Introduction
High levels of debt and changing bailout strategies are reshaping the geopolitical landscape of the Middle East and North Africa. Countries exporting hydrocarbons are gaining prominence over the highly indebted nations of Egypt, Jordan, Lebanon, and Tunisia. This is exacerbating the economic marginalization of low- and middle-income countries, forcing them to align geopolitically with ambitious, resource-rich funders, whose overlapping or colliding spheres of influence are fragmenting the region.
Among the indebted nations, Egypt and Tunisia have faced similar challenges, despite their divergent political and economic trajectories since 2011. Both are striving to secure external financial support, having suffered from successive food and energy price shocks as well as rising interest rates. Following years of austerity, Egypt, the world’s largest importer of wheat, is struggling with the shocks generated by the Russia-Ukraine war. Tunisia, in turn, has faced a steadily worsening fiscal situation and barely sustainable public debt.
Since the COVID-19 pandemic, the long-term structural vulnerabilities of the two countries have been exacerbated by adverse global economic conditions. The decline of foreign direct investment due to a long slowdown of the global economy, the contraction of global trade and of the lucrative Egyptian and Tunisian tourism sectors, and soaring food and energy prices have all aggravated deficits and financial needs. Egypt concluded an agreement with the International Monetary Fund (IMF) in December 2022 that averted a catastrophe after a major outflow of short-term debt, but it still relies mainly on the largesse of Gulf Cooperation Council (GCC) states. Yet GCC countries remain reluctant to support Egypt, given its significant financial needs.
In Tunisia, President Kais Saied has isolated Tunisia from its Western sponsors, even as he reversed the country’s decade-long democratization process after organizing a coup in July 2021. His populist authoritarian regime has relied mainly on meager financial support provided by neighboring Algeria. In the same way that Egypt has been forced to align with the Gulf states due to its financial requirements, Tunisia has had to do the same with Algeria, breaking with its more independent approach in the past.
This chronic dependency on outside funding has created a two-tier peripheralization process for Egypt and Tunisia. Both have become peripheral in the global economy, so that their economic policies are now primarily defined by a need to secure outside financing and accept their creditors’ preferences to fill ever-widening funding gaps. At the same time, their dependency on hydrocarbon exporting countries has also reflected their peripheralization in terms of Middle Eastern and North African geopolitics, undermining Egypt’s and Tunisia’s longstanding foreign policy autonomy.
Trajectories of Dependency on Foreign Financing
Since 2013, Egypt and Tunisia have become significantly more reliant on foreign financial resources because of food, energy, and interest-rate shocks. That year, Tunisia adopted its first IMF program after the 2011 uprising, whereas Egypt relied on long-term deposits and low-interest loans from GCC states to stabilize its economy. Tunisia again agreed to an IMF program in 2016, as did Egypt. These were crucial for both countries to access international financial markets. Yet the programs left Egypt and Tunisia exposed to the conditionalities imposed by international financial institutions, making them more vulnerable to external shocks, particularly changes in interest rates on the U.S. dollar. In Egypt, these shocks put further strains on President Abdel-Fattah al-Sisi’s regime, adding to the risks of social tension, while in Tunisia they continue to seriously undercut Saied’s ability to consolidate his authoritarian leadership.
Egypt’s economic problems date back to the period following the 2011 uprising and the instability that ensued. Food insecurity and large current-account and trade deficits all converged to heighten the country’s dependency on foreign financing, increasing its foreign debt stock and the burden of debt servicing. Since finalizing the IMF agreement in late 2016, Egypt’s government has pursued a neoliberal agenda that has included a sharp devaluation of the Egyptian pound, resulting in rising inflation rates. The IMF program also imposed severe austerity measures, among them slashing subsidies, rolling back public services, and broadening indirect taxation.
