March 14, 2024


Egyptian Leverage

The IMF invests in the Egyptian dictatorship’s structural payments imbalance

As Cairo stared down another balance of payments crisis in the winter of 2023–24, students of the last half century of Egyptian public finance recognized a familiar ritual under way. Since the death throes of the Bretton Woods system in 1971, Egypt has come to the International Monetary Fund (IMF) for payments financing on no less than ten occasions: in 1977, 1978, 1987, 1991, 1993, 1996, 2016, twice in 2020, and in 2022. Performed by an exclusive circle of plenipotentiaries shuffling between Cairo, Washington DC, and Abu Dhabi, this ceremony echoes a broader pattern of sovereign debt lending in the global South since the 1970s. But the customary negotiations also reveal the privileged role of Egypt’s military dictatorship in US regional strategy. Conducted again between December and March, they have once again yielded a familiar result: a staff-level IMF agreement extending $8 billion in emergency loans to Egypt, its eleventh bailout, while Cairo committed to reduce government spending, privatize state-owned enterprises, and float the Egyptian pound. 

The ritualistic negotiations have the appearance of a highly asymmetrical exercise. On one side are staff from the IMF who command sovereign lending power worth $1 trillion and whose blessing Egypt often needs in order to guarantee credit worthiness abroad and to mollify Arab Gulf and US partners. The IMF team is predominantly composed of young, male, western-educated macroeconomists with PhDs who rotate on short country assignments and are led, according to a 1950s-era gentleman’s agreement, by an executive board recruited from Europe and the United States. 

On the other side is Egypt’s government, led by the cabinet-level officials of finance, investment, foreign affairs, and the central bank (ECB). Some of them, like Youssef Boutros Ghali, who served as Minister of Finance in the Mubarak era, the former Minister of Investment Sahar Nasr, or the current Minister of Investment Rania Al-Mashat at one time worked for Bretton Woods institutions. They represent a country of 114 million people, two-thirds of whom live on less than $6.85 a day, facing an inflation rate that reached 37 percent in 2023, where the non-oil private-sector has contracted nearly every month for the past five years, and whose top 1 percent of affluent citizens own more than nine times the national wealth of the bottom 50 percent. Egypt also suffers under a high degree of real and perceived downward mobility, immortalized in Alaa El Aswany’s novel Yacoubian Building, in which each generation to inhabit an Art Deco apartment in Cairo is of a lower social caste than its predecessor.

Egypt has been ruled for the past eleven years by the military dictatorship of Abdel Fattah El-Sisi which has incarcerated an estimated 60,000 political prisoners and ranks 136 out of 142 nations on the World Justice Project’s Rule of Law Index. It is bordered on its south by Sudan (convulsed by civil war since April 2023), on its west by a cold peace in Libya, and on its eastern Sinai border by the apartheid state of Israel, now engaged in the large-scale destruction of Gaza. It is historically a major importer of grain from the Black Sea, a supply now disrupted by the Russian war in Ukraine. 

Egypt is also severely in debt; external sovereign debt currently sits at $164 billion. It has run debt-to-GDP ratios above 80 percent for most of the past decade, hitting 93 percent in 2023. In any given year, Cairo pays 50–60 percent of state revenue in payments on this debt, while 40–45 percent of its revenue comes from regressive taxes on the poor, many introduced in 2016 with IMF support. The other half of its state budget is borrowed money, which Cairo acquires from Gulf Arab donors, the IMF, and by selling its own deposit certificates and bonds at high interest. In October 2023, the sovereign credit rating of those bonds was lowered by S&P Global to a junk “B-” grading. Motivating this debt is Egypt’s chronic current account deficits, which it has run since 2008, that leave it vulnerable to speculative attacks on its foreign currency reserves. It was such an attack that compelled Cairo to negotiate once again with the IMF.

On March 6, the IMF announced that an $8 billion loan agreement had been reached and that Cairo would “move to a flexible exchange rate system.” It is a promise that Sisi, like Mubarak, has made before. If the past is any guide, Egypt will be adept at postponing reforms; indeed the past week’s exchange rate data suggests the pound has simply been devalued to a new peg. Regardless, IMF, American, and Gulf relief will likely continue. Cairo’s role in a US-backed regional security architecture makes the military dictatorship a regional giant too big to fail. The Sisi regime, like its predecessors, is keenly aware of this status and leverages it to secure the acquiescence of creditors and allies. The size of the IMF agreement—more than double the $3 billion originally on the table—recognizes this fact. 

