Assessing Egypt’s State Ownership Policy: Challenges and Requirements

More than thirty years after the launch in 1991 of the Economic Reform and Structural Transformation Program that was supposed to privatize much of Egypt’s state-owned economy, government interventions through laws and regulations remain so widespread that they virtually determine the level and composition of output in many economic sectors, even those in which the private sector owns majority stakes. In 2020, a Country Private Sector Diagnostic for Egypt by the World Bank’s International Finance Corporation reaffirmed that “the presence of SOEs [state-owned enterprises] in almost every sector feeds a perception of widespread activity and even overstretch, while the multitude of governing laws and ownership frameworks under which they operate makes their identification difficult and complex.” The following year, the International Monetary Fund (IMF) recommended that Egyptian state “centraliz[e] state ownership in a single entity” while exiting the rest of the economy. The severe financial and economic crisis that struck Egypt in early 2022 has pushed these issues to the forefront in an unprecedented manner.

In response, Egyptian Prime Minister Mostafa Madbouly announced in May 2022 that the government was preparing to remap “the state’s borders in the economy” with the aim of invigorating the private sector’s role. The government followed up in June by releasing a draft State Ownership Policy outlining its plan for the state to exit a number of economic sectors, reduce its role in some, and increase its role in yet others. It also launched consultations with the private sector and other actors with a view to producing a final draft, which was ultimately approved by the Council of Ministers on November 30, and by President Abdel Fattah el-Sisi on December 29. The original announcement of the draft State Ownership Policy coincided with the government’s ongoing talks with the IMF over a new loan, its fourth since 2016, suggesting that the new policy initiative was at least partly a public relations exercise. But even if only parts of the new policy framework are properly implemented, this could start to pry open the country’s political economy, improving prospects for further, transformative change.

However, the actual thrust and impact of the State Ownership Policy are open to question. The fact that it was only one of several economic policy frameworks announced by the government within ten months suggests a lack of policy coherence, and possibly of commitment as well. The most important of these initiatives was the Memorandum of Economic and Financial Policies (MEFP), which the government submitted on November 30 as part of its new loan agreement with the IMF. While the memorandum acknowledged the State Ownership Policy as its “structural benchmark,” in reality it promised a much larger scope of reforms in public financial and economic management. On the positive side, departing from the State Ownership Policy would negate it as a policy framework. Adhering to the State Ownership Policy, conversely, would effectively negate the memorandum. The generation of official strategies might in itself be the goal, however, rather than ensuring their mutual harmony and consistency. After all, the government had already committed to a structural reform agenda in agreement with the Organisation for Economic Co-operation and Development in October 2021, only months before drafting the State Ownership Policy and a mere year before submitting the MEFP to the IMF.

Similarly, the announcement by Madbouly in February 2023 that shares in thirty-two state-owned companies would be offered to private investors was presented as implementing the State Ownership Policy, but diverged from it in at least one key respect. Whereas the State Ownership Policy endorsed the Sovereign Fund of Egypt as its preferred vehicle for receiving private investments, Madbouly now announced that flotations would happen through the Egyptian Exchange or in bilateral negotiation with strategic investors. As Mada Masr correspondents Ahmed Bakr and Reham al-Saadany noted, the flotation list moreover represented “a repackaging of companies and assets that the government has been attempting to levy for foreign investment for the past five years.” This was a reference to the government’s half-hearted pursuit starting in 2018 of a partial privatization plan for twenty-three state-owned companies, which failed almost completely to materialize. Consequently, the government’s apparently ad hoc addition of half a dozen more companies for flotation in the weeks after its February 2023 announcement, and the unrealistic twelve-month time frame for completing the sales, only reinforced the impression of policy confusion and lack of either a genuine strategy or political will to confront the vested interests that had already blocked previous privatization efforts.

The same credibility problems apply to the State Ownership Policy itself. Having announced—and indeed implemented—a consultative process following its release of the draft document in June 2022, the government allowed the initiative to drop entirely from public view. There has been little evidence of political preparation among key economic and social groups—business, labor, civil servants—to support changes of the scope and scale envisaged. The government billed an economic conference it convened at the end of October as concluding its consultations on the draft policy, but in fact it was scrambling to respond to a passing comment from Sisi that he wanted the state to have its say on economic issues. In reality, there was minimal discussion of the State Ownership Policy during the three-day conference, which instead revolved around lengthy interventions from the president and the prime minister.

A line-by-line comparison of the first and final drafts of the State Ownership Policy moreover confirms that, apart from minor editorial changes to the text, the overall policy framework it contained and its modalities remained the same. The only substantive differences were the reallocation of a few activities between categories: from full to partial state exit, or to no exit, or vice versa. These specific changes were significant only in what they suggested about the economic interest groups that had presumably lobbied for them and about what the document’s authors regarded as permissible or not. Most significantly, the section that presents the rationale for maintaining—or even increasing—state ownership and intervention across the economy remains untouched.

Finally, the Egyptian government must tackle major challenges if it is to make a success of the State Ownership Policy. This is a big “if.” As the essays in this compendium show, the means of financing the policy are murky and uncertain. Selling shares in profitable state-owned companies may be the government’s only means of raising badly needed capital, but would deprive it of part of an assured revenue stream. The Sisi administration’s heavy bias toward investment in nontradable sectors has further impeded productivity and profitability increases in tradable sectors, while widening the disconnect between the country’s need for investment capital and the economy’s ability to generate it. Delays and pull-outs have already beset negotiations with “strategic investors” among Egypt’s partners and allies in the Gulf. Last but not least, a bifurcated strategy that applies only to civilian state-owned entities, but exempts the military (whether de jure or de facto), is more than likely to deter the private sector uptake that the State Ownership Policy ostensibly seeks.

Its fundamental flaws and discrepancies aside, the State Ownership Policy appears far from sufficient to resolve the crisis facing Egypt. Crucially, the real problem is one of intention and credibility: To what extent does the government actually have the will or, as worryingly, the capability, to implement the MEFP in the face of deeply entrenched and politically powerful actors, including the president and an economically active military?

Investing in Egypt’s Future, or Selling Family Jewels?

The release of Egypt’s draft State Ownership Policy (SOP) in May 2022 was in retrospect remarkably timely. Announced shortly after the government commenced negotiations with the International Monetary Fund (IMF) for its fourth loan in six years, worth $3 billion, the SOP was later endorsed as the structural benchmark for the new IMF program. The policy was finalized in December 2022 and helped trigger the IMF extended arrangement. However, this event reflects limited confidence in the Egyptian economy, as the country has previously negotiated arrangements of up to $12 billion and has received significantly more “hot money” inflows from purchasers of its sovereign debt following previous IMF loans. Facing the need to repay the IMF $17 billion over five years, to say nothing of the costs of servicing its other debts, the government has little choice but to sell public assets. In early February 2023, it announced that stakes of thirty-two state-owned enterprises would be sold by March 2024.

The sequence and timing of these events raises interrelated questions. Are the privatizations essentially unanticipated fire sales needed to ward off default, fortuitously legitimated by the SOP? Or are the economic pressures facing Egypt simply providing the government with an opportunity to implement a predetermined strategy to begin to transform the economy? The SOP lists objectives that are suggestive of Egypt’s strategic ambitions. These broad objectives include consolidating the role of the private sector in economic activity, creating an economy conducive for investments, and defining the state’s presence in the economy. And they are accompanied by specific targets, such as increasing investment to 25–30 percent of the gross domestic product and raising economic growth to 7–9 percent, having the state assume primary responsibility in sectors unattractive to private capital, and achieving financial stability while expanding social safety networks.

But is this just verbiage, merely intended to appeal to the IMF? Whether verbiage or genuine policy commitments, what does the privatization plan announced in February indicate for the future of Egypt’s political economy? Will the economy flounder or prosper? Will the state be able to withstand political backlashes from citizens negatively affected directly or indirectly by the sale of national assets? If implemented fully, the privatizations will clearly have tangible impacts on future purchases of Egypt’s sovereign debt, on relations within and between various categories of investors, and on flows of rents to regime insiders (whether they are privileged military or security officers or civilian cronies).

Sectors Targeted for Full Privatization

A number of the thirty-two companies offered for partial sale may reasonably be characterized as some of the country’s “family jewels”—those that have long been among the most profitable of state-owned enterprises. But it is not just the companies, but also the sectors in which they operate, that reveal the government’s intentions and the possible consequences of the SOP. These sectors are banking and finance, real estate, tourism, logistics, medical and pharmaceutical, electricity generation, and carbon-intensive processing. The two outlier companies listed, Safi and Wataniya, are military-owned; they fit into none of these sectors, as the former produces bottled water and the latter sells fuel to motorists. Neither of these activities has been listed for privatization in the SOP, but presumably the two companies are included to meet the IMF’s requirement to privatize some military-owned assets. The companies can be easily disposed of because they are not of vital interest to the military or the state.

These are all sectors that both public and private investors from member states of the Gulf Cooperation Council (GCC) have previously entered or indicated a desire to do so. The United Arab Emirates’ sovereign wealth fund, for example, has already acquired substantial stakes in Egypt’s medical and pharmaceutical sector and in logistics. But the Egyptian government’s new offer is even more enticing than previous ones, which suggests that it desires to attract more substantial investments from the GCC and that it does not anticipate much interest from other foreign sources. Further, official statements about the method of privatization point to a preference for purchases in foreign currencies by anchor investors rather than purchases through initial public offerings (IPOs) on the Egyptian Stock Exchange, which would be in local currency. This preference implies not only that Egypt is in profound need of foreign exchange, but again that the prime target is GCC investors. Going on past experience, GCC investors are less likely than novice investors or multinational corporations to be deterred by holding significant but nevertheless minority stakes in companies in which the government remains the majority shareholder.

