The economic situation in Egypt, one of the top three economies in the Middle East and the second largest in Africa, has become a national crisis.
The intervention of the army in the country’s economy, the weakening of the national currency, the crisis in Ukraine, the post-Covid situation and numerous international loans have all made this situation more critical.
Egyptian authorities had relied mostly on the help of their traditional Arab and western allies, whose support they won by promoting western values and stability and maintaining a regional balance of power.
However, Cairo gradually realised that this aid was accompanied by preconditions that would either strain the Egyptian economy, as in the case of the International Monetary Fund (IMF) loans, or direct wealth outside of the country to its Arab investors in the Gulf region.
It is for these reasons that Egypt has recently sought to diversify its sources of foreign aid and strengthen relationships with other allies, particularly those in the far east.
In November 2016, Egypt received a $12bn loan from the IMF following the 2011 revolution and subsequent falling revenue from the Suez Canal. As the economic situation deteriorated further, the Fund approved two more loans in the amounts of $2.72bn and $5.2bn to stem the effects of the Covid-19 pandemic. The Egyptian government then received approval for a fourth $3bn IMF loan in December 2022 over 46 months with economic adjustment preconditions. Egypt is now second place in receiving the highest amount of combined loans in IMF history after Argentina.
For China, Egypt is a distressed asset – the Belt and Road Initiative partner is too important to ignore, its economy too big to be allowed to fail
The most significant request of the IMF was the privatisation of government assets, despite the army’s grip on the economy. It also advised slowing down the construction of mega projects, and shifting to a more flexible and floating currency exchange rate.
These demands disappointed politically vulnerable Cairo officials, whom the people blame for the current economic crisis, particularly President Abdel Fattah el-Sisi. Egyptian leaders believe that a strong pound is a sign of national credit and a way to manage foreign debt levels, inflation and the cost of importing essential items, including building materials for military companies engaged in construction and infrastructure projects.
National and infrastructure projects have served as a means of earning popular support for the regime, strengthening ties between the army and Sisi, and growing the GDP. In fact, Sisi, in contrast to the IMF’s commitment, pledged at an economic conference in October that national projects would continue, and the army would remain active.
Other IMF demands, such as the gradual elimination of fuel subsidies, have increased frustration and pressure among the Egyptian middle class and workers.
The loan requirements have been supported by the EU, a longstanding ally of Egypt, which contributes about €1.2bn ($1.3bn) annually. The US has also occasionally reduced or even withdrawn support for Egypt.
For two consecutive years, Washington withheld part of its aid – $130m out of the total of $1.3bn allocated to Egypt annually as military assistance. A further $75m in assistance was blocked by US Senator Patrick Leahy in early 2022, a move that has cast a pall over Cairo’s relations with Washington.
The Gulf monarchies have served as Egypt’s second main ally. Egypt plays a key role in helping to stabilise and provide security for the region; in turn, the Gulf states have been committed to supporting the Egyptian economy. Since 2013, the Arab regimes have given Egypt $12bn to stabilise the country after Sisi’s coup against former Egyptian President Mohamed Morsi, a leader of the Muslim Brotherhood.
Yet Egypt no longer enjoys free and unlimited financial aid from its allies, as in the past.
The Gulf monarchies, along with the IMF, have increasingly pressured Sisi to meet the requirements of the IMF and implement reforms. They are simultaneously developing ambitious economic plans to diversify their economies and seeking alternative revenue sources to oil, such as Saudi Arabia’s Vision 2030, which, as in the past, has helped GCC countries reduce the budget deficit and spending.
The Gulf states’ plan to help other countries has changed, prioritising investments instead of direct aid, deposits or grants.
This year, Saudi Finance Minister Mohammed al-Jadaan announced at the World Economic Forum in Davos on 18 January that Saudi aid would now come with conditions.
“We used to give direct grants and deposits without strings attached, and we are changing that,” he said. Without naming Egypt, observers immediately knew his comments were in reference to Cairo.
In February, Egypt declared its intent to sell 32 state-owned companies to increase foreign exchange reserves. Saudi and Emirati investors expressed great interest in investing in these profitable and important companies.
Abu Dhabi’s sovereign wealth fund, ADQ, and Saudi Arabia’s Public Investment Fund spent some $3.1bn to acquire significant minority stakes in some of the “strongest companies”.
They snapped up key shares in Egypt’s two largest fertiliser producers, 41.5 percent of the Abu Qir Fertilisers Company and 45 percent of Mopco. ADQ is also the largest private shareholder in Egypt’s Commercial International Bank, purchasing a 17.5 percent stake in April 2022 for $911.5m.
The strict conditions of the IMF and the reduced willingness of the Gulf monarchies to help Egypt have forced Cairo to look for new partners. Although its traditional partners remain vital to the country’s economic survival, Egypt has been looking for new eastern donors who would impose fewer constraints.
Among its allies, China is the most influential, and a strategic partnership with Egypt gives Beijing not just economic benefits, but also geopolitical weight. Indeed, for China, Egypt is a distressed asset – the Belt and Road Initiative (BRI) partner is too important to ignore, its economy too big to be allowed to fail.
Over the past decade, China has become one of Egypt’s largest trading partners and investors. Egypt attracted around $28.5bn in Chinese investments between 2018 and 2019, which makes it the largest recipient of Chinese investments in the Arab world. These investments created roughly 24,000 job opportunities. In addition, China is the largest investor in the Suez Economic and Trade Cooperation Zone (SETC-Zone).
China has also sought to empower Egypt to repay its debts. To date, Beijing has provided emergency loans without pressing borrowers to restore economic policy discipline. As for loans, Beijing tends to pursue an independent path, instead of coordinating with other creditors and the IMF. In this way, China has become Egypt’s fourth-largest creditor, at $8bn.
In addition, Egypt is the first African country to secure a Chinese panda bond. China’s lower-interest loans, issued to Egypt at $500m, are attractive, especially since Egypt will have to repay $11.4bn to the IMF alone over the next three years.
India, as a fast-growing economy, is another potential ally to help Egypt tackle its economic crisis. Egypt ranks just behind China as the world’s largest importer of wheat, and after the war in Ukraine began, it started looking for alternative ways to import the grain.
Last summer, Cairo ordered a large shipment of wheat from India, and despite India’s wheat export ban, due to rising global prices, New Delhi made an exception and supplied 61,000 tonnes.
China is not just a mere lender, but has sought to empower Egypt to repay its debts, becoming its fourth-largest creditor at $8bn
Egypt’s status as a dialogue partner in the Shanghai Cooperation Organisation, its application to join the Brics group, and the possibility of the de-dollarisation of trade with Russia, China and Turkey are further signs of Cairo’s economic diversification and new balance with traditional partners.
However, Egypt will proceed slowly in this process and continue to focus attention on its main financial backers in the West and the Gulf.
Source : MiddleEastEye