resulting from the tightening of political space, economic challenges have faced Egypt since the 1952 Revolution, and challenges that faced the cliquish neoliberalism of Mubarak’s long rule were at the heart of the January 2011 Revolution. But the severity of the current economic situation, the quickening of the potential collapse, and the country’s increasingly limited options may be unprecedented to the point that alarm bells are undoubtedly sounding, not only in Egyptian institutions but also in friendly regional and international capitals such as Riyadh, Abu Dhabi, and Washington.

Alarm bells are undoubtedly sounding, not only in Egyptian institutions but also in friendly regional and international capitals such as Riyadh and Washington.

Egypt’s poverty rate is continuing its previous upward trend dating back to pre-2011 Revolution times. According to official figures, 30 percent of Egyptians live below the poverty line; but the World Bank estimates that 60 percent should actually be considered poor or vulnerable. With a population of over 108 million, these figures translate into anywhere between 30 and 60 million impoverished people, a mass that the authoritarian regime should fear. Poverty today is exacerbated by an unchecked rise in inflation that reached almost 37 percent last June (about 65 percent for food and beverage items), up from 34 percent in May. Budget deficits, challenges to food imports because of the Russian war on Ukraine, and a quickly devaluating national currency (by 50 percent since the beginning of the Ukraine war) promise even higher inflation in the coming months. Russia’s recent withdrawal from the UN- and Turkey-mediated deal with Ukraine to allow for wheat shipments out of the two countries is undoubtedly going to exacerbate the situation of scarce food supplies and the concomitant inflation of commodity prices for Egypt, as well as for many others in the region.

Additionally, official unemployment figures at 7 percent (over 17 percent among youth aged 15 to 24) give pause, especially coming during a time of high inflation and currency devaluation. The 2023/2024 budget deficit is forecasted to be some $27 billion, as national debt climbs to over $165 billion, about 97 percent of the gross domestic product. Debt service is a huge drain on the budget (56 percent), depriving the government of the ability to expand social programs to the poor and development projects to address poor economic performance, and increasing the cost of borrowing. Furthermore, 49 percent of said budget is funded by debt; in other words, if it were not for borrowed money, the government may not have enough to maintain basic services and pay salaries.

The Gulf countries are estimated to have given Egypt $100 billion since 2013, mainly in the form of central bank deposits and fuel.

Borrowing money is also getting harder to do. The Gulf Arab countries, especially Saudi Arabia and the United Arab Emirates, are estimated to have given Egypt $100 billion since Sisi’s coup in 2013, mainly in the form of central bank deposits and fuel. In 2022 alone, they gave Egypt $22 billion to deal with problems born of the Russian invasion of Ukraine and other concerns. But as with all borrowing, there comes a time when no money will be forthcoming without accompanying demands for repayment or exchange. Deals worth some $12 billion and signed in 2022 between Egypt and the UAE, Saudi Arabia, and Qatar, for example, exchanged funding to address budget and foreign reserve deficits for foreign ownership stakes in Egypt’s state-owned enterprises. For its portion of investments, the UAE got shares in five of Egypt’s largest companies. Pledges by Saudi Arabia and Qatar, on the other hand, ran into some difficulties because of differences in valuations of Egyptian state companies’ assets following repeated devaluations of the Egyptian currency. Indeed, Saudi Arabia’s Finance Minister Mohammed al-Jadaan minced no words when he told his audience at the World Economic Forum last January that the kingdom was no longer interested in granting assistance for its own sake and would from then on demand reforms and returns on its aid. The same sentiment has also been expressed by the United Arab Emirates.

As a lender of last resort, the International Monetary Fund agreed in December 2022 to extend a $3 billion loan to Egypt, to be disbursed over a 46-month period, and conditioned on some structural reforms that the Egyptian government will have difficulty implementing. Back in 2016, the fund lent Egypt $12 billion to institute an economic reform program to ensure economic stability and support sustainable growth. In both cases, the fund presented a rosy picture of the Egyptian economy and the government’s commitment to reform. But the fund’s attempt at helping successive governments’ plans for bringing restraint and rationality into economic policy has failed, specifically because of the regime’s penchant for extravagant spending on grandiose projects and the role of the military in the economy, which is crowding out the private sector.