Companies to Be Partially Privatized

Even partial sales of the particular companies on offer will deprive the government of future revenue flows while steering rents into private hands. In the banking and finance sector, the banks on offer include Banque du Caire, United Bank of Egypt, and Arab African International Bank—all of which are quite profitable. Their financial success, however, is due primarily to the generous spread between interest paid on deposits and interest received from investing in Egypt’s sovereign debt, which typically constitutes about half their loans. That spread based on bank overnight deposit rates and interest paid on treasury bills (T-bills) has in the last year been as high as 7 percent. The banks have obvious potential to rapidly expand their customer base and hence profitability. Only about one-third of of adult Egyptians have bank accounts, while almost half of the country’s small and medium-sized enterprises (SMEs) do not have access to credit. Moreover, the government refuses to license new banks, thereby increasing the profitability and attractiveness of the almost forty in operation.

By offering to privatize 20–30 percent of these banks’ shares, the government will be forgoing the profits it earns by placing T-bills with them—profits that presently offset some of the interest paid to service the national debt. Whether this opportunity cost has been deducted from the estimated profits that privatization is expected to bring is not clear, but it is a cost that will undoubtedly increase the government’s need to obtain foreign currency.

In the insurance sector, the two companies on offer are Misr Life Insurance and Misr Insurance; the former is the country’s largest issuer of life insurance policies and the latter enjoys a monopoly over insurance in the vital energy sector. Both are presently 100 percent state-owned and have significant real estate holdings, many dating back to former president Gamal Abdel Nasser’s socialization measures in the early 1960s. Like the banks, they potentially offer substantial profitability to those who gain a share of their ownership and benefit from the realization that capital is languishing in undervalued real estate. Also like the banks, the insurance companies’ profitability is guaranteed by the government itself, as about half of the total capital invested by insurance companies is in government debt.

In the real estate and tourism sectors, the companies on offer are similarly attractive. They include the country’s most famous historic hotels, such as the Old Cataract, Winter Palace Luxor, and Mena House. And, reportedly, purchasers will be able to construct new hotels on valuable land adjacent to the existing ones. According to the same source, tourist nights are moreover projected to more than triple by 2025 from the low of 43 million in 2020, suggesting that the seven hotels on offer will likely experience substantial, almost immediate growth in profits.

Possibly the most attractive offerings include those companies engaged in extracting or processing hydrocarbons or utilizing the energy they generate to produce chemicals, plastics, cement, fertilizer, and iron and steel. Because the companies have been able to purchase natural gas from the government at subsidized prices and export much of what they produce, they have reaped substantial profits. Companies producing electricity may also be attractive, in that the main ones can purchase natural gas at about $3 per million BTUs, just slightly more than the Henry Hub price, which was the world’s lowest as of March 2023. But acquiring partial shares of the Beni Suef Power Plant, built by Siemens and operating on natural gas, poses risks to potential purchasers. They could be squeezed between a higher price for gas coupled with fixed rates for consumers, both of which are in the government’s interest.

Moreover, prospective purchasers in the energy sector will have to assume responsibility for the debt of some $2 billion owed to foreign financial institutions, chiefly those in Germany. How the German government and its taxpayers will respond to the partial sale of companies that received funds as part of development assistance to Egypt—because the loans were guaranteed by Berlin—remains to be seen, but this could be an additional complicating factor. The two wind-powered plants on offer base their rate of return on the feed-in price to the national grid. The government has already backtracked on a commitment to set relatively high prices to attract investment in wind turbines and solar farms, and it will likely maintain this stance to avoid further inflation and popular backlash.

Implications

As the above analysis suggests, the Egyptian government has zeroed in on Gulf-based investors to purchase, using foreign currency, minority shares in generally profitable companies in key sectors of the economy. But vital questions remain unanswered. Some have immediate relevance for those transactions, while others pertain to the longer-term economic and political consequences.

Several key questions have to do with rents and regulations, prime determinants of the profitability of many, if not all, of the companies on offer. For example, will rents in the form of low prices for fuel continue at present rates once privatization commences? Will regulatory frameworks, currently intended in part to protect consumers from inflation, be relaxed to permit increased profitability? Will the government provide any guarantees to prospective purchasers on these matters? If so, how will the government justify them in cases when publics are negatively affected by increased prices and foreigners benefit as a result?

The most immediate question relates to the exchange rate at which anchor investors will purchase shares. In February 2023, a dispute over the rate stalled negotiations between the Saudi sovereign wealth fund and the government of Egypt for the purchase of the United Bank. Offering the Saudis a more favorable rate would add downward pressure on the Egyptian pound, and Egyptians who are struggling to cope with inflation and other consequences of the shortage of foreign currency would view the deal as preferential treatment of Saudis over Egyptians. Clearly, difficult negotiations lie ahead between the government and prospective purchasers. Whether those negotiations are at least semi-public or entirely private will serve as a measure of the government’s sensitivity to potential political backlash and the balance between repression and openness in how it explains privatization to its citizens.

Other immediately relevant questions are economic in nature. Will the foreign exchange inflows generated by partial privatizations be enough to cover the substantial funding gap that has grown partly because of the smaller IMF extended facility and the much lower likelihood of new hot money? The privatizations are currently estimated to generate between $2.5 billion and $4.6 billion in 2023–2024, considerably less than what is needed given an estimated financing gap of some $5 billion by summer 2023. But might the foreign exchange inflows have sufficient positive impacts on the exchange rate and inflation to stimulate new foreign investments in Egypt’s sovereign debt? How much of the companies’ current revenue will be forgone because of the partial privatizations? Will there be inflationary impacts due to anticipated adjustments to regulatory frameworks?

Structural aspects of the political economy will also become more relevant in the wake of the privatizations. For instance, the “missing middle” syndrome of an economy with a few very large firms, masses of small ones, and comparatively few medium-sized ones might be lessened, but not resolved. This is due primarily to “segmentation” of the political economy, as Amr Adly terms it, and to its “division between insiders and outsiders,” to use Steffen Hertog’s language.¹ To address the missing middle syndrome, the Egyptian government would need to level the economic playing field by reducing or eliminating rents and removing regulations that benefit large firms—as called for in the country IMF Staff Report. The desire to sell shares in state-owned enterprises at the highest possible price could, however, work against such reforms by reducing those firms’ profitability and hence their appeal to potential investors.

In fact, privatization could reinforce existing gaps in size, wealth, and market shares between large, capital intensive firms and SMEs. The announced privatization plan suggests that the government prefers to “go big” rather than address the constraints presently preventing the growth of SMEs. If concerned with the latter, the government would prefer IPOs on the Egyptian Stock Exchange over sales to anchor investors. Stock flotations would attract local capital, presumably from within market sectors, thus helping to integrate SMEs. Different, and in some cases conflicting, economic interests of SME owners and large enterprise owners will, in the wake of sales to GCC investors, be reinforced by nationalist backlashes.

A shift from the production of nontradable to tradable goods is similarly unlikely to be propelled by privatizations, except in the sectors directly connected to hydrocarbons. Other sectors such as real estate or pharmaceuticals are inherently nontradable or depend heavily on imported intermediate goods. But the hydrocarbon downstream sectors will generally face the challenge of shifting to green energy, which is likely to include special levies—at least in the European Union—on imports of steel, fertilizer, cement, and other products produced by carbon-intensive methods. Egypt’s comparative advantage based primarily on natural gas will thus be eroded, and ultimately, the country will be forced to convert to green energy. But that requires capital and technological upgrades that the country cannot currently provide. Lastly, why should Gulf investors assist with these upgrades in Egypt rather than at home? In sum, at least this first round of partial privatizations will do little to address the structural balance of trade deficits by shifting production to tradables.

A further implication is that the SOP is unlikely to substantially reduce the military’s dominant role in the economy. Only two military-run companies are slated for partial sale during what is purported to be an initial privatization round that will last for more than a year. This suggests that the Egyptian government is buying time on this sensitive matter. Perhaps it hopes that the IMF will lose interest when and if the economy improves. In addition to the government’s reluctance to privatize military assets, the privatization process itself could reinforce the military’s role in the economy. The process will create shared interests between investors and officers, not only in companies formerly owned fully by the military but also in civilian state-owned enterprises as well. This is because intramilitary linkages of the “Officer’s Republic” penetrate much of the political economy and because investors in substantial enterprises typically must operate within settings shaped by these linkages.

A parallel move in December 2022 by Parliament to transfer revenue from the operations of the Suez Canal to a special fund that President Abdel Fattah el-Sisi stated would be under a “sovereign entity”—a designation normally taken to mean either the military or the General Intelligence Service—reinforces the impression that the intent of the SOP is not to divest the military of significant economic assets, but rather the opposite. Also suggestive is that the government continues to assign the military key roles in major land reclamation projects.