Demystifying the bargain

At the core of negotiations between Egypt and the IMF is monetary policy. Since March 2022, the Egyptian pound (LE) has lost 70 percent of its official value against the US dollar, while the gap between its official and black market rate has widened. By February 2024, a US dollar could buy LE 70 on the black market, more than twice its official exchange rate. Remittances also fell 30 percent in the first quarter of the 2023–24 fiscal year against the period prior, as migrant workers abroad held back transfers to their families in an attempt to preserve the value of their earnings. In response, the central bank has raised interest rates and devalued the pound four times over the past year and half, while Sisi’s regime has resorted to imaginative policies in order to attract hard currency and beat back speculators: raids on informal currency traders, foreign transaction limits for credit cards, and lifting the ban on foreign ownership of desert lands. Despite this, the IMF has pushed Egypt to commit to a further, long-standing demand, made since at least the 1980s, of full market liberalization of the exchange rate. 

The IMF has long argued that allowing markets to set exchange rates is good for Egypt. It would break the central bank’s costly habit of spending billions of US dollars to defend its currency peg against speculators as well as eliminate a parallel black market by encouraging remittance flows to re-enter the official banking sector. These remittances are a larger source of foreign currency than tourism and foreign direct investment combined. Releasing the peg would also devalue the pound, boosting Egypt’s export revenues and placing the burdens of exchange rate adjustment on the private sector, not the central bank. Finally, it would smoothen the large, abrupt shocks which have punctuated the country’s monetary history into more minute, dynamic pricing adjustments.

Since the United States abandoned the gold standard in 1971, Egypt has resisted these arguments. For one, external debts are denominated in hard currencies like dollars and euros, but government revenue is mostly in Egyptian pounds. Liberalizing the exchange rate would swiftly devalue the pound and force a massive spike in the state budget’s allocation for external debt servicing. According to Mohamed Badrawy, a parliamentarian from the regime-aligned Wafd party, for every 1 Egyptian pound decrease in value against the dollar, the cost of external debt increases by LE 83 billion. Left unchecked, it could also potentially bankrupt government entities like the Egyptian National Railways Authority, which are not included in the general public budget but do hold public debts. 

Second, devaluing may likely aggravate inflation; Mada Masr reports that a decision to float the pound could lead to 45 percent inflation in 2024. Egypt runs high import bills, around 20–40 percent of its GDP in any given year. These imports—wheat, seeds, dairy, fertilizer, fuel, etc.—are often purchased by state buyers and paid for with foreign currencies like dollars and euros. State buyers and some private sector companies acquire these currencies from the banking system at official exchange rates, so devaluing the currency makes imports more costly. Imports factor into the production of consumer goods like bread, which enjoy separate consumer subsidies. These price supports are quasi-sacred lifelines to a deeply impoverished population, reduced at the risk of riots, as in 1977, or revolution, as in 2011. Sisi’s pledge three years ago to raise prices of subsidized baladi bread, for instance, remains unfulfilled. Egypt will likely be the world’s largest importer of wheat again in 2024; it does not want to pay more.

For these reasons, the IMF’s perfunctory pressure to float the pound indicates the structural constraints of a neoliberal age and the intellectual exhaustion of its developmentalist wisdom. In 1981, Egypt’s literary jester, Sonallah Ibrahim, directed his novel Al-Lajna (“The Committee”) toward this order, depicting a young protagonist in front of a board of faceless bureaucrats who ask him to perform a humiliating belly-dance and, in a final act of absurdity, cannibalism. He complies. Al-Lajna was at the time a wild allegory for Anwar Sadat’s policy, from 1974 onward, of Egyptian infitah, or “opening” to foreign investors and Coca Cola culture. Yet Sisi’s regime is not exactly the hapless victim of Ibrahim’s story.

In fact, the Egyptian government has been quite successful at securing last-minute credit and staving off exchange rate liberalization.1 In 1986, IMF and Egyptian officials had reached a deadlock on the exchange rate; the executive board overruled its staff in May 1987 and accepted a “gradual” reform instead of a full float. In the end, Egypt only implemented the first stage of the exchange rate unification. In 1993, it staunchly refused devaluation but got the first Extended Fund Facility (EFF) tranches disbursed anyway—negotiations later collapsed when it refused to devalue or implement reforms. The 1996 agreement conspicuously left devaluation off the table. In 2016, the central bank briefly floated the pound to secure a $12 billion release of IMF funds, only to intervene a few years later after the pound plunged in value. In 2020 and 2022, it opted for partial devaluations rather than a free float.