The Sisi regime adopted repressive measures against the political opposition and civil society groups to implement unpopular austerity. The relative improvement of macroeconomic indicators was necessary to attract short-term portfolio investments in Egypt’s external debt, often having a maturity of less than a year. Indeed, the share of short-term debt in Egypt’s foreign reserves tripled from an average of 11.86 percent in 2000–2010 to 29 percent in 2011–2021. This had to do with the very high real interest rates following the IMF deal of 2016, as well as Egypt’s diminished capacity to attract foreign direct investment, which tends to be focused on the longer term.
Initially, short-term debt was made up of deposits from GCC central banks at Egypt’s central bank. However, as of 2017, these were gradually replaced by short-term inflows from international equity funds. Yet this exposed Egypt more to the vagaries of global financial markets. It also reflected the deteriorating terms of borrowing for peripheral economies in the Global South, which had to contend with attracting short-term financing in the absence of longer-term investments.
In Tunisia, the situation was somewhat different. After the popular uprising in 2010– 2011, the country received substantial capital inflows of various kinds: low-interest loans, deposits at Tunisia’s central bank, U.S.-guaranteed loans, and macro-financial assistance from the European Union, among others. These helped the country to cope with the sharp decline in foreign direct investment and the collapse of tourism after terrorist attacks in 2015 and 2016. At the time, Tunisia benefited from a democratic rent—funding motivated by Tunisia’s democratization process. However, because Tunisian decisionmakers felt confident that international partners would continue supporting Tunisian democracy no matter what, they had no incentive to comply with the conditions of international financial institutions. Instead of implementing reforms to reduce Tunisia’s debt burden, the ruling elites therefore relied on the inflows to buy time and avoid much-needed economic adjustment.
The country’s worsening fiscal situation compelled the government to negotiate the IMF deal in 2016. Among the IMF’s demands were reducing the public-sector wage bill and subsidies, and implementing tax reform. However, the failure of political leaders to accommodate conflicting economic and sectoral interests made it difficult to adopt reforms and reduce the public debt. Seeing that its program was not advancing, the IMF decided in 2019 to suspend the disbursement of loan tranches, signaling a shift in attitude at the institution as Tunisia’s economic situation became extremely fragile.
Domestically, the failure of Tunisian governments to build a burden-sharing compromise encouraged local players—unions, business elites, and corporations—to double down on their demands. Tunisia ended up paying a price for the delayed reforms after the outbreak of the COVID-19 pandemic. The impact on economic activity led to a negative growth rate of 8.6 percent in real GDP terms in 2020, the largest recorded decline since independence in 1956. While Tunisia tried to recover from this shock, the start of the Ukraine war in February 2022 only augmented its fiscal imbalances. The public debt dramatically increased from 47.7 percent of GDP in 2012 to 88 percent in 2022. The percentage of short-term debt in Tunisia’s external debt increased from 21.7 percent in 2011 to 32.4 percent in 2021. The share of short-term debt as a percentage of total reserves also increased dramatically, from 51 percent in 2011 to 152.5 percent in 2021. These trends only underscored the country’s exposure to external financial markets and the sharp decline in long-term sources of hard currency—investment, tourism, and revenues from Tunisia’s exports of phosphate. As in Egypt, the precipitous rise in international energy prices, the high dependency on food imports, and the increase in global interest rates exacerbated Tunisia’s need for hard currency. Yet, after 2019, Tunisia lost access to international financial markets as its credit rating was periodically downgraded by major rating agencies.
Faced with this worsening situation, Tunisia sought a new deal with the IMF. In October 2022, it signed a staff-level agreement with the organization, which is awaiting the approval of the IMF board. Saied’s coup, his lack of commitment to reform, and Tunisia’s broken promises over the previous decade have led the IMF to continue demanding measures that would show the president’s willingness to embark on a difficult four-year reform program (2023–2027). However, the contrary occurred in April 2023, when Saied rejected the IMF conditions as “diktats.” This caused Tunisia’s bonds to lose more ground in international markets, further harming the country’s credit rating and threatening its debt sustainability. At the lowest rating the EU will simply be unable to release more funds, given its internal regulations.