The SOP is not likely to bring about fundamental political changes either. GCC investors, especially sovereign wealth funds, will be driven by both geopolitical and economic interests, possibly creating tensions between them and Egyptians. At the least, ownership of major slices of the economy by a mix of foreigners and Egyptians will present obstacles to achieving a more coherent, united bourgeoisie that has both the interest and the clout to propel liberalization of the political economy. The preference for anchor investors over IPOs means the plan forgoes the historic opportunity to broaden the shareholder base and help boost a rising middle class. The need to attract capital into large firms in key sectors will make increasing profitability a priority over meeting labor and consumer interests, thus exacerbating inequality.

On the Brink of a Slippery Slope

The SOP is yet to be implemented, and therefore, the overall indication that selling national assets will not guarantee a bright economic future for Egypt is theoretical rather than empirical in nature. Many questions remain. For example, on balance, will the partial sale of state-owned assets produce only short-term gains while imposing long-term costs on the political economy? Or will it serve to enliven dead capital and improve economic growth rates, possibly with attendant trickle-down effects to the broader population?

Present indications suggest that, at a minimum, the initial privatizations will not redress fiscal and trade imbalances. But they could improve the imbalances enough to stimulate a flow of investment into sovereign debt and even attract some foreign direct investment, including in promising new sectors such as agribusiness and Suez Canal–based logistics. If this improvement does not happen, more state assets will have to be sold, thus further aggravating the likely tensions induced by the first round of privatizations.

Egypt is on the brink of a slippery slope. It is precariously balanced there, while its leadership hopes that, by selling valuable assets, it will not be forced by dire economic conditions to truly liberalize and civilianize the political economy. But reforming the economy will be vital for the country’s future, and so the real test of the SOP is whether it furthers this outcome or not.

Notes

¹ Amr Adly, Cleft Capitalism: The Social Origins of Failed Market Making in Egypt (Palo Alto: Stanford University Press, 2020); and Steffen Hertog, Locked Out of Development: Insiders and Outsiders in Arab Capitalism (Cambridge: Cambridge University Press, 2022).

Is Egypt Too Big to Fail or Too Big to Bail?

The economic and financial crisis that struck Egypt in 2022 generated considerable discussion about causes and solutions. While many observers continue to emphasize the need for more growth, there has been little understanding of why national investment is so low, particularly from the private sector.

This is evidenced by the International Monetary Fund’s (IMF) latest loan agreement with Egypt, which programs investment rates much smaller than those in the government’s projections and assumes improbably high growth rates. Arguably, the previous IMF agreement launched in 2016 not only did nothing to improve the investment climate, but in fact indirectly allowed it to deteriorate. There is stronger understanding now within the international community that for economic growth to be larger, the private sector must be more dynamic. Consequently, any reform agenda aimed at increasing economic growth needs to provide the domestic private sector with both incentives and the ability to invest in the country’s future. There is also an understanding that this requires limiting the military’s role in the economy to reduce competition. In addition to a level playing field, this should include more access to finance. But Egypt’s national savings level is very low. To revitalize the economy, there must also be inducements for all economic agents to save sufficiently so that the country can finance larger investments.

Improbable Expectations and a Flawed Policy Framework

Through its new State Ownership Policy, and its Memorandum of Economic and Financial Policies, which together are regarded as the structural benchmarks of the current IMF agreement, the Egyptian government aims to increase investment rates to somewhere between 25 and 30 percent of the country’s gross domestic product (GDP). The government expects this increase to then generate high economic growth rates, from 7 to 9 percent per year over the medium term. By comparison, the IMF Staff Report that lays out the agreed-upon policy framework projects a more realistic rise in investment rates (from 12 percent of GDP in 2022 to 14 percent of GDP five years later) but anticipates an almost equally ambitious growth rate of about 6 percent.

The difference between the government’s ambitious investment aspirations and the more conservative expectations embodied in its deal with the IMF can be interpreted charitably as a difference in opinion on what is feasible. Less clear, however, is why the two sides expect similarly high economic growth rates. At least the government’s expectation of a 7–9 percent growth rate is consistent with its aspiration for a high investment rate. The IMF’s expectation of Egypt’s growth is inconsistent with its projected low investment rate, which is perhaps even more problematic.

In 2016, the IMF had anticipated a growth rate of 5 percent in its $12 billion loan program to Egypt. This rate could have also been considered oversized in relation to the level of investment projected then, which was 14 percent of GDP. While actual growth over the period covered by the program ended up close to this target, at 4 percent, the IMF acknowledged in its own evaluation of the program that this relatively good performance was due not to reforms and autonomous growth, but to the lucky discovery of offshore gas in 2019, which buoyed the growth rate for a few years. While further surprises cannot be ruled out, no such windfall was on Egypt’s horizon at the start of 2023.

The bottom line is that the Egyptian government’s aspirations seem overly ambitious (the investment rate cannot realistically be doubled in five years), and the IMF’s projections are inconsistent (growth cannot be so fast with such low investment). A cynical view is that both parties projected high economic growth rates in order to convince their respective constituencies that even though Egypt’s public debt to GDP ratio is very high at close to 100 percent, this ratio nonetheless stands a good chance of falling over time. With an economic growth rate high enough, debt ratios automatically decline.

A more realistic scenario, however, is that investment rates increase to the level projected by the IMF, but growth rates remain lower at around 3–4 percent. What is currently termed a base case macro scenario is too optimistic. In a realistic base case, public debt is not sustainable; hence, external debts of around $155 billion should be restructured prior to an IMF bailout—a difficult and protracted challenge that would unsettle the international bond market. In assuming a high growth rate, the IMF has made it easier for its board to turn a blind eye for the time being and thus extend support to a country often described as politically too big to fail.

But the reality is that Egypt may be becoming too big to bail. The IMF ended up putting very little of its own money on the table. A popular saying in financial circles has it that “if you owe the bank $100 that’s your problem; but if you owe the bank $100 million, that’s the bank’s problem.” Since Egypt is already the IMF’s second-largest borrower worldwide, it risks becoming, like Argentina, the “fund’s problem.” Given the situation, the $3 billion loan that was finally extended was a compromise: it got the IMF off the political hook, at least in the short term, while keeping its financial exposure manageable. But by kicking the can down the road, that loan leaves Egypt with a hugely underfunded program and unsustainable finances. In all likelihood, the program will not evolve in a satisfactory manner and will have to be renegotiated sooner rather than later. Indeed, unless an unlikely exogenous positive shock occurs, renegotiation may have to take place in the context of a large-scale restructuring of Egypt’s debt.

Seven Years for Nothing

In 2016, Egypt’s foremost economic problem was its poor growth performance due to a low investment rate. The IMF program launched in that year was supposed to both stabilize the Egyptian economy and start fixing its structural defects in order to raise investment, growth, and job creation. Low investment in Egypt was, and still is, a problem of low private investment. World Bank and IMF data show that this investment has reached incredibly low levels (see figure 1). Although never as elevated in Egypt, private investment rates stood at the respectable level of around 15 percent of GDP in 1989 and in 2008. Since 2008, however, private investment rates have declined massively—to 10 percent of GDP in 2011, and to 7 percent in 2014, the year Abdel Fattah el-Sisi became president. And instead of rates rising thanks to the 2016 IMF program, they actually dipped further under his administration. After a brief increase in 2018 and 2019, the investment rate sank to 2 percent by 2021. No economy can be sustained on such a catastrophically low level of private commitment. For comparison, private investment currently stands at 37 percent of GDP in China, 22 percent in India, 20 percent in Ethiopia, and 11 percent in low-growth Pakistan.

The lack of dynamism in Egypt’s economy is also reflected in the poor performance of exports, since it is almost exclusively private firms that export. Since 2014, exports of goods and services have hovered around $50 billion annually (on average, merely 15 percent of GDP). Worryingly, the business climate has been so poor that even the grave devaluation of the Egyptian pound in 2016 failed to elicit a supply response and a sustainable rise in exports. This is especially significant because external debt grew by around $100 billion in the same period; the gap between interest due on external debt and ability to pay as measured by export revenues has been widening almost exponentially, especially since 2016 (see figure 2). This disconnect between a rise in borrowing and a stagnant ability to repay is at the heart of the current financial crisis.

In retrospect, this disconnect appears to have been exacerbated by the IMF program of 2016. The feel-good factor it generated improved Egypt’s credit rating and allowed the country to borrow massively and live beyond its means for the next seven years. Global and domestic markets bought into the idea that a strong national leadership with IMF backing was a guarantee of economic strength. But rather than help support reforms and finance productive investments, the IMF’s program allowed the Egyptian government to borrow more and delay politically costly reforms that could have nonetheless unleashed sustainable growth. Instead of making vital reforms, the government invested massively in large infrastructure projects, which generated some immediate economic activity but did not significantly increase national exports. This temporary breathing space allowed the regime to continue to ignore the needs of the private sector.

This quasi-repression of the private sector is not a new phenomenon in Egypt, but it has worsened in recent years. Former presidents Anwar Sadat and Hosni Mubarak did not trust private businesspeople, fearing that this cohort could develop into an autonomous political force that would threaten the government’s hold on power. But when debt crises compelled the presidents to roll back the state, the economy had to be opened up to private enterprise. Sadat initiated a policy of infitah (openness), which started to move the economy away from former president Gamal Abdel Nasser’s socialism. Mubarak built up a friendly, albeit crony, private sector, more notable for its political loyalty than for its capitalistic dynamism. Still, in retrospect, one cannot but feel some nostalgia for the oligarchs that led Egypt’s modest modernization drive of the 2000s. Seven years after the launch of the 2016 IMF program, the country is nearly $300 billion deeper in public debt; even the cronies were considerably more innovative than the military businesses that the Sisi presidency has freed of financial constraints.