Time after time, Egypt comes back, hat in hand. Solemn promises are made. The IMF relents to a bailout in which austerity and devaluation proceed haltingly but never completely. The government miraculously secures new credit, dutifully pays its interest, gets some of the old debt forgiven, and rolls old loans into new ones. It’s a strange juxtaposition of persistently rickety public finances on the one hand and an adroitness at securing a last-minute Hail Mary on the other. In fact, despite its junky credit rating and rock-bottom reputation for the rule of law, Egypt is, in the typology of Michael Tomz, a “reputed stalwart.” It pays in good times and bad; the last time Egypt fully defaulted on its sovereign debt was a century and a half ago. 

Egypt’s debt cycle

What explains this need for credit? Cairo needs to raise revenue for its bureaucratic and military payroll, to build public works, pay interest on pre-existing debts, maintain infrastructure, purchase weapons, issue pensions, and sustain consumer subsidies for fuel, electricity, transport, and food. For most of its history, Egypt’s domestic tax base has been too poor and under-developed for the revenue needed in a modernized state. Simply printing Egyptian pounds and giving it to the ministries may momentarily ease the solvency problem but would create inflation. It is another form of tax. Similarly, foreign-denominated imports and debts cannot be paid by simply printing Egyptian pounds unless the government credibly fixes exchange rates, which in turn requires costly foreign reserves.

For that reason, Egypt has historically borrowed foreign currency from abroad in the hope that future growth would let it pay off its debts. In the late nineteenth century, the Khedive floated huge treasury bonds to banking houses in London and Paris. External debt quintupled from 1863 to 1879. Despite lacking an annual budget, tax apparatus, or official register, the Khedive could float its debt on European bond markets by promising high returns. Bondholders, poorly regulated and poorly informed, were in turn willing to lend their money, edified by Egyptian cotton exports and news of the French-bankrolled Suez Canal, which opened in 1869 thanks to the corvée of some 1.5 million peasants. 

Promises of growth proved brittle. When American cotton flooded back to global markets during Reconstruction, Egypt’s momentary cotton dominance came to an end. Its meager share of Suez revenues did not compensate. The Khedive had over-extended. In Rosa Luxemburg’s words from 1913, “the fellah had been drained of his last drop of blood. Used as a leech by European capital, the Egyptian state had accomplished its function and was no longer needed.” When the Ottoman Empire defaulted in 1875, Egypt fell with it. By May 1876, European lenders and their colonial representatives established a commission, the Caisse de la Dette Publique, to agglomerate the debt and collect Egypt’s own taxes to service it; local taxes in Cairo and Alexandria, taxes on salt and tobacco as well as all customs revenue went to the Caisse. The Khedive, notes economic historian Ali Coşkun Tunçer, feebly agreed.

The concessions initiated a process that Didac Queralt in his recent book calls “pawning national assets.” First was the Caisse. “Dual Control” followed in November 1876, establishing a special administration of the railways and the port of Alexandria under the direct control of a majority-European commission. The bad cotton harvest and the Russo-Turkish War of 1877–78 resulted in a British-led Ministry of Finance and French-led Ministry of Public Works. The Europeans consolidated and restructured the debt, and following military occupation in 1879 the new Khedive Tewfiq Pasha decreed virtually the entire administration of the country to England and France. Military occupation met three years of anti-colonial revolt, after which the British made Egypt a protectorate in 1882.

Egypt’s colonial history parallels the sovereign borrowing problems that have frustrated economic development in the neoliberal era. The persistent allure of “hot money”—credit raised by promising high interest rates to speculators that cannot be sustained when growth fails to materialize—spirals viciously into debt accumulation, as Egypt must spend increasingly large shares of national revenue to pay public debts rather than invest toward public goods. When revenues are unable to meet these obligations, the country forfeits national assets to international lenders, opening the door to foreign domination.

Although the Bretton Woods Agreement established the IMF to prevent external payment imbalances and solve liquidity constraints, variations on the nineteenth-century theme have lately returned. One example is Egypt’s transfer of the Sanafir and Tiran islands to Saudi Arabia in 2017, amid rumors of a Saudi quid pro quo to aid the struggling economy. Another instance involves acquisitions by the Emirati sovereign wealth fund ADQ and the Saudi Public Investment Fund of Egyptian farmland and major stakes in petrochemical companies last year. Even more recently, negotiations to sell Ras El Hikma—a $35 billion resort on Egypt’s north coast—to an Emirati consortium made headlines, which regime-aligned media have framed as a deal to “end the exchange rate crisis.”

