President Sisi’s regime follows a consistent policy of entrenchment in the global financial system to align its own stability with the economic interests of international organizations, Western states, and private businesses. Even if the diet markets itself internationally as a bulwark against terrorism and illegal migratory flows, this narrative often overshadows an underlying economic strategy. It is a policy of heavy borrowing that involves international actors in the repression of the regime and increased social deprivation of the lower and middle classes, effectively fueling instability and violent extremism, not only in Egypt, but also maybe in the whole region.
The government’s policy to fit into the global financial system has three components. First, there is an increased dependence on external loans to finance government operations and infrastructure megaprojects. This includes an upsurge in short-term government bonds and treasury bills, or “Hot money. “Second, the increase in arms transactions since 2014 has made the regime the third largest global arms importer between 2015 and 2019. Finally, the high level of foreign direct investment (FDI) in the Egyptian oil and gas sector has linked long-term Western investments to the stability of the regime. These factors provide a basis for international confidence in the regime due to financial interests. They also provide direct incentives for international complicity in repression and create obstacles to democratization. Ultimately, this economic strategy exacerbates long-term challenges with adverse and destabilizing effects. When international capital flows are used to finance the military domination of the Egyptian economy, they allow the security apparatus to tighten its grip on the state.
Egypt relies heavily on debt to create financial dependencies between the regime and international actors. The regime embarked on a borrowing frenzy which increased external debt as a percentage of GDP from debt by 14.67 percent in 2012 at 31.7% by the first quarter of 2020, reaching $ 111.3 billion. This explosion in debt was also accompanied by exponential growth the level of foreign holdings of short-term Egyptian Treasury instruments, which rose from $ 60 million mid-2016 to $ 20 billion in October 2019. The scheme was able to attract this inflow of short-term capital by offering one of the highest interest rates in emerging markets, with a rate of return hovering around 13 percent from July 2020. This has earned Egypt the reputation of “darling of emerging markets, ”And was reflected in the level of investor demand for a $ 5 billion Eurobond episode. The largest in Egyptian history, the bond was 4.4 times oversubscribed, indicating investor confidence in the regime’s stability.
The heavy borrowing has a number of serious consequences for Egypt and the international community. First, it roots the regime in the global financial system, as its ability to repay debt depends on the regime’s survival. This isolates the regime from international pressure to moderate its repression. The unrest in Egypt will directly affect government revenues as the regime’s ability to collect taxes declines, in addition to its ability to raise taxes. to roll its debt, which increases the risk of default. Second, it involves the regime’s international creditors in its appropriation of public funds for the enrichment of military elites through mega infrastructure projects. These projects are both directly and indirectly funded by international donors (including regional allies and international organizations like the IMF).
The regime’s arms spending spree, from 2014 onwards, played a key role in consolidating its international safety net. Imports of arms triple between 2014 and 2018 compared to the period 2009 to 2013. This is an increase of 206 percent. The glut of arms purchases shows no signs of slowing down – as recently as June 2020, the regime was in talks with Italy for a major worthy arms deal $ 9.8 billion. The Western arms industry is the main source of to supply-France, Russia and the United States are the main suppliers. France alone satisfied 35% of the regime’s demand for arms between 2015 and 2019.
While arms transfers include conventional arms, they also include the purchase of surveillance equipment and crowd control equipment, used in the direct repression of demonstrations. The sources of funding for these arms transactions are difficult to confirm: they are not reflected in official defense budget figures. However, there is some evidence that external loans are partially used for this purpose. For example, in 2015, a € 5.2 billion arms contract – which included twenty-four Rafael fighter jets – between Egypt and France was partially funded by a loan from the French State of 3.2 billion euros. This means that French taxpayers have loaned the Egyptian regime 3.2 billion euros to buy weapons, which Egyptian taxpayers will repay with interest. This reflects the process of appropriating Egyptian public funds for the benefit of the French arms industry. These arms deals made the regime one of the main customers of Western arms manufacturers, effectively mixing Western defense industries with the regime’s survival.
The transformation of the regime into a major arms importer has two main consequences. First, it involves Western states and the defense industry – the main supplier of surveillance and crowd control equipment – in suppressing popular dissent. Second, it inhibits the will of Western states to condemn and act against human rights violations. For example, Italy has continued supplying arms to the regime even after five members of the Egyptian security apparatus appointed in December 2018 as a suspect in the torture and murder in 2016 of an Italian student, Giulio Regeni. In addition, Italian arms sales to Egypt triple in 2019, and plans for a series of arms transactions for 2020 totaling 11 billion euros. The continued flow of arms from Italy has caused Human Rights Watch to call for a halt to Italian arms transfers, citing concerns that Italian arms are facilitating despotism. States like Italy allow the regime’s strong repression in a way that will only increase political polarization, prevent the prospect of democratization, and centralize state power in the hands of the security apparatus.
Another element is the increased level of foreign direct investment (FDI) in Egypt’s oil and gas sector. The scheme is currently the number one African destination for FDI, with investments exceeding $ 9 billion in 2019. Most investments are directed to the oil and gas sector, which has been boosted by the Discovery of the Zhor gas field in 2015, the largest in Egypt and the Mediterranean. To continue to attract FDI in the sector, in 2019, the regime introduced new oil and gas exploration contracts on favorable terms for the investor. These new conditions allow the investor to control his share of production, rather than forcing it to sell it to the government. The Zhor field, which is part of the Shorouk concession, is jointly owned by Eni, the Italian state oil company, British Petroleum and Rosneft. Eni has a 50 percent stake. While the accumulated FDI in the sector is in the billions, Eni’s total investment in the sector from 2015 to 2018 reached 13 billion dollars. The surge in foreign investment in Egypt’s oil and gas sector is a deliberate policy of the state. On August 31, President Sisi expressed his Support for the expansion of Eni’s investments in the country. These investments increase the interest of international energy companies in the regime, tying billions of dollars in investments to its immortality.
In addition to the implications for security and stability, these policies make the regime the primary beneficiary of wealth transfer from the middle and lower classes to the military elites. The regime accumulates profits through interest on loans, arms sales, and oil and gas revenues, all funded by the Egyptian taxpayer. It also ensures that any emerging demand for democratization would clash with international interests, essentially ensuring the survival of the regime much longer than it would have without such lavish support.
Maged Mandour is a political analyst and writes the column “Chronicles of the Arab Revolt” for Open Democracy. Follow him on Twitter @MagedMandour.