The Failure of All Economic Actors to Save for a Better Future

Besides politically driven marginalization, the private sector also experiences financial repression as its needs are crowded out by the large financing needs of the public sector. This effect has grown with time, in part because the state has increased its borrowing to refinance growing debt, but also because the pool of savings has shrunk. According to IMF statistics, in 2022, Egypt had one of the lowest rates of national savings among large countries—9 percent of GDP compared to 45 percent in China, 34 percent in Nigeria, 33 percent in Indonesia, 30 percent in India, and 25 percent in ultra-poor Ethiopia. The rate in Pakistan is closer, but still over 1.5 times higher, at 14 percent.

Today’s national savings rate is probably the lowest in Egyptian history. In the early 1990s, when the first wave of economic reforms started, it was 35 percent. But then it declined to 23 percent in 2006 under the “businessmen cabinet” dominated by Mubarak’s son, Gamal, which marked the zenith of the crony capitalism phase (see figure 1). It has since been on a continuous slide, dropping to 17 percent on the eve of the 2011 uprising, collapsing to 12 percent by the time Sisi took office in 2014, and dipping dangerously to an even lower level in recent years.

Low national saving rates reflect two distinct phenomena: large dissaving by the government and low household savings. Dissaving is spending more money than is earned. Its consequences are visible everywhere in Egypt in the form of run-down infrastructure, poor-quality education, and increased air and water pollution. And it highlights the huge opportunity cost of splurging on a new administrative capital, which has at best a very long-term return. Resources being spent on the capital could be better invested in productive assets capable of generating and sustaining higher productivity, more jobs, and higher incomes. Low and falling savings also reflect a population that lives increasingly “from hand to mouth.” As poverty deepens and liquidity becomes scarcer, individuals—and institutions—are tempted to erode assets to improve their short-term welfare, even at high future costs. The 2016 devaluation of the Egyptian pound reduced real wages by 40 percent over the following three years, pushing the poverty rate up to over 30 percent of the population. The devaluation of nearly equal magnitude that took place in 2022 will have even worse effects.

A fast rise in the private savings rate under Egypt’s present conditions would likely result from a steep fall in consumption, implying a further deepening of poverty. Public deficits are already programmed to fall and therefore produce a primary surplus of 2 percent of GDP; but, in the absence of debt relief, it is hard to do more in this regard after years of cutting social expenditures. Furthermore, debt service consumes around 50 percent of public expenditures, according to current projections. Thus, to refinance public debt, the amount of credit going to the private sector would have to be heavily restricted. Indeed, the IMF projects that extend credit to the private sector will barely expand over the duration of the program. A good solution would be to attract foreign direct investment (FDI), and the IMF plays this card as aggressively as possible, doubling its projection of FDI to Egypt from the current level of $8 billion annually to $16 billion annually within five years. But the underlying assumption is that the government will raise a total of $8 billion by privatizing state-owned enterprises, which is likely to meet domestic opposition.

Can a Gloomy Future Be Avoided?

Where does this leave Egypt? The program outlined in the current IMF loan agreement lacks credibility, which is reflected in its cold reception in capital markets. This means that, unlike in 2016, it will be harder for Egypt to attract new capital flows at reasonable interest rates. It also means that domestic debt, which represents two-thirds of public debt, will become increasingly costly to refinance. Capital controls will be needed to keep interest rates from rising too much but will make it harder to attract remittances from Egyptians working abroad, currently the country’s principal source of hard currency. At the same time, the banking sector is at risk of weakening. In more than one way, Egypt is following in the footsteps of Lebanon, moving toward a financial meltdown and hyperinflation.

There is no easy solution at this point. Egypt’s situation is very precarious. An obvious question is how much will it cost to keep Egypt’s economy afloat if GDP grows at only around 3 percent per year, close to the population growth rate? It is hard to say, but given the size of the country, the bill will not be cheap. Among large developing countries, only Pakistan presents a problem on the same order of magnitude. The risk of Egypt becoming too large to bail is all too real, especially as funding is becoming scarcer because of rising budget constraints worldwide.

A responsible leadership would make economic growth its central goal, not a peripheral task left to technocratic ministers (no matter how competent they are). Such a leadership would work hard to construct a national coalition for reforms that can unleash productivity and innovation. The road would be painful, but no more so than the alternative low-growth path that could lead to the economy’s “death by a thousand cuts.”

Crowding Egypt’s Private Sector In, Not Out

Before the economic and financial crisis hit in 2022, much had been made of Egypt’s growth rate, which weathered the first year of the coronavirus pandemic comparatively well. The country’s gross domestic product (GDP) averaged 4.38 percent annually from 2016 to 2021, representing a substantial improvement on the average rate of 2.97 percent from 2011 to 2016 and coming close to the average of 4.67 percent from 2002 to 2011, a period with the highest growth rates since the 1970s. But in the first quarter of 2022, the massive capital flight of $20 billion, equivalent to approximately 50 percent of Egypt’s official foreign reserves, revealed that the seeming economic recovery of the preceding six years had been precarious. Moreover, it compelled the government to seek another bailout from its Gulf partners and the International Monetary Fund (IMF), similar to the one extended from 2013 to 2016.

The sectoral composition of Egypt’s economic recovery is crucial to understanding the country’s chronic vulnerabilities and especially its persistent need for foreign financing despite rounds of IMF-sponsored reforms. Much of this need can be traced to the state’s primary use of nontradable sectors for recovering from the severe economic and financial crisis that followed the 2011 uprising. According to economist Arnold Harberger, nontradables include “services where the demander and producer must be in the same location, and commodities which have low value relative to either their weight or volume”; thus, they are not traded internationally. In Egypt, heavy state investment in construction, real estate, and associated feeder industries generated fairly high rates of growth and employment from 2013 onward. But because these nontradables neither increased exports nor replaced imports, they failed to address Egypt’s external position and the need to generate or save hard currency.

Although many economists highlighted the shortcomings of this recovery strategy, the state did not change course. Starting in 2014, it prioritized nontradable sectors, despite the potential economic pitfalls. The underlying rationale was largely political: alongside the search for revenue, legitimizing the post-2013 regime and cementing the ruling coalition were paramount.

Fiscal Situation

The challenge of Egypt’s external position is reflected in its current account balance, which remains below its pre-2011 levels (see figure 1). The devaluation of the Egyptian pound (EGP) in 2016 quickly helped cut the deficit from 6 percent to 3 percent of GDP, but it has stagnated at that level or worsened slightly since 2018, especially as the economic recovery has increased demand for imported inputs.

The country’s persistent current account deficit can be understood in light of two related but distinct forces. First, the trade balance has hardly improved since 2016 despite the massive EGP devaluation. As figure 2 shows, the trade deficit has remained virtually unchanged, indicating a general inelasticity of imports and exports alike. Second, the country’s financing gap continues to be filled by a growing external debt, whose stock as a percentage of gross national income (GNI) more than doubled from 15.4 percent in 2015 to 36.67 percent in 2020. And this has placed additional pressure on the current account, as foreign debt service doubled during the same interval from 1.17 percent to 3.9 percent of Egypt’s GNI.

The 50 percent depreciation of the EGP vis-à-vis the dollar between 2016 and 2019—which came at a tremendous social and economic cost, as it fueled inflation for Egypt, a net importer of food and energy—was woefully inadequate for mitigating the structural weaknesses in the country’s tradable sectors. Similarly, the construction and real estate sectors did not attract significant foreign direct investment (FDI). According to a 2020 report by the Organisation for Economic Co-operation and Development, the share of construction and real estate in total FDI inflows in 2016 was 1.5 percent and 3.6 percent, respectively, compared to 53.5 percent in oil extraction.

This performance was not inevitable. The state could have prioritized tradable sectors and pursued industrial deepening to reduce the import intensiveness of its productive sectors (manufacturing and agriculture) and promote exports. But the bias toward nontradables is obvious when comparing the average annual growth in the construction and real estate sectors with manufacturing (excluding oil refining), as shown in table 1.

Table 1: Growth Rates, Select Sectors
Annual Average/ Sector	2007–2011	2012–2016	2017–2020
GDP growth rate	5.17	2.65	4.39
Construction sector	11.42	5.14	4.70
Real estate sector	3.70	4.39	4.23
Manufacturing sector (excluding oil refining)	4.15	5.40	3.32
Source: Author’s calculations based on data from “GDP at Factor Cost (Constant Prices),” Central Bank of Egypt, accessed April 6, 2023, https://www.cbe.org.eg/en/economic-research/time-series/downloadlist?category=DEF6421CA1354B128A1113D7A5BBFC66.

A Political Economy of Bad Policy Choices

From the outset, the Egyptian recovery strategy was shaped by the chronic fiscal crisis the country faced. On the one hand, despite concerted efforts, the state was unable to raise the ratio of tax revenues to GDP, which stagnated around 13.67 percent between 2015 and 2020 according to Central Bank data, markedly lower than the average ratios for countries like Turkey and Morocco (19.94 percent and 17.61 percent, respectively, based on corresponding World Bank data). On the other hand, the IMF deal in 2016 required austerity measures in order to slash the budget deficit, limiting the fiscal space for public investment. The subsequent bias toward construction and real estate allowed not only state control over the planning, but also the allocation and use of desert land as a main means of generating revenue streams and the expansion of extra-budgetary spending.