Two important differences between Egypt’s pre-infitah history and the debt landscape today are innovation in private financial instruments and restriction of public alternatives. In the 1950s, President Gamal Abdel Nasser could nationalize the Suez and seize the assets of foreigners, Egyptian landowners, and the bourgeoisie because much wealth was held in farmland or factory equipment—immobile and easily confiscated. There is only one Suez Canal and cargo firms will pay the transit fees whether the canal is owned by Egypt or the French. A skilled leader like Nasser could also leverage the Cold War rivalry, playing off the Soviet Union against the United States to access foreign currency for projects like the Aswan High Dam. “Sisi has none of these advantages,” writes the sociologist Hazem Kandil. “The assets of Egypt’s businessmen in today’s global financial capitalism are much more elusive and transferable.” The desire to attract foreign investors creates strong incentives to limit tax burdens on the rich, be it on their private corporations, startups, or assets. 

A second difference is the state’s trade deficit, which has grown over time. Today, imports like wheat, seeds, dairy, and fuel are paid for with foreign currencies, like dollars and euros, and are often tied to popular consumer subsidy supports. In pre-infitah Egypt, by contrast, most Egyptians were rural laborers enmeshed in peasant economies and less dependent on urban, consumer subsidies. But by the 1970s, three-quarters of an increasingly-urbanized Egyptian public relied on bread subsidies, thanks to transformations in dietary patterns and the glut of cheap US food aid. These shifts created stiff pressures on the subsidy budget and foreign exchange. 

Faced with a higher import bill than its export earnings could cover, and with increasingly footloose capital, what could Cairo do? In the late 1970s, it was to Sadat’s fortune that foreign exchange receipts from oil, tourism, the restoration of Suez Canal trade, and migrant remittances from the Gulf could sustain solvency. Despite this, facing fiscal pressure, Cairo opted for an IMF loan. This Stand-by Agreement, signed in January 1977, released some $146 million but required Egypt to devalue the pound and reduce its budget deficit, which Sadat attempted to do by removing subsidies on basic consumer goods. Protests over the price increases devolved into riots on the streets of Cairo. In response, the government swiftly reimposed the price supports, and the IMF relented on the severity of its structural adjustment, signing a watered-down EFF agreement in 1978. The US also relented, rescheduling some of Egypt’s debt to ease the balance of payments—an early example of Cairo’s capacity to leverage its political instability to secure concessions.

To buy time before his own negotiations with the IMF, Sisi tapped a network of regional lenders. Since 2013, he has secured some $92 billion from Saudi Arabia and the Gulf states. But as oil prices slumped—not regaining their $100-per-barrel price until 2022—the Gulf monarchs became increasingly reluctant to give unconditional aid to Egypt in the form of central bank deposits and fuel assistance. In the early phase of his rule, Sisi also tried coaxing patriotic donations from the nation’s capitalists into development funds like Tahya Misr (“Long Live Egypt”). In another instance, Egypt launched a Suez Canal expansion in 2014 at a cost of $8.2 billion, which Sisi initially attempted to finance by exhorting the public to buy subscriptions or shares, but to no avail. Disappointing expectations further, foreign exchange revenue from the Suez Canal Authority hardly budged in the five years after opening.

With charity running dry, Cairo resorts to direct financial incentives to speculative capital. As Heba Salem has reported, the central bank put to auction short-term, high-yield debt instruments for myopic hot money investors, less concerned about the country’s overall debt servicing and economic growth than with exchange-rate risks and the political status quo. Examples include the one-year local currency treasury bills with 13.25 percent interest, auctioned in December 2021. To sweeten the carry trade, central bank governors promised to redeem foreign investors’ bonds and T-bills in dollars at the official exchange rate upon maturity—a bet which is only worthwhile if the Egyptian pound maintains its value. The central bank thus acquired an additional incentive to fix the peg, since letting the pound devalue would trigger capital flight. But hot-money investors are still easily spooked; in the first five months of 2022, Egypt witnessed some $25 billion in outflows precipitating that year’s IMF negotiations. 

When panic followed this avowedly risky strategy, Egypt returned to the IMF. The deal negotiated in March is the country’s fifth in the last eight years. The IMF conditioned Egypt’s return to solvency upon commitments to implement a neoliberal package appropriate for the 2020s. This means devaluing the currency, strengthening property rights and tax incentives for foreigners, reducing trade barriers, balancing the budget through spending cuts (what the IMF now euphemistically calls “fiscal consolidation”), replacing consumer subsidy supports with cash transfer programs like Takaful and Karama, and privatizing state-owned enterprises (“reducing public-sector footprint”).

The contours of a debt cycle thus come into view: (1) under fiscal and foreign exchange pressures, Egypt opens the door wide to foreign investment; (2) falling short of the needed cash, it turns to hot money by promising high-yield loans unfavorable to itself; (3) to prevent the hot money from bolting, the central bank defends the currency peg with costly foreign reserves; but (4) the hot money bolts anyway; so (5) the government resorts to the lender of last resort, the IMF, which imposes disciplining conditionalities, such as devaluation, to restore the government to credit worthiness and encourage foreign investment. Nonetheless, (6) devaluation further constrains Egypt’s ability to provision public goods, service debt, and pay for imports, bringing it back full circle. 

