Too big to fail

The global fallout of the conflict in Ukraine is having wide repercussions on the economies of both developed and developing countries, exposing unaddressed vulnerabilities and putting fiscal policies under increasing strains. Non-oil producing countries in Middle East and North Africa (MENA) have been particularly affected by the economic downturn, aggravated by the external shocks of the past few years, which include the COVID-19 pandemic and the disruption of global supply chain. Lockdown policies adopted worldwide went along with incidents that had a huge impact on global trade. Interestingly, less than two years after the Ever Given container ship got stuck in the Suez Canal blocking the passage for 6 days, all eyes are on Egypt again as its economic crisis and worsening financial situation can potentially have repercussions on a wider scale.

Contrary to Tunisia, that still awaits final approval on its US$1,9 billion preliminary deal with the International Monetary Fund (IMF), the details of the US$3 billion financial support package to Cairo were made public by the same lender of last resort on 10 January 2023. The 46-month Extended Fund Facility (EFF) will run for 46 months, during which the Egyptian regime has pledged to adopt structural reforms to address the currency crisis and reducing the deepening debt. The role of the state in the economy has been the focal point of the discussions with the Bretton Wood institution, as the Egyptian government has promised a wide sell-off of state-owned enterprises (SOEs) and to increase the private sector participation in public investments, a way to levelling the playing field between public and private sectors.

The military’s outsized role in the economy (with activities ranging from running fuel stations to producing water bottles) is likely the shrink as the state promises to exit 79 economic sectors and partially exit 45 more. However, the decoupling and partial liberalisation (that would exempt sectors considered strategic by the government) will also represent a stress test, revealing the true nature of Egypt’s hybrid regime, in which the cohabitation between civilian and military authorities could start to unravel under the pressure of the IMF-guided reforms. Considering his military background, President Abdel Fattah al-Sisi is very unlikely to alienate the army, the monopolistic force that is driving post-2013 Egypt (and before) and has been entrusted with megaprojects such as the US$8 billion expansion of the Suez Canal and the US$45 billion New Administrative Capital, particularly useful for patronage distribution.

At the same time al-Sisi needs to strike a fine balance for the IMF loan to act as a catalyst for further investments from the Gulf, at a time when Saudi Arabia has just announced the end of the unconditional aid policy that has also seen Cairo among the main beneficiaries. While solving the dilemma between the need for critical reforms and the reality of a military-controlled economy, the cost-of-living crisis is pushing an increasing number of Egyptians to migrate towards Europe with arrivals in Italy rising from 1.264 in 2020 to 20.542 last year. Considering its demographics, which makes it the most populous country in MENA, an ominous sign that shows how Egypt is too big to be allowed to fail.