The recovery strategy therefore depended heavily on consolidating state-owned assets for their progressive monetization and securitization. It was in this context that the Sovereign Fund of Egypt was established in 2018 and the New Administrative Capital was launched as an extra-budgetary project. Similarly, in 2019, the New Urban Communities Authority (NUCA) concluded a 4 billion pound (around $260 million in 2019 exchange rates) securitization bond with a substantial investment from the European Bank for Reconstruction and Development, and in 2022, it leveraged its huge “bank” of desert land to issue the largest securitization bond program in Egypt, worth 20 billion pounds (around $800 million in 2022 exchange rates).

Generating money was not an end in itself, however, but rather a means to legitimize the ruling regime. Moreover, targeted nontradable sectors such as the construction of housing and infrastructure, including what Egypt researcher W.J. Dorman calls large-scale “edifice projects,” helped in simultaneously achieving two goals. First, these megaprojects promised a quick recovery from the severe economic and financial crisis in the aftermath of the 2011 revolution, fulfilling a political priority, regardless of the strategy’s sectoral composition. Second, official leaders presented the megaprojects as visible proof of national achievements, deploying what political scientist Robert Springborg has dubbed the “wow” factor.

Construction and real estate activities were significantly easier to coordinate and implement in a shorter time. They allowed the state bureaucracy to do what it knew, rather than what it needed to do. Since the late 1970s, the state has been building new towns and cities in the desert and fully controlling the supply of desert land, enabling it to maintain the upper hand in mobilizing private developers toward the task. An alternative strategy of industrial deepening or export upgrading would have required significantly heavier institutional investment to coordinate action and monitor the performance of private producers, who control nearly 96 percent and 100 percent respectively of the manufacturing and agricultural output in Egypt.

Finally, the heavy emphasis on nontradables emerged as a means for building and maintaining a political coalition, A prime example is the Administrative Capital for Urban Development (ACUD), whose ownership structure is almost equally divided between NUCA (51 percent) and the Ministry of Defense (49 percent). ACUD enjoyed a 170,000-acre land bank as of February 2023. Access to these vast tracts of land was used to attract foreign capital holders, including members of the Gulf Cooperation Council and Chinese investors. Paradoxically, in responding to its chronic fiscal crisis by expanding extra-budgetary spending, the administration that emerged under President Abdel Fattah el-Sisi after 2013 purposefully crowded in, rather than crowded out, the private sector.

Crowding In, Not Crowding Out

Liberal critique of the state’s, especially the military’s, increasing involvement in the economy has largely focused on the supposed crowding-out effect on the private sector, both internationally and domestically. But military-affiliated actors and other state agencies have hardly displaced private sector real estate developers, let alone replaced them. In fact, they have depended fairly heavily on the private sector to finance huge real estate development and construction projects. Therefore, contrary to the conventional view, the state has been crowding in private investment and household savings to help finance nontradables.

Official Egyptian statistics distinguish between the construction and real estate sectors. Whereas the former refers to the physical building of houses as well as infrastructure and public works, the latter predominantly refers to services, including marketing and sales, advertising, and property-related activities. Intuitively, the construction sector is significantly larger than the real estate sector. Calculating from data provided by the Central Bank of Egypt, construction accounted for an average weight of 4.54 percent of GDP during the 2015–2020 period, while real estate accounted for 2.94 percent, for a combined total of 7.48 percent.

Both the construction and real estate sectors, especially housing, have historically been dominated by private sector actors. This has been the case particularly in the real estate sector since 2014. Between 2015 and 2020, the share of the private sector in real estate averaged 96.9 percent of total output, compared to 95.83 percent between 2005 and 2011. Many of these private actors are small and medium-sized enterprises, whether individual contractors or family-led, and often function in the informal economy. A few large developers cater for high-income customers and produce the highest-value units, typically found in gated communities and compounds in Cairo’s suburban areas.

In the construction sector, there has been noticeable, albeit not dramatic, change since 2014, especially given the increased investment in infrastructure. Between 2005 and 2011, the private sector share of annual output averaged 88.95 percent. The period 2011–2013 was too unstable to be accounted for, but between 2015 and 2020, the average private sector share shrank to 81.33 percent, primarily because of the boost to state investment in infrastructure. Nonetheless, it is noteworthy that the construction and real estate sectors overall have remained largely in private sector hands. Moreover, the rising role of the public sector since 2015 has masked a division of labor between the state and private developers that has reflected a partnership, albeit uneven, rather than a crowding out.

In this vein, the New Capital City (NAC), the crown jewel of Sisi’s state-led development project, has depended on attracting private investment from both domestic and foreign sources. In October 2022, ACUD’s president estimated private investment in the megaproject to be 300 billion pounds (the equivalent of $12 billion at the time) and government spending on infrastructure to be at least 80 billion pounds (around $3.2 billion). A stark example of the premium placed on attracting large private developers involves the Talaat Moustafa Group, Egypt’s largest real estate developer by far. Its chairman, Hesham Talaat Moustafa, was sentenced in 2009 to fifteen years in prison for murder but received a presidential pardon in 2017; a few months later, the group announced the purchase of 500 acres of land for development in the NAC for 4.4 billion pounds (around $290 million in 2017 exchange rates).

The NAC demonstrates an investment model in which state agencies sell overpriced plots of desert land to private developers for the construction of high-end housing and commercial units. The developers sell “off-plan” units to final customers, usually affluent Egyptians, whose monthly or quarterly installments finance the building process over periods that may extend anywhere between seven and thirteen years. These cash flows enable developers to pay their own installments thanks to the state agencies involved, most prominently NUCA or the NAC, which the agencies in turn use to finance infrastructure projects outside the official state budget.

From the Sectoral Economy to the Macroeconomy

Whether it is civilian or military-affiliated state agencies at the top of the development hierarchy is of secondary importance in assessing Egypt’s development model over the past decade. More important are the composition of sectors supporting the country’s growth and employment and the preponderance of nontradable sectors. The real problem lies in the state’s engineering of artificial shortages in desert land, leading to overpriced plots that do not create much value-added to the economy let alone improve the country’s chronic external financial gap. How the state and private sector developers share the rent generated through this speculative mechanism depends on the sector and should not obscure the macroeconomic shortcomings that characterize the overall development model pursued in Egypt.

The bias toward nontradables, especially high-end real estate, converts meager domestic household savings into overpriced real estate assets that are not used for any further productive purpose—and thus represent “dead capital.” According to World Bank data, Egypt’s gross savings ratio to GDP averaged a mere 13 percent from 2010 to 2020, compared to 26 percent for the rest of the Middle East and North Africa (excluding high-income countries) and to 28.7 percent and 34.1 percent for lower middle–income and middle-income countries, respectively, worldwide. Prioritizing construction (including infrastructure) and real estate has diverted investment away from tradables, partly explaining the disappointing performance of exports following the massive depreciation of the national currency of 2016. As the World Bank Egypt monitor report observed in 2019, although “net exports became the largest contributor to GDP growth, helped by competitiveness gains of the depreciated local currency, . . . the exports base remains narrow and concentrated in extracted gas.”

Figure 3 lends weight to the crowding-in argument at the macro level. Gross capital formation is one of the most widely used indicators for investment. Notably, although the overall share of the private sector in gross capital formation in Egypt has remained modest, if not stagnant, since 2006, there was a significant spike in its annual growth rate between 2017 and 2019. This would hardly have been possible without the increase in total gross capital formation driven by the state’s intensive involvement in construction, especially in the building of infrastructure and social housing. The upward curve only reversed after the coronavirus pandemic began.

A Way Out?

It is now clear that Egypt’s post-2016 recovery has suffered from major vulnerabilities. The state’s external position reveals a persistently huge current account deficit and rising dependency on short-term foreign debt. The sharp depreciation of the EGP vis-à-vis the dollar in 2016, together with the slowdown in international trade, should have contributed more to the competitiveness of Egyptian producers in both domestic and international markets. Egypt enjoyed a conducive policy context for taking advantage of a favorable foreign exchange rate until 2022 and could feasibly have targeted tradables rather than nontradables with the aim of industrial deepening and export upgrading. To do so, the state could have proactively given the manufacturing sector more access to financial and physical capital—including the land that was instead used for speculative real estate development—and also supported technology transfer.

Because it did not pursue this strategy, Egypt currently faces the same economic conditions it did in 2016–2017. The EGP has dived again, amid yet another bailout from the IMF and several Gulf states. Adopting policies aimed at industrial deepening in selected sectors, or even in specific industries within these sectors, could enhance the ability of Egyptian manufacturers to compete with imported goods in domestic markets and to integrate more effectively into export value chains. Intermediate goods, which account for around 30 percent of Egypt’s total import bill, could be produced locally under supportive policy schemes, taking advantage of the de facto protectionism provided by the large currency depreciation. These include petrochemical products, plastics, iron and steel, iron articles, manmade filaments, and others. And if Egypt’s authorities embark on this course, then regional and international partners should recognize that easing the country’s passage from a growth model dependent on nontradables to one dependent on tradables is essential for a sustainable recovery in the medium to long term.