Among the beneficiaries of this vicious cycle are speculators who derive their income from high-yield assets. Their victims are the working and lower-middle classes, who are most acutely exposed to austerity and inflation shocks. Empirical analysis of IMF conditionalities confirms their deleterious impacts on health and equality, as economists Alexandros Kentikelenis and Thomas Stubbs have shown; the IMF’s official recognition of the value of prosocial spending measures and “policy flexibility” since the global financial crisis has been mostly cosmetic.2 “There is so much anger here,” said one labor union leader, Refaat Hussein, shortly after the IMF-approved currency devaluation in 2016. “The little guy is always the one who pays for these decisions. The pound is nothing to the rich.” 

Generals in the boardroom

Footloose foreign capital, import dependence, foreign reserve problems, painful austerity—these are common challenges for the global South in the neoliberal era. What distinguishes Egypt? Backed by Western patrons, the Egyptian military is key to insulating the Sisi regime from lender pressure. This power to continuously refinance the nation’s sovereign debt reflects a politically expedient coup-proofing strategy to shelter clientelistic channels from scrutiny. American patronage sanctifies this arrangement as one plank in a broader regional security edifice; the US contribution takes the form of weapon sales to Gulf allies, diplomatic efforts like the Abraham Accords to normalize relations between Israel and the Arab League, and a massive subsidy to the Egyptian military dictatorship and Israeli apartheid forces—about $4.2 billion to Israel annually and $1.2 billion annually to Egypt since 2001. 

There are of course domestic constituencies within the US who favor these transfers, such as the weapons industry and Israel lobby. However, if the rhetoric of Bush, Obama, Trump, and Biden is any guide, the grander regional strategy behind these aims is to arm deputies in the War on Terror and to stitch them into a reliable constellation of states that can contain Iran. For the European Union, the key term that loosens the purse and quiets the conscience is “irregular migrant.” In December 2023, Brussels granted €110 million to boost Egypt’s border and coast guard capacities, paving the way for future aid, rumored at some €9 billion. 

Against these overriding security and border objectives, concerns about Egyptian rule of law, democracy, fiscal consolidation, and monetary policy take a back seat. As US Secretary of Defense at the time Chuck Hagel told Sisi weeks before his 2013 coup d’etat, “I don’t live in Cairo, you do. You do have to protect your security, protect your country.” In Trump’s blunter words, his “favorite dictator” had “gotten the terrorists out” of Egypt. When Cairo cooperates with American geopolitical objectives, the United States is happy to keep it solvent. George H. W. Bush, for instance, forgave some $7.1 billion of Egypt’s military debts in 1990 ($16.75 billion in 2024 dollars) to reward Cairo’s support for the Gulf War against Iraq.

Turning off the spigot of arms and finance is difficult. Obama briefly imposed an arms ban on Egypt but succumbed in 2015 after just two years. Arms transfers to Sisi resumed in 2017 under a catchall “national security” loophole to the Leahy Laws, which involved spinning an elaborate legal fiction that what happened in Cairo in 2013 was not a coup d’etat and should not trigger a coup restriction. Neither Biden’s pledge in 2020 to put human rights at the center of his foreign policy nor European political institutions have diminished North Atlantic states’ financing of the Sisi dictatorship. 

Security concerns strengthen the Egyptian military’s hold on the economy, contributing to Egypt’s ability to both avoid default and resist more aggressive exchange-rate reform or divestment. The Egyptian Armed Forces run a vast, unaccountable, and shadowy business empire with corvée labor. Conscription is compulsory in Egypt for men between eighteen and thirty years of age, who serve one to three years with low pay. Many are sent to military-owned firms: refrigerator plants, cement and steel factories, gas stations, hospitals, event venues, and Red Sea resorts. The military also owns farms in the Delta, makes pasta, bottles water, assembles vehicles, broadcasts radio, and produces movies. Military enterprises are untaxed, unaudited by parliament or public agencies, and not listed on the stock exchange with open company profiles. Their profits are not reported in the state budget. 

