Egypt's Economic Turmoil

Jon Alterman: Hafsa Halawa is an independent consultant and a non-resident scholar at the Middle East Institute based in Dubai. She's the author of “Gulf Investment in Egypt, A Balance of Mutual Need.” Hafsa, welcome to Babel.

Hafsa Halawa: Hi Jon. Thank you for having me.

Jon Alterman: In your recent book, you discuss Gulf investment in Egypt. Why do the Gulf States care about Egypt?

Hafsa Halawa: It's a difficult question to answer at the moment, considering the level of frustration on all sides. Ultimately, Egypt is the most populous Arab nation, and strategically located, bridging Africa and the Middle East. It has the Suez Canal, Mediterranean and Red Sea access, and a historic role to play in the region. In addition, its successive regimes and leaderships have been able to exert massive power and control over the trajectory of the wider Middle East and North Africa.

Jon Alterman: When Mohammed Morsi was president of Egypt, the Gulf States were concerned. When Abdel Fattah Sisi became Egypt’s leader and later its president, they were very encouraged. In your paper, you discussed the Gulf states dispersing about a hundred billion dollars to Egypt after Sisi took power and their sense that Egypt wasted the breathing space that aid produced. Do Gulf states see Egypt’s hundred billion dollars in aid as a lot of money?

Hafsa Halawa: I should caveat that the hundred billion dollars are an assortment of concrete figures and speculation over a number of other investments, loans, and financial injections that were given to the country over the past 10 years. It's a massive amount of money. President Sisi did not effectively utilize this breathing space as he not only reinforced very bad economic practices that were a holdover of the Mubarak regime but also went even further back than that. He has used that money to invest heavily in state infrastructure projects, siphoning off a lot of that money through state contracts to military companies and Egyptian construction companies. This has helped keep the macroeconomic growth numbers on a level that has pleased the international finance institutions and delayed the international panic that is now setting in towards Egypt and its fiscal planning. 

President Sisi did not significantly change Egypt's economy. Though there have been efforts to reform the economy, none have been successfully implemented. For example, the massive IMF deal signed in November 2016 was largely about lifting subsidies, but it did also aim to reform a number of state institutions, notably the Egyptian gas and petroleum companies that manage Egypt's natural resources. The goal was to open up those sectors to privatization and allow for a thriving private sector in the country. In reality, President Sisi stifled private sector investment even further, by not introducing the kind of reforms that the IMF and other partners wanted to see and by enriching and empowering the military through a web of military companies.

Part of the reason that the military has been empowered is a series of legislative reforms over the last decade that have entrenched the power and ability of these military companies to receive state tenders.

This is an institution that does establish a paper trail. There are always laws, amendments, or decrees that link us to how they're able to access funds and contracts.

Throughout the decades of Gulf aid, we are seeing a real shift from aid to investment. There is now a clear desire across the three major Gulf states, Saudi Arabia, UAE, and Qatar, to see a return on investment. Though these states are unified in this position, each state is seeking its own interests in the kind of investments they want to be part of inside Egypt or what they view as a political versus economic relationship. The UAE continues to work on the political and economic relationship together, while Saudi Arabia is dividing the two and siloing them off, with the political relationship being a separate discussion to the economic relationship.

Jon Alterman: When it comes to the negotiations over the terms of investment. I was corresponding with a banker this morning who said it's almost as if Sisi is playing a game of chicken with Mohammed bin Salman over who is going to bend on some of these conditions. Does that sound accurate to you?

Hafsa Halawa: Absolutely. The Egyptian regime is in a real identity crisis. This is not just about President Sisi. This decades-long, if not centuries-old idiom, of Umm Al-Dunya (mother of the world) in Egypt is primarily rooted in the idea that Egypt is too big to fail. This is not something new; this idea has been batted around often since the uprising that led to the fall of Hosni Mubarak in 2011. In reality, this is something that is very internalized and a part of the regime's identity, the military institution's identity, and Egyptian cultural identity itself.

Jon Alterman: You have described the UAE and Saudi Arabia, almost as if they're aligned. Do they have differences when it comes to, their history with the Egyptian leadership, their approach to Egyptian leadership, and their sense of the role of military institutions in the economy?

Hafsa Halawa: There is still an inherent belief in this regime that Egypt is too big to fail, and that the Gulf States will come to their aid. The question really is, will they? My conclusion in the paper is that there is a moment where Egypt, to an extent is too big to fail. I don't see massive rescue packages and bailouts from the Gulf. That is over.

However, there is a watershed moment, probably later this year, where the Egyptian regime will have to concede significantly, and the Gulf States will come in with the bare minimum according to those concessions because they want to see significant reform. The problem is that the reforms the IMF and the Gulf states are pushing for will be very painful for Egyptians, bringing into question issues of legitimacy and political survival. The regime's political survival is not necessarily contingent on economic security, but this creates major fishers and problems vis-a-vis the civilian-military relationship.

I was just in Cairo two weeks ago. There is significant anger across the country, which is not lost on the regime, despite the defiance in the face of these challenges. The regime is seen as being responsible for the problem as much as they are responsible for the solution. It is very difficult now to find anybody in Egypt with a lot of patience and will to give this regime time to fix certain issues and mistakes that have been made in economic planning. That's a bigger calculation for leaders in Cairo than it is maybe for leaders in the Gulf States.