Gulf Investment in Egypt: A Balance of Mutual Need

For the past decade, crucial financial assistance from the Gulf states to Egypt has helped consolidate the new ruling order that emerged following the military takeover and rise of President Abdel Fattah el-Sisi in 2013–2014. In particular, support from Saudi Arabia, the United Arab Emirates (UAE), and Kuwait has allowed the government to pursue large state- and military-led investments. But this relatively cost-free arrangement—for the Sisi administration, that is—is coming under strain. Gulf allies and partners are increasingly feeling that the Sisi administration has wasted the breathing space provided by their disbursement of an estimated $100 billion or more in various forms of assistance since 2013. This, despite additional support of up to $13 billion deposited in 2022 alone to fix a damaging fiscal policy that has used foreign reserves as a means of protecting an overvalued currency.

Growing divergences in their respective foreign policies toward the region have also given Gulf allies pause, prompting them to reassess Egyptian appeals for new financial support, even as they continue to regard Egyptian political stability and security as a paramount concern. While the Gulf states feel unable to simply curtail assistance to Egypt or walk away altogether, the deepening financial and economic crisis of Egypt since 2022 has enabled them to become more forceful in demanding structural economic reforms.

No less significant is that, in addition to reportedly pressing the International Monetary Fund (IMF) to take a hard line in negotiating last year’s new loan agreement with Egypt, Gulf allies now seek a controlling share of certain Egyptian state assets in return for further assistance. This demand has taken a country long used to leveraging historical political and cultural ties to the Gulf by surprise. Sisi’s administration may still feel assured of continued political and financial support from the Gulf states, but it will have to accommodate their economic priorities and commercial considerations that look set to determine both the form and volume of investment inflows in coming years.

The Gulf’s new investment-led approach to assisting Egypt has immediately run into problems, however. It is evident that the two sides have different expectations regarding control and governance, especially when one compares the Gulf states’ expectations with those outlined by the Egyptian government in its new State Ownership Policy (SOP). The Sisi administration and its powerful military faction face a mounting challenge of attracting Gulf investment while ensuring that they do not relinquish control of state assets or the rest of the economy.

From Assistance to Investment

Egypt’s new SOP, ratified by Sisi on December 29, 2022, hardly dented the Gulf’s skepticism. While the draft policy was going through successive rounds of review between May and October, Gulf states, led by the UAE, were pressuring the IMF to ensure that its new lending program for Egypt would effectively address the country’s disastrous fiscal policy. In a firm public statement following approval of the loan arrangement, the IMF confirmed conditions on Egypt that responded to UAE concerns. With the IMF reportedly denying Egyptian requests for a new loan between $9 billion and $12 billion, and instead settling on $3 billion, Egypt is now more dependent than ever on renewed cash inflows from the Gulf to make up the shortfall. Indeed, the bulk of up to $17 billion in credit that the IMF loan is intended to generate is expected to come from the Gulf.

In partnering with the IMF in this way, Gulf donors aim to shift their former assistance model to a more robust scheme based on investment funds that have a better chance of reaping verifiable outcomes and returns. If successful, they believe the new scheme (investment in lieu of outright assistance) could serve as a model for supporting other cash-strapped economies such as Jordan, Tunisia, Pakistan, and possibly even Lebanon. Although Egypt’s SOP highlighted the country’s sovereign wealth fund as its primary vehicle for attracting and managing private investment, Gulf states seek a model that offers them greater transparency and meaningful control.

Joint investment firms such as Egypt Kuwait Holding, established by a consortium of Kuwaiti and Egyptian businessmen in 1997, appear to provide a replicable model. And, in fact, similar vehicles appear to be the primary form through which Gulf investments in Egypt will be made. This is because such vehicles take politics out of the equation, help avoid surprises from bilateral deals being made behind closed doors, and ensure lucrative returns on Gulf assistance. The UAE and Saudi Arabia have already created joint venture investment vehicles and, according to Egyptian sources, Qatar will follow suit. In addition, the UAE has led the formation of a new investment framework for industry and sustainable development with Egypt, Jordan, and Bahrain, pledging some $10 billion.

A Problematic Framework

Although novel investment vehicles address a real need, they are far from problem-free. Egypt Kuwait Holding boasted significant profits in the energy sector in 2022, but the Egypt-UAE joint strategic investment platform founded in 2019 has not been as successful despite pledges of up to $20 billion, with recent investment attempts from Abu Dhabi prompting political and security sensitivities, and coming from bilateral meetings between the two leaders, outside the vehicle and arguably more politically charged. Meanwhile, the Saudi Egyptian Investment Company (SEIC), established in 2022, is already facing challenges. Moreover, the Gulf states and Egypt differ over how their investments should be undertaken and, in turn, over what Cairo hopes to get from its Gulf partners.

Further complicating matters is that the Egyptian government’s real policy intentions are unclear. Gulf partners have not engaged substantively with the SOP as a framework document, at least not publicly, and instead have focused on the government’s announcement in January 2023 of its intention to sell stakes (ranging from 10 percent to 40 percent) of thirty-two state-owned companies.

While much of the focus in Egypt has been on the companies on offer, Gulf partners have been more concerned with the size of the stakes being sold. Privately, some Gulf officials have expressed disappointment over the offering, as it does not include full privatization of any state assets let alone the selling of a majority stake that would transfer management control. That said, they have also expressed disappointment about the companies on offer, from a commercial perspective. Their reactions reveal an unwillingness to base purchases of stakes purely on the strength of bilateral political relations, if at all. Rather, Gulf states expect financial gain.

This expectation is most evident for Saudi Arabia. The SEIC is intended, in large part, to transfer full responsibility and financial decisionmaking power to Saudi Arabia’s sovereign wealth fund, the Public Investment Fund (PIF), and therefore reflects the latter’s exclusive focus on achieving long-term returns on investments. Consequently, the PIF appears uninterested in investing in the Egyptian tourism or real estate sectors, which it regards as saturated; instead, the fund is looking both at banking, suitable for long-term investment, and at media acquisitions, helpful for projecting soft power. Saudi Arabian Crown Prince Mohammed bin Salman, who chairs the PIF, is believed to oppose providing unconditional assistance to a country that already owes billions to his country. This helps explain why Saudi Arabia insists on acquiring United Bank—one of Egypt’s more profitable banks—in devalued Egyptian pounds rather than in dollars as the Egyptian government wants. As a result of the disagreement, acquisition negotiations were suspended in February 2023.

Egypt’s other Gulf allies have a more nuanced view of the balance between commercial and political investment. For the UAE, investments in Egyptian ports and logistics (through the state-owned Abu Dhabi Ports Group) can provide political and security gains as well as financial gains. Negotiations were reportedly ongoing as of March 2023 for the UAE’s acquisition of facilities in the Suez Canal Economic Zone, and possibly for usufruct rights in the operations and services of the Suez Canal Authority. Notably, this entire sector is outside the remit of Egypt’s new SOP. But more importantly, parts of the Egyptian security apparatus that already view the UAE’s political influence with some unease privately appear nervous over suggested plans for the zone. A public backlash to what has been—misleadingly—portrayed in Egyptian social media as a government plan to “sell the Suez Canal” arguably supports their nervousness.

The UAE’s perceived influence and intentions, coupled with Saudi Arabia’s barely concealed anger over investment negotiations, have made Egypt’s effort to source investment from Qatar more urgent, as a way of balancing the other two Gulf allies. Qatar appears coy about putting substantial amounts of money into Egypt given that the trust and policy alignments between the countries are still fragile, but the Egyptian government hopes that its promises to exempt foreign investment from crippling capital controls and also ensure the repatriation of profits will encourage prospective investors.

Private sector firms in the Gulf—mostly state-funded ones—have continued to invest in Egypt, despite that bilateral ties between their states and Egypt have fluctuated. UAE-based real estate giants such as Emaar (Dubai) and Aldar (Abu Dhabi) have gained large profits from their investments in Egypt. Qatari company investments have also continued to grow, even during rifts between their governments. Qatar’s most visible investment is the Diar building complex, which includes residential homes, a luxury hotel, and commercial offices; the complex formally opened for business in March 2021, soon after the countries restored political and diplomatic ties. Qatar has since announced even larger real estate investments in Egypt, following in the UAE’s footsteps.

Moving Past the State Ownership Policy

It is unclear whether Egypt’s SOP is infeasible or simply remains in its infancy and, moreover, whether Gulf partners will ever regard it as a suitable framework for a long-term investment strategy. In the short term, the allies obviously want to see Egypt manage its fiscal policy in a consistent, sustainable manner and commit fully to the latest IMF program. They also want an answer to this larger question: does the Egyptian government merely seek to attract Gulf funds through the sale of minority stakes in state- and military-owned companies and assets, while maintaining its control over them?

Egypt can ill afford Gulf disengagement but, despite its efforts to date, it has not yet found common ground with its Gulf counterparts on an approach to investment. It may be easier for both sides to compromise on the partial sales of Egyptian military-owned companies, as long as Gulf partners are assured of greater transparency in these cases. This would allow the military’s overall role in the economy to remain largely undiminished, albeit no longer completely unchecked. But with time running out for Egypt to increase cash inflows, the government might have to appease the Gulf states by widening the investment portfolio offerings.

The collapse of negotiations with the SEIC over the valuation of United Bank, and the subsequent collapse of negotiations with the UAE over stakes in Telecom Egypt, appear to have compelled the Egyptian government to reassess its approach, even though it remains unwilling to relinquish management of, or a majority share in, the companies on offer. Mere weeks after listing the thirty-two companies for partial sale, it added several new companies—including Telecom Egypt—from economic sectors that were not included in the SOP for either full or partial privatization. This was clearly a bid to lure in more Gulf money and play down the dispute over state management and, especially, control. But the bid is unlikely to be successful. Some observers assert that the dispute is being driven by Gulf attempts to exploit downward economic trends in Egypt and pick up state assets on the cheap, but it is more likely being stoked by years of limited but accumulating divergence over the Sisi administration’s economic and foreign policies.