Sisi repeatedly says that the military sector accounts for an implausible 2 percent of the economy. But this estimate obscures the military’s true reach. Retired officers go on to be the heads of port, dam, canal, river, and metro authorities. They govern provinces and sit on the board of state-owned companies for water and sewage, land reclamation, and telecom. Army engineers are regularly employed in state-owned and private construction firms; ex-pilots go into civil aviation, while the Armed Forces often control legal rights to factors of civilian production such as land. Finally the military manages public works and procurement contracts, which it subcontracts to the private sector in a relationship of dependence. For example, a military-owned company oversaw the 2014 Suez Canal expansion, while another is building Egypt’s New Administrative Capital, forty kilometers east of Cairo. There are conspicuous signs that the military footprint has been growing since Sisi took power.

Egyptian political economists like Timothy Kaldas and watchdogs like Human Rights Watch rail against the military and push the IMF to incorporate conditionalities that reduce its economic presence or at least make it more transparent. Military business, or “Milbus,” however, is an intimate feature of the neoliberal age. Following the Cold War, the IMF and North Atlantic donor states pushed authoritarian regimes with socialist economies to liberalize markets and cut public spending, including military budgets. “To compensate the officers for budgetary losses and avoid potential coups d’état,” writes Zeinab Abul-Magd, “authoritarian regimes allowed their armies to engage in legal or illicit business activities.” She sees this logic at work not just in post-infitah Egypt, but in Pakistan, Syria, Turkey, Israel, and Iraq.3 Egypt’s military sector consequently evolved not just as a coup-proofing technique, but as a strategy to shelter grift under the banner of “national security.” 

This military dominance contributes to Egypt’s balance of payments crisis in three ways. First, military enterprises crowd out and out-compete the private sector. They enjoy cheap labor, tax breaks, reduced red tape, no-bid contracts, preferential access to credit, and soft budgetary constraints. Timothy Kaldas cites, for example, the army’s decision in 2018 to build a $1.2 billion cement factory in Beni Suef, which quickly over-saturated the market and forced a German-owned Tourah plant to halt production. Naturally, this dominance deters foreign investment in the private sector. 

Second, the impunity of the officers who run this business empire encourages a “predatory state”—that is, a government dominated by parasitic interests and a business culture inclined toward rent-seeking and fraud, rather than real growth.4 One reads of Ponzi schemes hatched by swindlers and poorly-regulated local banks in the 1980s and 2020s alike, robbing millions of their life savings. There is widespread fraud in building codes, resulting in periodic building collapse and death. In fact, the scale of corruption in Sisi’s regime was put into stark relief by Mohamed Ali, a former sub-contractor swindled by the military, who released a series of videos in September 2019 attacking Sisi and his military hustlers for wasting public funds on the rich. But most businessmen prefer to keep their heads down, hedging with the state, not against it. Consider for instance the precipitous rise of Ibrahim al-Argany, the billionaire head of a group called Sons of Sinai, whose company Hala now hustles the Gaza–Rafah bottleneck, charging exorbitant fees to arrange Palestinian departure from the war zone.

Using economic rents to buy acquiescence extends beyond Egypt’s borders, as illustrated by the recent indictment of US Democratic Senator Bob Menendez. Menendez is accused, in a colorful 2023 indictment, of accepting cash and gold bars from the Egyptian government in exchange for votes on the Senate Foreign Affairs Committee to secure continued US military funding to Cairo; the bribes were paid from revenues collected by an exclusive monopoly the Egyptian state granted to a New Jersey company to certify US halal meat exports to Egypt.

Third, the profits that accrue to military-owned enterprises are not routed into the general budget or deployed to reduce sovereign debts. There is no accounting or macroeconomic law that says the military cannot use its unspent revenues to provide civilian public goods or cut back on the deficit. But the reported average 25–30 percent of project budgets retained by the military remain with the military or are expended on weapons purchases. Between 2016 and 2020, Egypt became the world’s third largest arms importer according to the Stockholm International Peace Research Institute. Sisi’s regime now boasts a fleet of Rafale and Eurofighter Typhoon fighter jets, amphibious assault ships, naval frigates, the region’s only aircraft carrier, and an arsenal of missiles and air defense systems, inking deals with Germany, Italy, France, and the United States in the process. This level of military spending reduces budget space for public investments in health and education. Strikingly for a government already severely in debt, which receives a yearly gift of $1.3 billion on average in US military financing, Cairo still acquires its arms with borrowed money. This was the case for its multi-billion euro deals with France in 2015 and 2021.

