The Egyptian Bail Out
Debt, territorial control, foreign policy, and war remain intertwined, as they always have been.
It has gone rather underappreciated in international media, but the Egyptian government of strongman Abdel Fatah el Sisi is in the process of being bailed out. The lead actors in this process are the Gulf Arab states – the UAE announced a plan to invest $35 billion in the country on 23 February - and the institutions of the international economic order, meaning it has Washington’s backing, with IMF head Kristalina Georgieva announcing its own multi-billion dollar loan program is likely to be finalized in the coming weeks as well.
It is not hard to see why these actors are to shore up Cairo. Despite Sisi’s anti-democratic rule, his government’s 2016 murder of Italian researcher Giulio Regeni with years of subsequent cover-up, and the jailing and persecution of any domestic political opposition. Or even the fact that Sisi has reportedly sought to sell arms to Vladimir Putin’s Russia amid its war against Ukraine.
The reason is that Egypt is on the brink of seeing its slowly escalating economic crisis turn political. Even though it received a previous IMF support package in December 2022 and failed to follow through on a key pledge to move the Egyptian pound to a free float, a move aimed at saving the government much-needed foreign currency to service its hard currency debts. Cairo did allow the Egyptian pound to weaken somewhat in the aftermath of the initial deal, but by September, it was clear that Sisi’s government would not act further. The IMF effectively moved to suspend its program last September because Cairo failed to comply.
But on 7 October, when Hamas launched its terror attacks on Israel, everything changed. The subsequent Israeli response has decimated the Gaza Strip, which lies on the border with Egypt’s Sinai (which Israel also occupied between 1967 and 1982 before the normalization of ties with Cairo). As of the time of writing, an estimated 1 million Gazans – nearly half of the region’s population are huddled in the border town of Rafah. While they already face a humanitarian catastrophe, the situation may get worse yet still. And those Palestinians certainly believe that they face, at the minimum, a significant risk of being ethnically cleansed if the Israeli Defense Forces (IDF) does move in and pushes them over the border into Egypt. The track record of Tel Aviv allowing Palestinians forced out of their homes to return is de minimis; in fact, most of the Gazans themselves are descendants of those displaced by the conflict that accompanied Israel’s foundation, also known as the Nakba, in 1948.
Cairo refuses to open its border to these refugees, in part because it agrees with the Gazans that they will not be allowed to return if they leave – but a bigger motivating factor for Sisi’s regime is an attempt to mitigate its own political risk. Such a humanitarian catastrophe would surely see thousands, if not millions, of Egyptians take to the streets and demand the end of Cairo’s increasingly close political and economic relations with Israel. Egypt was the first state to recognize Israel back in 1979, leading to the ultimate Israeli withdrawal of Sinai, which led to an agreement for Israel to buy gas from Egypt, but in the last decade, that relationship has been reversed. Egypt’s declining hydrocarbon production means it now buys gas from Israel instead, with the East Mediterranean Gas Pipeline reversed in 2019 after production at Israel’s flagship Leviathan gas field came online.
“The population is already angry at Sisi’s government for its economic mismanagement – and warning signs are flashing red.”
And while Sisi has jailed every domestic political leader willing to challenge him and dismantled the networks of the Muslim Brotherhood that formed the core of Egypt’s only non-military dominated government after the 2011 Arab Spring before he ousted them in a coup, a dramatic crisis from Gaza would be very likely to fuel a new Egyptian opposition and even street protests. The population is already angry at Sisi’s government for its economic mismanagement – and warning signs are flashing red. Inflation and youth unemployment are higher today than on the eve of the Arab Spring.
A new crisis in Egypt is the last thing that the Gulf Arab states want to see, given their fears about contagion from the major population center of the Sunni Arab world. It would also deeply undermine the Biden Administration’s attempts to stop the conflict in the Gaza Strip from spreading further throughout the region. So, while investing in Egypt may be an unwise economic decision, it makes political sense for those doing the heavy lifting.
One additional point is that I am skeptical that the UAE’s $35 billion investment package may not quite reach that size. But the fact that it does include $11 billion in Emirati deposits being turned into local currency (and those handing those billions to the Egyptian Central Bank) should provide a strong basis of support for avoiding the pain of currency liberalization, though formally the IMF is unlikely to give up on this demand. Egyptian debt has been on a tear since the deal was announced, little surprise since the sticker value of the UAE’s funds is larger than Cairo’s entire external debt servicing bill for the year.
It also remains to be seen if Saudi Arabia – historically the source of bailouts for Middle Eastern countries from Bahrain to Lebanon – will also join the effort. Crown Prince Mohammed bin Salman (MBS) has recently been vowing not to provide such support anymore. However, he was largely speaking in the context of Lebanon – which has been in default since March 2020 and which Riyadh under MBS has refused to aid, citing the dominance of the Iranian-backed Shia terrorist group Hezbollah in its politics. Might more Saudi money be coming for Egypt? I would guess yes – but it will also involve the future control of land, with Riyadh renewing its longstanding demand for the transfer of two islands, Tiran and Sanafir, in the Red Sea near MBS’ beloved pet project, NEOMm, the hyper-futuristic supercity he has envisaged out of his favored yacht berth. However, such a move would also provoke Egyptian opposition, and local media has speculated that Cairo may offer land in the southern Sinai for Saudi to develop in support of MBS’ NEOM project.
Debt, territorial control, foreign policy, and war remain intertwined, as they always have been. Egypt’s bailout is the latest evidence of that.