Tunisia’s incapacity to cover its spending needs and secure substantive international financial support has begun causing problems in securing essential imports. In 2022, basic goods such as sugar, vegetable oil, rice, coffee, and milk started disappearing from supermarkets. Not surprisingly, as Tunisia and Egypt faced financing difficulties, both countries were pushed into quandaries affecting their regional political approaches.
Outside Funding and Its Geopolitical Implications
In seeking to meet their financial needs, Egypt and Tunisia have had to revise their foreign policy outlooks and align with countries that have either helped fund them or are in a position to do so. For Egypt, this has driven it closer to the political positions of the GCC states, in contrast with its previous role as a country that defined major political directions in the Arab world. Tunisia has only received meaningful support from Algeria and has abandoned its traditional middle-of-the-road policy to North African affairs. These shifts have fed a process of regional peripheralization of two countries that had previously played a vanguard role in post-colonial Arab history.
Egypt’s economic weaknesses in the past decade have meant that the country has recurrently required financial support from Saudi Arabia and the United Arab Emirates (UAE). The two Gulf states sought to stabilize the situation for political and geostrategic reasons—to curb the wave of Arab uprisings, dislodge Islamists from power, and keep Egypt within their spheres of influence. Qatar too has played a growing role. After years of frayed relationships, during which Egypt joined Saudi Arabia, the UAE, and Bahrain in imposing sanctions on Qatar, Cairo and Doha initiated a diplomatic and economic rapprochement in 2022, which facilitated the return of Qatari investment to Egypt.
Yet today, the Gulf countries’ attitude toward Egypt has changed. The focus is no longer solely on political and security considerations. Rather, GCC investors are increasingly looking for better returns on their investment by gaining control of state assets, some with strategic value, such as seaports and public utilities. In parallel, there is rising concern with Egypt’s economy. Given that Egypt has become dependent on more frequent and larger bailouts, governments in the Gulf have developed an interest in Egypt’s macroeconomic policies. Historically, Egypt had used its strong ties with the GCC as a substitute for IMF funding. That period seems to be over. In December 2022, the IMF agreed to “catalyze” funding for Egypt from GCC countries, which was a first. Furthermore, in line with IMF conditions, Gulf countries are pushing Egypt to reduce the involvement of the Egyptian military in the economy and be more transparent about the finances of state-owned enterprises.
Tunisia is also at an impasse. After a decade of financial support and access to easy money, the country finds itself stuck under the Saied government. The president has isolated Tunisia without any backup plan. According to the 2022 staff-level agreement, the IMF agreed to provide Tunisia with $1.9 billion. However, the organization expected other states to fill the funding gap. While Saudi Arabia, Kuwait, and the UAE were initially likely to do so, they ultimately left this to European countries.
The failure of the Tunisian government to mobilize funding shows that Saied is seriously lacking in financial resources to consolidate his regime and manage social tensions. Instead, the president has been buying time, legitimizing a view internationally that he is unwilling, or unable, to tackle Tunisia’s fiscal and economic problems. Saied’s racist remarks against “migrants from sub-Saharan Africa” in February 2023 only made things worse. Reacting to the violence and harassment the president’s comments provoked, the World Bank Group announced on March 7 that it would freeze discussions on the Country Partnership Framework for 2023–2027, which may suspend its commitment to Tunisia for the coming years.
Saied’s rejection of the recent IMF conditions was based, first, on a conviction that they represent a violation of Tunisian sovereignty. The president believes Tunisians must rely on themselves to resolve their economic crisis, which he considers a consequence of the actions of a corrupt elite. His paranoid style has generated distrust of major partners, including international financial institutions. The distrust is reciprocated by the United States and European countries, who are afraid of seeing Saied’s anti-Western rhetoric lead to a change in Tunisia’s political and economic affiliations, which the president has intimated he is reconsidering.
A second reason why Saied rejected the IMF’s conditions was his fear of popular protests. The president’s unilateral way of rebuilding Tunisia’s political system and managing public affairs has alienated him from many social actors. His inability to assemble a broad social coalition is undermining the legitimacy of the new political system, making Saied dependent on the security services to compensate for what he lacks in popular support. His rejection of intermediary bodies between state and society has put him in conflict with most political parties, labor unions, and professional corporations. This increases the risk of protests if the economic situation deteriorates further, but also if Tunisia implements the unpopular stipulations of the IMF deal.