Beyond the Money: Reevaluating the Geopolitical Bond

Since assuming office, Sisi appears to have been guided by the belief that Egypt’s partners cannot afford to let the country collapse economically. He trusts that Egypt’s strategic location, its exponentially growing population, and its security partnerships with Israel and the United States all sufficiently lower the risk that Gulf states will hold him accountable for his government’s fiscal policies and for spending their assistance on outsized investment schemes. From a Gulf perspective, however, a decade of propping up Egypt’s economy has not resulted in full alignment on foreign policy or regional security.

The UAE and Saudi Arabia, in particular, have broadly shifted their foreign policies, moving away from taking confrontational stances toward emphasizing regional integration and rapprochement with former adversaries, most prominently Qatar and Turkey. In public, Emirati officials continue to say that Egypt is a key regional security partner, but the two countries’ foreign policies toward Ethiopia, Libya, and Sudan have clearly diverged. Moreover, Egypt was ambivalent about the 2020 Abraham Accords that normalized relations between the UAE and Israel, fearing that their burgeoning security partnership would diminish Egypt’s own role as Israel’s primary security partner in the region. Egypt’s refusal to join the Yemen war in 2015 strained relations with Saudi Arabia. Sisi’s commitment to transfer two Red Sea islands to Saudi sovereign control in 2016 improved bilateral relations on a leadership level, but the resulting domestic backlash in Egypt has delayed the formal transfer. Similarly, the restoration in 2021 of official ties with Qatar, which Egypt hopes will allow it to expand its relationships in the Gulf, has not resolved contentions over security—particularly concerns over Qatar’s support for the outlawed Muslim Brotherhood group.

Meanwhile, Gulf states must contend with growing demands from their own citizens for accountability and transparency in investments abroad. There appears to be little patience for continued bailouts for Egypt (or other countries in the wider region), prompting Gulf states to double down on their demands for more transparency from the Egyptian state. Sisi is under similar domestic pressure, but more because both mainstream media and social media are awash with criticism of Gulf allies for not coming to the country’s rescue—which has only fueled further angry ripostes across the Gulf that Egypt should take responsibility for its own fiscal planning.

Is a New Modus Vivendi Possible?

Egypt needs the Gulf, but the latter may not have enough leverage to force the fiscal changes and structural reforms it wishes to see. Gulf states are caught in a dilemma: having invested so heavily in propping up the Sisi administration since 2013, they cannot simply allow it to collapse, but neither can they completely buy into the common perception that Egypt is “too big to fail”—a perception astutely exploited by Sisi. At a minimum, the era of unconditional financial assistance to Egypt, which took the form of direct cash deposits into the Central Bank of Egypt in 2013–2017, is over.

The Sisi administration may have to bite some painful bullets. Nonetheless, the fact that leading Gulf states want to model their economic relationships with other countries in the region on Egypt offers the Sisi administration an opportunity to remold its own relationship with the Gulf. The continuing importance of Gulf political and security interests in Egypt, in particular, means there is room for both sides to negotiate conditions for further economic and financial support for Egypt and to cultivate a win-win investment climate rooted in the IMF program. How far either side will bend to meet the other’s concerns remains to be seen, but the present impasse is most likely to be broken through compromise and mutual concessions.

Egypt’s State Ownership Policy and the Military Economy: An Irreconcilable Gap?

The public release of the Egyptian government’s draft State Ownership Policy (SOP) in June 2022 raised an immediate question: would the new framework encompass the military’s businesses and its general role in the economy? The draft mentioned neither, and so a broader question was whether the SOP could be coherent without addressing continued military involvement, since this would directly undermine the integrity—and therefore the viability—of the government’s stated goals in numerous economic sectors. The official Memorandum of Economic and Financial Policies (MEFP) submitted by the government on November 30 as part of its new loan agreement with the International Monetary Fund (IMF), appeared to resolve these questions by placing all military businesses squarely under the same regulatory and governance framework as the rest of the (civilian) public sector. The final version of the SOP was also brought in line through the addition of a single phrase placing “companies affiliated with the Armed Forces and operating in the economic sphere” within its scope.

The implications of the MEFP are staggering. In short, the government said it would assert direct control over military companies. But that presents a problem in itself, not least because there appears to be little policy capacity or political will to implement this provision. Indeed, the military has expanded its activities in sectors that the SOP originally encompassed, and some of its most important economically active agencies are not companies at all. Furthermore, although the MEFP incorporated the SOP as its “structural benchmark” (as did the IMF loan program), there was no attempt to adapt the sectoral priorities and modalities contained in the SOP so as to resolve contradictions between the updated commitment and the realities of continuing military involvement in the economy.

Flip-flopping on this scale within the space of a few months hardly inspires confidence. Moreover, without specifics on how the government hopes to subject a supremely powerful military to the SOP provisions, it is unclear how committed the government really is. Indeed, given its own haplessness in the face of economic agenda–setting by an all-powerful president, is the government being bold or merely disingenuous? Either way, its policy framework leaves an irreconcilable gap between its declared goal of leveling the economic playing field with the private sector and the reality of the military’s economic role and business activities.

Implications for the Military

In labeling the SOP explicitly as its benchmark for structural reforms, the MEFP affirms the significant loopholes that allow the Egyptian state—and hence the military—to retain substantial ownership in the economy. But ownership is only part of the picture. Bringing the military under the overall regulatory and governance framework mapped out in the MEFP would help plug some significant gaps left open by the SOP. In particular, the MEFP promises that all state-owned enterprises, including military companies, will be required to (1) submit biannual financial accounts and declare “any quasi-fiscal activities” (with data for public release); (2) adopt performance contracts for management based on formal operational and financial targets; (3) submit to more centralized oversight in each sector and to empowered anticompetitive practices; (4) undertake public procurement in a fully competitive and transparent manner; and (5) lose all their current tax exemptions.

At a minimum, good-faith implementation of these provisions could go far in curbing blatant violations and market rigging across all economic sectors and activities, including those from which the state will exit only partially or not at all. But even if the SOP and MEFP were to be implemented in tandem, the military would still have significant leeway to continue on its present trajectory. First, both policy documents make a crucial distinction between “strategic” and “nonstrategic” sectors to justify largely maintaining, and in many cases increasing, the economic footprint of the state and therefore the military as well. As loose as it is broad, the definition of “strategic” sectors ranges from those that meet the daily needs of citizens (for example, food, education, healthcare, and energy), through low-income housing and public infrastructure, to those that involve industry technology transfers, various manufacturing areas, the media, chemical inputs for agriculture, and land reclamation.

Notably, as the state seeks to reduce its ownership in nonstrategic sectors, the military’s role in spearheading or managing state investments in strategic sectors could actually grow relative to other public agencies. This is a significant concern, as the military is already present or a leader in the construction, provision, and support of land and maritime transport infrastructure, hospitals, and primary healthcare centers; communications, media production, and distribution; engineering industries (equipment and machinery, semiconductors, vessels and boats construction, and renewable energy); metallurgical activities; printing and advertising; pharmaceuticals and medical supplies; and fertilizers.

Second, the military is involved in prominent sectors that are not specifically mentioned in the SOP. These sectors include cement (in which the military’s share of total capacity has gone from nearly zero in 2011 to around 25 percent by 2019); the automotive industry; and intermediate (industrial) chemicals. Omission of the tourism sector is also striking. In December 2022, the Ministry of Military Production was awarded usufruct rights to manage the Cairo Zoo and nearby public gardens for twenty-five years, and in February 2023, the military-owned Tolip hotel chain acquired the five-star Stella di Mare resort in Sharm el-Sheikh. The military had already been awarded exclusive control over lucrative parts of the Red Sea littoral and forty-seven offshore islands in 2019.

Another glaring omission is real estate, which was mentioned in the original draft SOP but dropped in the final version. The Ministry of Defense has a 51 percent stake in the company managing construction of the New Administrative Capital, which according to Sisi had 3-4 trillion pounds (then $191 billion–$255 billion) in total holdings by August 2021 and had earned 2 trillion pounds (then some $102 billion) in revenue by October 2022. The military moreover manages many, if not all, of the twenty-two new residential cities completed around the country by early 2021 (out of thirty planned), with investments totaling 700 billion pounds, according to Prime Minister Mostafa Madbouly. Encroaching further, the Land Projects Agency of the Egyptian Armed Forces (EAF) acquired commercial exploitation rights over much of Cairo’s public waterfront and adjacent wetlands, thirty-six midstream islands in prime urban locations along the Nile River, and Alexandria’s largest parks in the course of 2022.

Loopholes

Strictly speaking, so-called strategic sectors could be subjected to the same regulatory and governance frameworks as nonstrategic sectors, regardless of whether the state or private sector exercises ownership. However, the MEFP is vague on this point. It promises “specific measures to address competitive neutrality in line with the eight priority areas outlined by the [Organisation for Economic Co-operation and Development (OECD)] (2012), namely the operational form of government business, cost identification, rate of return requirements, public service obligations, tax neutrality, debt neutrality, regulatory neutrality, and public procurement practices.” But the MEFP links the applicability of these measures specifically to nonstrategic sectors. The same is true of the MEFP’s monitoring and evaluation framework, which requires annual reports that include evaluations of the divestments, disclosure of the assets and parties involved, and explanations of how the divestment proceeds are used.

