Egypt: Too big to fail or too difficult to save?

  • John Sfakianakis

    Associate fellow, Chatham House

    زميل مشارك، تشاتام هاوس

  • Robert Springborg

    Italian Institute of International Affairs & Simon Fraser University

    المعهد الإيطالي للشؤون الدولية وجامعة سيمون فريزر

Both Egypt’s economy and the Sisi regime are in crisis. A fiscal catastrophe coupled with socio-political unrest could be on the horizon – and possibly soon.

The ongoing crisis in Gaza and geopolitical unpredictability in the wider Middle East is intensifying the parlous state of Egypt’s economy. Serious efforts to address the crisis, such as an anticipated currency devaluation, have been postponed until after the presidential election in December lest they further sour the public mood. But exactly how Egypt will seek to overcome its economic plight is unknown.

Egypt’s debt has quadrupled under President Sisi. More than half of Egypt’s state revenue goes to servicing its debts, which amounts to more than 90 per cent of its GDP. Sisi’s focus on mega infrastructure projects – such as the almost $60 billion new administrative capital – has necessitated runaway borrowing from foreign capital sources. Most such projects generate few if any returns in local currency, and virtually none in foreign currency.

The economy now faces two interconnected challenges: the ability to borrow and the ability to sustain debt servicing. After Argentina, Egypt is the IMF’s largest debtor. Anxious to avoid a default, the IMF has continually portrayed the Egyptian economy in favourable terms but has not convinced private investors to renew purchases of the country’s sovereign debt.

Some observers argue that Egypt will be able to muddle through, due overwhelmingly to financial support from the US, EU, and the Gulf, an argument bolstered by Egypt’s direct relevance to the conflict in Gaza. In this view, Egypt is too big to be allowed to fail, largely because of the inevitable repercussions for its Israeli, Arab and European neighbours. Others are sceptical, arguing that the underlying monetary, fiscal, and structural causes of the historically high debt will remain unaddressed. Even if Egypt gets additional support from its allies, this would likely fall significantly below its aggregate capital needs.

In the coming two years, Egypt will have to make around $47 billion in repayments, equal to 28 per cent of the country’s total external debt, of which $6.3 billion is in interest payments alone. Egypt after war-torn Ukraine is ranked as the country second most at risk of default.

Egypt has become so indebted and politically repressed that ultimately another crisis combining a fiscal catastrophe with socio-political unrest will arise – and possibly soon.

Can Egypt’s economy be rescued?

One scenario is that Egypt manages to attract sufficient external funds from a variety of foreign sources, so its debt becomes viable in the short term and insolvency is avoided through debt write offs – if creditors consent to this. But even Egypt’s long-standing allies are becoming more assertive about conditionality attached to financial support. The Gulf countries are increasingly focused on return from their Egyptian investments, both for domestic reasons as well as their dissatisfaction with aspects of the Sisi regime. They will no longer be signing blank checks as they did to stabilize the military government in the wake of the 2013 regime change.

Egypt will thus not be able to depend entirely on its creditors to help it escape its debt trap. This predicament suggests two alternative outcomes. One would be for Egypt to restructure its debt pre-emptively and thereby exert some control over the process. A second would resemble a free-fall restructuring. To realize the first scenario and avoid the second Egypt will have to not only juggle its finances but will have to formulate an economic model that is deemed sufficiently convincing and sustainable to attract new external support. But the Sisi regime lacks the in-house capacity to steward such a process, raising the question of whether option one is even possible.

Can the regime survive?

The regime faces the same existential question: is it too big to fail or too difficult to save? It is ‘big’ only in the sense that it occupies a space which otherwise would be filled by less desirable forces. In its present form it has no other redeeming features. Its strength is paradoxically its weakness, meaning its inability to govern effectively has given rise to economic, population, and political time bombs, the explosion of which would reverberate throughout the region and across the Mediterranean.

Most Egyptians have never experienced such personal hardships as they have in the past few years. With overall inflation at 36 per cent, real incomes are falling and poverty increasing at such an alarming rate the government has blocked release of the relevant survey data. People’s suffering has been trivialized by the unsympathetic regime, which treats any criticism as subversion. A sudden shift from fear to anger, such as that which propelled demonstrations in 2011, would hardly be surprising.

Moreover, there is little if anything to make up for hardships such as unemployment, declining public health and rising costs including for education which increasingly is being privatized. In the past, Egyptians had a strong sense of national pride in their country confronting Israel or leading the Arab world – or at least part of it. At the centre of that national pride was also an appealing leader, of whom Nasser was the most prominent. But Sisi and his colleagues inspire pride in ever fewer of their citizens.

Rather than a leader of the Arab world, Egypt now finds itself a spectator of Israel’s treatment of Palestinians in Gaza and of Qatar’s outsize diplomatic role in addressing the crisis, including being the centre for negotiations between Hamas and Israel over release of hostages. The Gulf countries will inevitably take the lead in Gaza’s reconstruction too.

Both Egypt’s economy and the regime are in crisis. Saving them is a very big undertaking. Given other regional and global challenges, coupled with declining US and European interest and power, it is difficult to see who might take charge of comprehensive rescue efforts. The almost year-long delay in negotiations with the IMF over release of the second tranche of a $3 billion loan, due to the regime’s unwillingness to meet the agreed-upon conditionalities, suggests how unlikely a root and branch approach is. Although efforts will be made to help Egypt muddle through – and it may get extra help from the IMF to help with the economic impacts of the Hamas-Israel war and the crisis in Gaza – this will not address its fundamental problems. That is up to Egypt itself, a country hamstrung by its present leadership.

December’s presidential election could have provided an opportunity to signal willingness to reform, had Sisi allowed significant candidates to compete and provided real guarantees of free and fair elections. Instead, he doubled down on repression, intimidating potential opposition candidates and their supporters while using a host of state resources, including control over public servants, to advance his campaign, indicating the elections will be neither free nor fair.

He seems to be hoping that popular anger will be focused on Israel and, to a lesser extent, the US for backing its actions in Gaza. His rhetorical strategy has been to align himself and the government with that anger. But his underlying nervousness is shown in the tight control of pro-Palestinian demonstrations, which can easily morph into anti-Sisi protests.

Sisi is walking a political tightrope. Were it not for his super-active and well-integrated security services, he would be vulnerable to a coup by officers discontented with his rule. Although still unlikely, the risk of a coup will increase as Egypt’s economic plight deteriorates further.