Much of the commentary has been alarming, warning that Egypt’s reliance on emergency inflows from the GCC—especially Saudi Arabia, the United Arab Emirates (UAE), and Kuwait—comes with a corresponding loss of autonomy.
This aid seems to be contingent on the Egyptian government further suppressing the Muslim Brotherhood, and it restricts Egypt's ability to pursue an independent foreign policy. But while Gulf economic lifelines come with political costs, they also present opportunities. Egypt is now well placed to reengage on favorable terms with a more diverse group of international creditors, the International Monetary Fund (IMF) in particular.
Following the military-backed coup last July, the IMF could not have been more irrelevant in Egypt. Saudi Arabia, Kuwait, and the UAE had pledged $12 billion in economic assistance, staving off an immediate crisis. The inflows stabilized Egypt’s diminishing foreign currency reserves, cushioned its widening current account deficit, and for a time strengthened the country’s social equilibrium by allowing the government to pay for crucial subsidies. The initial $12 billion has since been bolstered by an additional $5.8 billion, again pledged by Saudi Arabia and the UAE at the end of January 2014.
From the standpoint of investors and financial markets, all of this has instilled confidence in Egypt. Egyptian stocks rallied by over 40 percent in the second half of 2013, and the country’s foreign reserves reached $17.4 billion by the end of last month—approaching an all-time high level of foreign reserves in Egypt in the three years since the uprisings of 2011, nearing the $18.9 billion reached in August 2013. However, the underlying economic effect on Egypt from GCC inflows has been mixed.
The Egyptian pound has barely appreciated, and at around 11 percent inflation is manageable but remains a concern. And despite a limited stimulus program initiated by the government of former prime minister Hazem Beblawi, unemployment continues in Egypt between 13 and 25 percent. By no means has GCC assistance turned Egypt around or done much beyond allowing the government to secure desperately-needed breathing room.
Continued GCC assistance to Egypt is also far from certain. Each of the GCC states that stepped in following June 30 has its own pressing domestic needs that require a widening of government outlays. This is particularly the case for Saudi Arabia, which in 2011 sought to preempt popular protests in the country through a massive increase in its public sector, a series of pay raises, new housing projects, and major infrastructure initiatives.
Alongside these increasing expenditures, global oil prices remain weak and, as a result, net oil exporters have begun eating into their surpluses. A sustained period of cheap global energy further endangers the fiscal position of leading GCC countries, and without robust private sector growth in the near term, the Gulf could face a jobs gap of 1 million by 2016. These are serious economic and still unresolved social pressures that could lead them to shut off the tap or change the terms of their loan agreements to Egypt.
Then there is the political dimension of Egypt’s dependence on the GCC. On one hand, soon after July 3, the new government in Cairo abruptly pivoted from the Muslim Brotherhood’s earlier support for the Syrian rebels. Egyptian policy shifted once again after the government received its first installment of GCC inflows, and the military-backed government quietly fell in line with Saudi leadership on opposition to the Assad regime.
On the other hand, GCC and specifically Saudi interactions with Egypt have never resembled a smooth patron-client relationship. It remains to be seen whether or not a Sisi-led government will remain compliant with Saudi and GCC priorities following elections in Egypt.
So long as it remains the beneficiary of GCC largesse, however, Egypt is in its most strategic position since early 2011 to reengage with other international creditors—starting with the IMF. Despite the gravity of human rights abuses and the ongoing repression of civil society, in the case of the IMF, although not an overtly political institution, its actions reflect the imperatives of its leading member states and the economic policymakers charged with managing relief to sovereign debtors.
The IMF, in remaining “strongly committed” to Egypt, seems to have bought into the “restoration of democracy” narrative and it anticipates a return to stability following presidential elections.
There is also historic precedent for dealing with Egypt regardless of its domestic political climate. The IMF dealt with former president Hosni Mubarak as compensation for Egyptian support for coalition forces during the First Gulf War, whose government by then had a less than optimal record on human rights, civil governance, and transparency.
The geopolitical reasons for reengaging with Egypt today are equally profound. Despite public censure, western actors—notably the United States and European Union—by and large need Egypt to maintain pressure on armed Islamist groups in the Sinai and to remain a buffer against the larger destabilization of the region caused by the prolonged conflict in Syria. Western actors also want Egypt to not seek rival sponsors, such as Russia, whose recent arms agreement with Egypt buttresses speculation that Cairo is moving away from Washington.
Egypt could leverage these political circumstances to extract more favorable conditions from the IMF. The IMF’s own commitment to austerity is arguably more nuanced today than it has ever been previously, as when the IMF offered Egypt a $372 million loan agreement in 1991, which included harsh austerity conditions.
Following the most recent Eurozone crisis, the IMF position on austerity seems to have evolved—IMF leaders have been critical of austerity in certain EU economies, especially in the UK, and appreciate the explosiveness of the subsidy issue in Egypt. This would mean that Egypt could potentially secure an IMF loan without an immediate and drastic scaling back of subsidies that would further pressurize the domestic political climate.
For the moment, it is unclear whether a Sisi-led government would accept renewed terms from the IMF. Western commentators, for their part, have made mostly undocumented assertions that Abdel Fattah el-Sisi favors an increased role for the army in the economy and a return to statist policies pursued by Nasser in the 1950s.
This would suggest a turn away from the IMF and other western creditors. Still, an expansion of the military's prerogatives and continued private sector growth—fueled by the IMF—are not mutually exclusive, as the IMF’s role in Egypt in the early 1990s shows. If anything, market reforms following the IMF intervention in the early 1990s allowed the military to penetrate the private sector in ways that would not have been possible previously—largely by assuming direct ownership of companies, filling advisory boards, and dictating government contracts.
Egyptian and Arab sources also present a more complicated portrait of the current government’s early economic track record, including efforts to encourage a return of foreign direct investment (FDI). The government is already working with blue chip Asian companies such as Samsung—which opened its first factory in the Middle East at Beni Suef last September—and is presiding over major financial sector activity that involves a number of potentially large public offerings on the Egyptian exchange in the coming months.
Even though Beblawi is gone, there are still well-known technocrats in the government who understand the importance of good international credit to private sector growth, including Ibrahim Mahlab, Nabil Fahmy, and Hisham Zazou. These officials are well placed to make the case for the IMF to Sisi, especially if he is intent on reasserting Egyptian influence in the wider region. This would require a break away from Egypt's singular economic dependence on the GCC.
Given the weaknesses underlying continued dependence on the GCC and the government’s early approach to FDI, Sisi would do well to test the waters of renewed IMF negotiations. Even if the talks fell through, a dialogue would be confidence-inducing and—for better or worse—would shore up international credibility for the new regime.
If the current military leadership does indeed harbor Nasserist ambitions, they cannot remain pawns of the Gulf indefinitely and will need a clear road to economic recovery. The IMF provides one such possible path.
By Guylain Gustave Moke
Photo-Credit: Reuters-Photo: Egypt Presidential Election Candidate, Former Army Chief Abdel Fattah-al Sisi-photo