The preceding highlights legal and regulatory loopholes that will impede application of the SOP and MEFP to the military. For example, there is no indication that the economic activities of military companies and agencies in the civilian domain will be subject to the same contract enforcement and arbitration system as their civilian partners, subcontractors, and investors—posing a major obstacle to Sisi’s repeated attempts to float shares in military ventures through the stock exchange or sovereign wealth fund. The fact that only around half of the seventy-five or so military companies that engage in the production of civilian goods and services are registered as public sector or public business sector companies (a distinction determined by the law under which each was established and the ministry it belongs to) presents another legal loophole: the other half come under the Ministry of Defense and therefore may not be subject to the limitations and requirements set out in the SOP and MEFP.

More importantly, the new policy framework provided by the SOP and MEFP does not apply to military entities that undertake massive government-funded public works, but which are not registered as companies. Principal among these is the EAF’s Engineering Authority, followed by the EAF’s mega-projects, works, water, and survey departments. Together, military agencies managed approximately one-quarter of all infrastructure and housing projects between 2013 and 2018, a percentage that appears to have been maintained since then, if not increased.¹ Even the Air Force is economically active: it oversees the New Delta project to reclaim 2.2 million feddans (about 2.28 million acres) of desert land, directly implementing half of the project at a cost of approximately 260 billion pounds (then some $19.1 billion, based on unit costs cited by Sisi in April 2021).

In the policy domain, the SOP and MEFP are unlikely to stem the military’s growing involvement in setting policies in key sectors such as Fourth Industrial Revolution technologies and industrial development and in directing government procurement in spheres such as industrial and medical imports. The military moreover leverages de jure and de facto control over crucial bureaucratic nodes for financial gain, thus constraining civilian economic enterprise. For example, the military-headed National Center for Planning State Land Uses, along with the Ministry of Defense, controls access to 94 percent of Egypt’s land surface. And even when the military does not play a formal role in setting policy, its projects nonetheless bear heavily on how the government approaches foreign debt, foreign and domestic investment, and savings.

Additionally, the country’s Military Intelligence and military-staffed General Intelligence Service (which reports to the president) each maintain civilian “front” companies, while an “Officers’ Republic” of thousands of retired officers employed throughout the civilian bureaucracy engage in insider trading and predatory practices, often jointly with their active service counterparts. For example, an exposé in December 2022 revealed extensive profiteering by military retirees and the General Intelligence Service running the Grand Egyptian Museum project, which remains unfinished despite receiving $800 million in funding from the Japan International Cooperation Agency since 2006.

Doubling Down

Whatever its advantages in strategic sectors, the military should, in principle, divest or reduce its stake in line with the state’s plans to exit nonstrategic sectors, whether fully or partially. But there is no indication that this will happen. There are no signs so far of a lessening of the military footprint in sectors slated for the state’s full exit (including livestock importation, dairy, mining and quarrying, wholesale trade, sports facilities, renewable energy, metallurgical industry, and chemicals industries) or partial exit (including fish farming, agriculture, retail trade, leather tanning, appliances and electronics, food and beverage industries, and waste recycling). Indeed, even a cursory review reveals major new investments in livestock breeding, the conversion of leather waste, farming, frozen poultry importation, agriculture, and gold production as of April 2023.

The military remains wedded to its economic engagement, despite repeated failures. A massive cement factory launched at a cost of $1.2 billion in 2018—its second in an over-saturated sector—has disrupted civilian markets since coming onstream, and yet operates at well below capacity. Another example is the livestock-breeding complexes it launched in 2019 at a cost of 20 billion pounds (then some $1.25 billion), which have either closed since then or operate at well below capacity, resulting in major losses. The military similarly sank capital in an ambitious aquaculture program in which it aimed to establish fish farms at less than market cost and then sell them on for a profit; instead, the program experienced significant cost overruns—at least partly due to corruption within the closed circuit of military finances and commercial dealings—leading to losses that were ultimately borne by the state treasury. The military may continue resisting the financial and governance requirements of the MEFP so as to obscure these types of problems and failures.

Undeterred, military companies and agencies have launched new ventures since the release of the draft SOP. Some were announced prior to 2022, including establishing factories and production lines for organic fertilizer, leather tanning and dyeing chemicals, food, and industrial gelatine; setting up civilian telecoms masts; and breaking ground for a massive phosphates and nitrogen fertilizer complex. But newer ventures include production lines and factories for medical bandages, veterinary drugs and vaccines, vehicle tires, electrical and electronic devices, LED lighting systems, solar panels, hothouses, aluminium, food cartons, igniters for electricity plants, and extraction of heavy metals from black sands. Military agencies have also launched satellite-based internet services and what is billed as the largest polyethylene plant in the Middle East and North Africa.

An Untouchable Military?

Full implementation of the government’s SOP commitments would significantly affect military businesses and economically active military agencies across the board. The contribution to leveling the playing field in civilian markets between the private sector and the public sector, including the military, would be considerable—going far toward fulfilling a central IMF goal. Concrete proposals are available in the public domain that describe how the Egyptian authorities could work with the military to restructure or divest its civilian business and public management and procurement activities and how the IMF could assist with the process.

However, there is no evidence that the military anticipates slowing, let alone reversing, its expansionary trajectory. Nor is there any reason to expect either the president or government to hold the military accountable to the SOP or MEFP provisions, except where these provisions serve its interests. For its part, the military may argue that its continuing economic and commercial activities are in compliance with the benchmark “Guidelines on Corporate Governance of State-Owned Enterprises” published by the OECD, which the SOP claims as its reference. But such an argument does not hold up when all the other OECD benchmarks are ignored. Thus, the government’s commitments regarding the future of military companies appear to be merely cosmetic.

No matter how the SOP and MEFP are construed, Egypt’s monetary and economic crisis may actually accelerate the military’s expansionary economic trajectory, in part by reinforcing the case for state intervention. Indeed, by deepening the predicament of public and private sector businesses alike, the crisis could leave the military in a comparatively stronger position, even as the country faces crippling shortages of hard currency and savings. But if the Egyptian government interprets the SOP as exempting the military from exiting economic sectors regarded as “saturated,” this will deter private investment in them. Worse, this would perpetuate disruptive segmentation and low dynamism, not only in the economy as a whole, but also within these sectors—as Egypt has indeed witnessed in the cement and steel sectors.

At a minimum, making the MEFP the primary policy framework could reduce the award of contracts to the military for the procurement of goods and services on a no-bid basis. Similarly, it would reduce the military’s power to award contracts in the same noncompetitive way. According to insider accounts, the military leverages this advantage to extract profit margins ranging from 5 to 30 percent of government-funded project budgets. The enactment of a unified public procurement law, as well as financial transparency, would also substantially diminish the military’s ability to poach government contracts that would otherwise have gone to civilian public or private competitors.

Last but not least, enforcing financial disclosure would not only end the transfer of state assets to the military, but also increase state revenue, allow cost-benefit analyses (enabling feasibility studies and sensible investment strategies), and reduce abusive and predatory practices (including the hiding of arrears or the charging of unreasonable fees in return for licensing civilian use of state land). Further, ending the military’s tax and customs exemptions and its employment of conscript labor would help level the economic playing field with the private sector, and more importantly, subject the military unambiguously to civilian business law and courts in relation to all its activities in the civilian domain.

Where There Is No Political Will, There Is No Way

But can any remedies be attempted, let alone achieved? As former deputy prime minister Ziad Bahaeddine has noted, the government previously adopted the same modalities for increasing private sector participation, with no discernible impact. The problem is not that remedies are not known, or indeed not already on the books, but that political will and power to implement them are lacking. Even Sisi, indisputably the most powerful man in Egypt, is hostage to the military’s transactional loyalty to him. This is evidenced by his designation on January 31, 2023, of 15,000 square kilometers (5,800 square miles) of so-called “desert land” along 3,700 kilometers (2,300 miles) of intercity roads as “strategic zones of military importance”—a phrase that automatically awards the Ministry of Defense an exclusive commercial franchise in those areas. That this designation took place a mere three weeks after the IMF released the full text of its agreement with the Egyptian government speaks volumes.

In theory, the military could recognize the value of exiting tradable sectors, but probably only to entrench its hold on nontradable assets and associated services and on its role in managing real estate and land reclamation projects around the country. This would of course jeopardize the entirety of the government’s pitch to the IMF, Gulf allies, and international investors, but the military remains wedded to the notion that it has gained a usufruct to state-owned assets and to national resources generally. Rather than relinquish its stake in the economy, the military is far more likely to double down—and Sisi’s repeated urgent calls on the private sector to step up its investment share in the economy (and meet his desired targets) will not do much to stop it. Even if Sisi understands this predicament, he will not force a change in military direction, as it could cost him the presidency.

Notes

¹ Data for which sources are not shown mostly cite Yezid Sayigh, Owners of the Republic: An Anatomy of Egypt’s Military Economy, Malcolm H. Kerr Carnegie Middle East Center, November 18, 2019, https://carnegie-mec.org/2019/11/18/owners-of-republic-anatomy-of-egypt-s-military-economy-pub-80325.

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