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Egypt's military economy under threat from the IMF

Egypt's military economy under threat from the IMF
6 min read
13 May, 2022
Analysis: Struggling with an economic crisis, Egypt has once again appealed to the IMF for assistance. But new conditions may challenge the privileges that Egypt's military sector enjoys to the detriment of its private counterpart.

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, and 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 had 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 IMF 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.

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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 subsidiaries.

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 645 companies in which part of the capital belongs to the State. All these are 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 manufacturing but compete with private industrials in some fifteen activities which include food processing, the media, car manufacturing, tobacco and pharmaceuticals.

Egypt's powerful military sector, which permeates industries across the country, could be threatened by new IMF requirements amid a struggling economy. [Getty]

“Most of them make very little money while others benefit from advantages that are inaccessible to other economic agents,” the IMF observes. 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.

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 back to 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.

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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 Al-Ahram Weekly, 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.

Jean-Pierre Sereni is a journalist, former manager of Le Nouvel Economiste and managing editor of L’Express. He is the author of several books on Maghreb, Gulf countries, energy, major business leaders and the Fifth French Republic.

Follow him on Twitter: @jeanpierresrn

This article was originally by our partners at OrientXXI