Given its isolation, Tunisia has had to rely exclusively on financial support from Algeria. This has materialized through loans, deposits, and gas supplies at preferential prices. Since Saied’s power grab, Algerian loans and deposits at the Tunisia central bank have amounted to $800 million. However, the price for this has been Tunisia’s increasing alignment with Algeria in its conflict with Morocco. Historically, Tunisia had maintained a position of neutrality between the rival countries. This is no longer possible as Tunis has become financially dependent on Algiers. The inflection point occurred when Saied officially received leaders of the Polisario Front in Tunis in September 2022, showing that Tunisia was leaning toward the Algerian position in the Western Sahara conflict. Polisario, which Algeria backs, seeks the Western Sahara’s independence from Morocco, and the episode triggered an open diplomatic crisis between Tunis and Rabat, as both countries recalled their ambassadors.
Given its financial vulnerabilities, Tunisia is on the brink of defaulting on its debt. Its deteriorating relationship with international financial institutions, the absence of financial support from the Gulf or European countries, and its inability to access international financial markets are seriously aggravating the country’s debt problems. Tunisia plays a limited role in the Gulf states’ political, economic, and security priorities, therefore, GCC countries have refrained from providing it with funds. China, which Saied’s supporters regard as a potential alternative, has not stepped in and is likely to steer clear of Tunisia’s problems. All this is reinforcing the country’s peripheralization, which has only hardened its economic and political stalemate.
Egypt’s peripheralization with respect to its GCC sponsors began years ago and appears to be accelerating. In 2017, Egypt handed over two uninhabited, yet strategically important, islands in the Red Sea—Tiran and Sanafir—to Saudi Arabia. This provoked public opposition in Egypt. Riyadh had several reasons for taking over the islands, not least its claim that they had originally belonged to the kingdom before they were handed over to Egypt in 1950 to avoid an Israeli takeover. However, the move was portrayed in Egypt as a surrender of sovereign territory in exchange for Saudi financial assistance. This interpretation was justifiable insofar as Egypt would probably not have returned the islands had it not been financially dependent on Saudi Arabia.
Egypt has also lost its geostrategic importance as a potential intermediary between the Arab world and Israel. This role had been a cornerstone of Egypt’s relations with the United States after the peace treaty with Israel in 1979. Today, however, thanks to the so-called Abraham Accords, two GCC states—the UAE and Bahrain—have diplomatic ties with Israel, as do Morocco and Sudan, breaking Egypt’s and Jordan’s monopoly. That is perhaps why Egypt welcomed the Abraham Accords with implicit reservations by focusing on the need for Israel to conclude an agreement with the Palestinians, not just Arab states. However, amid economic turmoil in Egypt in early 2022 and the urgent resort to GCC funding, the country’s foreign minister attended the Negev Summit hosted by Israel in March, which included Arab states that had signed peace agreements with Israel. This signaled that Egypt would remain active in the Arab normalization process with Israel, in which a leading GCC state, namely the UAE, has played a major role, even though it had eclipsed Egypt’s regional status.
Conclusion
While Egypt and Tunisia struggle for stability, their growing peripheralization is leading them into a vicious circle. The more their economic problems accumulate, the more their financial needs will increase, and the deeper their geopolitical dependency on regional funders will be. The problem is that their geopolitical marginalization deprives them of room to maneuver as they become increasingly irrelevant in a changing regional and global geopolitical context. With the Middle East and North Africa going through profound transformations, Egypt and Tunisia have been left on the sidelines when it comes to determining outcomes. Egypt was absent from the Saudi-Iranian reconciliation, while in May 2022 Algeria’s president offered to play a role in resolving Tunisia’s domestic political crisis, as if Tunisia’s leaders were unable to do so themselves. Once peripheralization sets in, reversing it may prove very difficult.