External shocks

These features of Egypt’s political economy—a dominant military sector, high external debt, dependence on food imports, and US backing—have been present since the 1980s. What explains its recent stress? Egypt’s exposure to the wars in Ukraine, Sudan, and Gaza motivated the IMF’s speedy and generous credit extension in March. War in Ukraine has been especially impactful for Egypt’s tourism sector, which is responsible for 15 percent of GDP and is a source of precious foreign currency. Before January 2022, the millions of Ukrainians and Russians visiting the Red Sea resorts were two main sources of tourism. The Black Sea states were also Egypt’s largest import sources for wheat, crop seeds, and fuel. When Putin invaded Ukraine, the tourists left and grain reserves dwindled as state-buyers frantically sought alternative, more expensive sources. The hot-money investors soon bolted too, triggering the aforementioned capital flight of $25 billion. Fearing a foreign exchange shortage, the central bank moved in March 2022 to release the peg, sinking the pound from LE 15.6/$1 to LE 18.5/$1.

With crisis setting in, the Egyptian agricultural sector’s became unable to import crop seeds, held in limbo at the ports. The poultry industry, unable to secure imported chicken feed, found itself killing millions of chicks. Inflation rose continuously for the next two years, topping 37 percent in September 2023, while Egypt’s bonds downgraded to negative. Moreover, war in Sudan broke out in April 2023, throwing 450,000 refugees onto an already-stretched public services bureaucracy and subsidy regime and giving rise to waves of anti-immigrant sentiment in Egyptian cities and calls by the government to reconsider its support for “guests.” An estimated nine million Sudanese are internally displaced, a fact soon to register in the Mediterranean. 

The early weeks of the Gaza war saw disruptions to Israeli natural gas imports from the Tamar field, which Egypt re-exports for foreign currency. Power cuts at households lengthened nationwide as a result. The subsequent Houthi blockade of the Bab Al-Mandab straits in response to Israeli ethnic cleansing in Gaza has diverted world cargo traffic from the Red Sea, reducing Egyptian state revenue through the Suez. Renewed American bombings of Yemen have not restored the confidence of the shipping industry or its London insurers. Compared to January 2023, Suez revenues are down by 40–50 percent, further diluting Cairo’s access to foreign exchange reserves. 

Egypt’s military leverage

Against this underlying sensitivity to its balance of payments, Egypt’s military spending spree of the past decade can seem mysterious. Egypt is not under attack. It signed a peace deal with Israel half a century ago. The United States, Saudi Arabia, and the UAE are substantial allies. Cairo maintains deepening ties with Turkey and, since the Iran-Saudi détente in 2022, has discussed opening an embassy in Tehran. Ceasefires in Libya have held for four years, while the civil war in Sudan is in no danger of spilling over into Egypt. Belligerence against Ethiopia for a dam on the Blue Nile turned out to be mostly a war of words, while in the interior of the Sinai much of Egypt’s hardware seems incongruent with the goals of defeating a low-intensity insurgency.

A reasonable explanation is that armaments serve Sisi’s political agenda. As Khalil Al-Anani puts it, “upgrading and modernizing the Egyptian Armed Forces is a crucial element in Sisi’s attempt to maintain military support for his regime.” It supports Sisi’s image as a modernizer and fits the general’s vision for what kind of spending impresses the officer corps. To the United States, it also signals Cairo’s willingness to take on a more vigorous role in the US-backed regional framework, whether that means policing missions for Yemen, Somalia, and Libya or safeguarding naval traffic. The US is not the only advanced power to recognize this need; Sisi bought nearly $4 billion in French and German arms between 2013 and 2017 in defiance of the Obama-era freeze. But US military financing does provide important rents, which Sisi is anxious to maximize. Recall the gold bars his friends sent to Bob Menendez. 

On economic restructuring, the Egyptian government has been keen to leverage its status as a regional giant too big to fall. In 1987, the IMF executive directors cited Egypt’s “size and political importance in the region” in ignoring younger staffers’ push for more aggressive reforms, as Bessma Momani reports. Rather than Egypt floating its currency, the board accepted a gradual reform of the exchange rate in its 1987 Stand-by Agreement, releasing $327 million and then requesting that the Paris Club reschedule $7 billion of Egyptian sovereign debt on terms that a US Embassy Cairo report described as “more generous than had been granted to virtually any other debtor country.” 

Sisi is keenly aware of this leverage and appeals to US and European fear. “We were told by economists that we need deep austerity measures in our economy and that we should halt grand projects,” he said in January 2023. “But to that I say: I employ five to six million people, tell me, how could we shut all this down?” In other words, the projects can only be stopped at the risk of firing hundreds of thousands of young men. Or as he warned again a few weeks after the Hamas attack on October 7 and the Israeli invasion of Gaza, the region is “a ticking time bomb.” He then ruled out large-scale transfers of Gazans to the Sinai: “I must emphasize that we have not yet eradicated terrorism.” Egypt, in other words, needs ammo, not austerity or refugees. The message to donors parallels the one Sisi has perfected for a domestic audience, fearful that attempts at either revolution or neoliberal restructuring will lead to state collapse or popular misery. 

