Egypt: Cash helps now, but only reforms secure the future

For Egyptian President Abdel Fattah el-Sissi, the timing was perfect. The start of his third term as president coincided with a bonanza for his country.

When he was sworn in on Tuesday, el-Sissi promised "to adopt strategies that maximize Egypt's economic capabilities and resources, and enhance the solidity and resilience of the Egyptian economy in the face of crises, while achieving strong, sustainable and balanced economic growth."

Such strategies, however, have only become feasible thanks to a recent influx of international investment. 

In February, the United Arab Emirates announced a $35 billion (€32.2 billion) investment to build a new tourism resort on Egypt's Mediterranean coast. 

In March, the European Union entered a strategic partnership with Egypt worth $8 billion to reinforce Egypt's stability and to boost counter-migration efforts.

The same month, the International Monetary Fund (IMF) increased an existing funding deal of $3 billion to $8 billion.

Prior to these investments, el-Sissi would likely have had to scale back the lofty promises of his inauguration speech. Egypt's financial situation was dire: the country's public debt was close to 100% of GDP, a severe shortage of foreign currency reserves had left the indebted state strapped for cash, it suffered from inflation of around 36% and subsidy cuts had pushed some 60% of the population into poverty.

"The funding secured in recent weeks will ostensibly help ease the economic crisis and possibly stabilize Egypt in the short term, but I am skeptical that these funds may only offer the illusion of a temporary respite," Michelle Pace, professor of global studies at Denmark's Roskilde University, told DW.

Reforms challenge army-dominated economy

"The new financing heading to Egypt could either encourage more of the same destructive economic policies and practices or it could encourage serious reform," Timothy E. Kaldas, deputy director of the Washington-based Tahrir Institute for Middle East Policy, told DW.

So far, Egypt's central bank has implemented the IMF's first demand. In March, it devalued the local currency, the Egyptian pound, against the US dollar and transitioned it to a floating exchange rate.

This means that the price of one US dollar — which was previously pegged at 31 Egyptian pounds — is traded at market value and is currently hovering at around 50 Egyptian pounds.

The step marks a turnaround in Egyptian financial policy. A previous IMF loan fell through because the country's central bank didn't transition to a floating exchange rate.

"It will be critical for Egypt to continue with the implementation of economic policies under the program to achieve this and the IMF stands ready to support the Egyptian authorities in staying the course," an IMF spokesperson told DW.

The IMF will review Egypt's reform steps again in late June. Meanwhile, the IMF outlined five other recommendations to strengthen and extend Egypt's reform steps, including enabling private sector involvement in public infrastructure projects. 

However, several mega-projects, such as the construction of the New Administrative Capital and the expansion of the Suez Canal, are not only costly but also continue to be managed by companies connected to the army, which played a key role in all industries in Egypt. 

"The Egyptian army has a vast empire that includes hotels, housing, infrastructure projects, gas stations, consumer goods, food, mineral water, practically everything and the army enjoys privileges such as exemption from taxes and customs duties," Pace told DW.

Moreover, the military is a firm backer of el-Sissi and structural changes to this flourishing business establishment would be a delicate matter. 

"The funding from the IMF and EU is predicated on Egypt carrying through a series of significant reforms, but doing these reforms in a meaningful way would require the Egyptian government to make a big change in the economic policies it has followed so far," Anthony Dworkin, senior policy fellow at the European Council on Foreign Relations, told DW.

"There is a big risk that Egypt will try to use the lifeline it's been thrown to avoid these difficult reforms, counting on its geopolitical importance and the risk of instability to allow it to escape conditionality," Dworkin added.

Conflicting international interests

In addition to these complicated domestic structures in Egypt, other investors, such as the United Arab Emirates or Saudi Arabia, have  agendas  of their own that are backed by amounts that far exceed the current institutional funding.

Their key regional concern is to have a stable neighbor. In turn, investments are less linked to requests for change or reform and aim instead to stabilize the existing economy. 

However, Egypt does not rely on regional support alone, which gives some leverage to international bodies.

"It's very important for the EU and IMF to ensure that meaningful reforms do in fact take place in exchange for the successive tranches of funding that they deliver," Dworkin told DW.

Kaldas agreed, "If conditions aren't well targeted and strictly enforced, Egypt's leaders are likely to view the new funds as endorsing their sense that Egypt is too big to fail, assuming that they can continue unchanged and be bailed out when they crash Egypt's economy again."

Edited by: Sean M. Sinico