Unaffordable Grandiosity and a Dominant Military

One project that shows the mismatched priorities of the Egyptian regime is that of building a new administrative capital to replace the aging and spread out government buildings in central Cairo. Launched in 2015, the project was expected to finish in five years and to cost $58 billion, but it is late and seriously overbudget. Although President Sisi vowed at the time of inaugurating the new project that the government would not pay for any of it, studies show that what has been paid so far has come from the state’s general fund, including acquired land, state-subsidized loans, and added national debt. Apparently, no foreign direct investment has been forthcoming to finance the project. Another grandiose and seemingly needless project was that of widening the Suez Canal in 2015. What turned out to be a parallel channel to the regular canal that measures only about a third of its size cost $8 billion to build, without much economic benefit, except for a possible $100 million per year in additional revenue. One common feature of the two projects, however, is that they were undertaken with a large share of the work being given to military-affiliated companies where retired army officers and regime loyalists find jobs and benefits.

Over the years, and not necessarily during Sisi’s rule alone, the military institution became a large and significant economic actor in the country. In fact, Egypt’s military today is an independent economic player that practically controls the state’s public sector and is the essence of state capitalism that the Free Officers Revolution of 1952 established. Yezid Sayigh writes that the military is involved in or controls “real estate development, creation of industrial and transport hubs, natural resource extraction, relations with the private sector, and capitalizing the public sector with private investment.” All the military institutions’ economic activity is secret, and no outside monitoring authority is allowed to examine their records. Indeed, an important consideration in the IMF’s two loans since 2016 continues to be the public disclosure of the military’s business and lessening its role in the economy so that the private sector can enjoy unbridled operational freedom. But this economic role is accompanied by the widespread employment of thousands of former military officers, not only in the institution-controlled companies but in the public sector on the national and local levels. Thus, in addition to a secret and independent economy, the military exerts political influence over the whole polity, which limits the ability of the private sector or, indeed, regional and international funders to force changes on Egypt’s macroeconomic picture.

Inescapable Regime Change

Seventy-one years after the establishment of the Republic of Egypt, serious change needs to be made in the way the country is governed. The regime of Abdel Fattah el-Sisi cannot continue the current trajectory of borrowing money to address budget deficits or fund social and development programs and ill-advised grandiose projects. Nor should the regime rely on a false premise that “Egypt is too big to fail” and assume that lenders will always be ready to supply the massive amounts of loans that Egypt needs. To be sure, as socioeconomic conditions worsen and the macroeconomic situation becomes more dire, the Egyptian regime has only two choices: increased repression that would continue decades of autocratic rule, or a gradual but committed democratic transition that can restore the promise of the 2011 Revolution.

It is hard to see how a continuation of current autocratic governance can provide the necessary respite from sociopolitical uncertainty.

It is hard to see how a continuation of current autocratic governance can provide the necessary respite from sociopolitical uncertainty. Decades of authoritarian rule since the 1952 Revolution have stymied political and economic development, ensconced a self-interested military elite throughout the polity, and impoverished tens of millions of Egyptians. Since the Sisi-led military coup that toppled a democratically elected civilian president, repression and fear have governed Egyptian society. Military supervised and controlled development has led to a mushrooming national debt that is slowly eating away at essential funds for development. Politically, Egypt under the military has become a republic of fear in which free opinion is criminalized, thousands of political prisoners are held indefinitely, and the promise of a bright future is dashed. In other words, if authoritarianism has been at the heart of Egypt’s problem, why would it now be considered a panacea to get the country out of its protracted crises?

There is no alternative for Egypt except to chart a gradual path toward a political transition from authoritarian rule. The ongoing National Dialogue can provide a ready platform for negotiating a transitional period away from military rule, provided that the regime lift all restrictions on who participates in it and what gets debated. To be sure, the regime cannot simply negotiate with itself or with loyal political and societal forces that have long approved of the current state of affairs. Along with the dialogue, the regime should initiate a political decompression process that instills a spirit of acceptance for debate and criticism and opens the door for fundamental institutional change, the desire for which animated the demands of the 2011 Revolution. Sisi and his regional allies and supporters, specifically Saudi Arabia and the UAE, must realize that applying cosmetic solutions such as aid and grants without essential economic and political reforms will only prolong the rapid collapse of the Egyptian polity. The international community, especially the United States, must also pull its proverbial head out of the sand and see that only change in Egypt will save the country and keep it as a stable and peaceful partner in a turbulent region.

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