A deeper reckoning

The causes of Egypt’s crisis are thus two-fold: a distinct confluence of geopolitics in Ukraine, Sudan, and Gaza over the past two years, occurring in conjunction with long-standing structural failures of the Egyptian economy that privilege speculative capital and the military. These two forces combine to aggravate the cost-of-living crisis, while the burdens of adjustment to new inflationary regimes and lender conditionalities fall on the shoulders of wage labor. The IMF’s rescue deals accentuate this situation. By propping up an intellectually bankrupt model of speculation-led growth and austerity, it sets the stage for future conflict.

The country’s perpetual currency problems also reveal a neglected contradiction in the current, US-backed security settlement in the Middle East. Defending Israel’s occupation of the Palestinian territories is a crown jewel of American foreign policy, but it destabilizes Egypt. Popular agitation against the Sisi regime for its do-nothing policy toward Palestinians remains a source of potential political crisis, while a mass forced exodus of Palestinians from Gaza into the north of Sinai looms as a real possibility. Since October 7, the war on Gaza and the Houthi blockade of the Red Sea cargo trade have disrupted a crucial source of foreign currency for Egypt. To end the war would require conditioning American aid to Israel, a red line that so far is too bright for the Biden administration. American support for Israel and its strategy of violent equilibrium thus threaten to bankrupt Egypt, bringing it back once again to the IMF.

An IMF rescue and devaluation of the Egyptian pound in turn are unlikely to substantially civilianize the public sector because the regime’s political survival rests on military management of the economy. IMF structural reforms are not prepared to grapple with the fundamentally political nature of failed Egyptian governance; the lender has not so far been able to replace a political economy of clientelism with a new, coherent coalition of developmental elites. Rather its creditor conditionalities further immiserate the Arab world’s largest population, while saving the regime from default. Egypt is at once too big to fail and too difficult to save.

This dilemma calls for a new approach to foreign aid and sovereign debt financing that prioritizes debt forgiveness, capital controls, human security over weapon transfers, as well as timely, low-interest lines of credit and conditionalities that foster political openness and a progressive tax base. Mona Ali has called for such reforms at the IMF and donor level. On the geopolitical stage, ending the war on Gaza, allowing Palestinians to return north, loosening the Israeli-imposed bottlenecks on aid, and rebuilding the Strip are important steps for restoring Egyptian solvency. The immediate effect on Egypt’s economy would be to deflate the Houthi impetus for the blockade of the Bab al Mandab strait and encourage Suez Canal traffic. Further geopolitical boosts for Egypt’s stability would be consolidating the fragile peace of Libya’s new order (its last ceasefire was four years ago), taking steps to freeze the conflict between the Rapid Support Forces and General Burhan in Sudan, and restoring Black Sea wheat trade to pre-war volumes.

A new horizon for Egypt may also be opened by a revolutionary democratic transformation of the Egyptian state, on par with the end to military dictatorships in Portugal and South Korea during the 1970s and 80s, and for which Egypt’s 2011 revolution may one day be seen as a dress rehearsal. Unlike the Gulf states, Egypt has the mechanics of parliamentary democracy and a vibrant legacy of labor and student organizing; these were the groups which inaugurated the 2011 revolution. Success would require invigorating the old student-labor-urban middle-class alliance which forced Mubarak down, and convincing a critical mass of the army and security forces to defect. 

Because state and creditor interests favor the status quo, however, this kind of reckoning remains unlikely. It would require larger shifts in the global political economy or an unexpected shake-up in the balance of class forces within Egypt. The revolutionary chant yusqut yusqut hukm al-‘askar (“down with the military”) will likely remain a perennially relevant call, one hymn among many for the spiritual descendants of those progressives, who thirteen years ago bellowed from the streets of Cairo to Alexandria, Aswan to Port Said, the textile mills in Mahalla to the steel works in Helwan, their righteous demands for social justice, freedom, and bread.

  1. Bessma Momani, IMF–Egyptian Debt Negotiations (Cairo Papers in Social Science, 2003).

  2. Alexandros Kentikelenis and Thomas Stubbs, A Thousand Cuts: Social Protection in the Age of Austerity (Oxford University Press, 2023).

  3. Zeinab Abul-Magd, Militarizing the Nation: The Army, Business, and Revolution in Egypt (Columbia University Press, 2017), p. 20.

  4. See Farah, Nadia Farah’s Egypt’s Political Economy: Power Relations in Development (2009). Cf. James Galbrath’s The Predator State (2008). For a general treatment of “predatory states” see William Reno’s chapter “Predatory States and State Transformation” in The Oxford Handbook of Transformations of the State (2015).

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