Jon Alterman: You've been going back and forth to Egypt for your entire life. You went right after the revolution in 2011 to participate. You've seen Egypt under stress and the sort of small protests that turn into large protests. My sense is that there is anger, but there haven't been demonstrations and there's no organization. Additionally, many Egyptians feel that the actions of 2011 didn't move the country forward; they put the country backward. How does that affect the calculation of the current Egyptian leadership? How does it affect the calculations of the Gulf leaders? How does it affect the calculations of Egyptians as they think about this moment of crisis?

Hafsa Halawa: No one can predict mobilization. One of the major things that has shifted the course and trajectory of relationships with Egypt is how much of a surprise 2011 was in terms of the mobilization and the quick escalation in size and in the removal of Hosni Mubarak. I'm not necessarily suggesting that that's on the cards. I have much deeper fears for Egypt right now, not just for my own friends, family, community, and for the country at large. I've never seen people in such distress. I've never seen the country collectively in such distress and real fear about what is to come. The Egyptians have always been very proud. It comes back again to this Umm Al-Dunya internalization amongst them, that they are different from other nations. Some people call it arrogance. Some people call it exceptionalism. However, it is a very Egyptian thing to say, "We are Egyptian, we're not susceptible to the kind of risks that created the crisis in Iraq. We're not the same. At a moment of inflection, which could have descended us into civil war, we're not Syria, we're not Libya."

All of these things have been turned out by politicians and leaders over the decades, and it's a very internalized thing for Egyptians. People have looked now more deeply at the crises that have unfolded economically in countries like Turkey and Lebanon, and they're really, really afraid. This could be the formation of the civilian democratic movement and a much more vocal political opposition. Five, six years ago, the opposition was not part of the social, cultural, and political space in the country. Now these personalities, despite being barred from television by the security apparatus, are finding ways to communicate with the people, and the people only want the economy to be fixed.

I have friends who are educated mothers, some work and some do not. Our WhatsApp group is normally gifs, memes, jokes, social media chatter, and gossip about what's happening in the country. Now on a daily basis, it's a discussion about the price of the U.S. dollar on the black market or the price of coffee at their local cafe, or how they don’t go out as much for dinner because it's too expensive.

When I’m in Egypt, I’m so struck by how much this is affecting everyone from the poorest Egyptians to the most elite. Obviously, the elite have an opportunity because of their mass wealth to absorb a lot of these changes and sustain themselves, no matter the crisis, like what’s happening in Lebanon through that massive financial crisis. Yet, it really is affecting everyone and it's all anybody can talk about.

The biggest message that is becoming very clear inside Egypt, which the Gulf states are very cognizant of themselves, is things are only going to get worse. I'm struck by the lack of urgency that seems to be coming in terms of messaging from the government and leaders, within the presidency and around it. When a government is so disconnected from its people, it is majorly concerning.

Jon Alterman: You live in Dubai where you see Arabs from all over the world: Gulf Arabs, Egyptians, Iraqis, Lebanese, and Palestinians. What is the mood around Egypt? What's the regional sense of Egypt? Is there a sense that this is a precarious moment or is there a sense of, "Egyptians have always had their thing, this is just their thing?"

Hafsa Halawa: I’m struck by the level of concern from everyone: officials and non-officials, Emiratis, and other Gulf Nationals, and Arabs from all over the region. There are constant questions about what's happening in Egypt. One of the biggest misconceptions post-uprising and post-failed transition to democracy is this notion that suddenly everybody went back home and stopped reading the news and stopped caring and engaging in politics or economic or social issues across the region. That's not true. People are more engaged than ever, and people are more interconnected than ever.

Dubai is a great example of that, where people from all over the region are building lives and supporting their families back home. Amongst my Egyptian friends in Dubai there is constant chatter on WhatsApp of needing to send money back home and wondering how to buy Egyptian pounds and sell dollars. Across the region, people of all ages, portfolios, careers, and lives, are wondering about the 108 million Egyptians and what a massive economic shock will look like.

Despite the tone from the leaders of the Gulf states, they are incredibly concerned because it is such a large country and has such a strategic location. The economic issue in Egypt has become a major security question because there are major conditions now being placed on the Egyptian regime in order to receive Gulf support.

Jon Alterman: As you see the region focusing on Egypt, do you see the world focusing on Egypt as something that could destabilize the Middle East or create enough problems? Is Egypt being big enough to create problems to destabilize other parts of the world?

Hafsa Halawa: Absolutely. To be fair to the Umm Al-Dunya principle, what happens in Egypt rarely stays inside Egypt, be it political or social shocks or otherwise. It is a country that does affect its neighborhood greatly, both positively and negatively in its trajectory. I certainly get the sense from the EU and Britain that they're very concerned. There's also a little bit of headbanging against a wall, because there are, and have been in place for many years, guidelines on what Egypt needs to do. It's very clear.

It has seeped in so much so that you go and buy fruit off the street in Egypt, and they'll talk about the pegging of the pound, capital controls, and the issues with subsidies. It's been so regularly discussed from the very top levels of the corridors of Brussels, Paris. or Berlin all the way to the fruit sellers on the streets of Cairo, everybody knows what's wrong.

The bigger question is what can the international community do? They can't, and they won’t, bail Egypt out. These are countries that are very transparent with their citizens. They must explain how they use taxpayers’ money and have their own crises, particularly energy crises. If I can be frank, my fear is that questions and fears of migration, particularly with the outbreak of conflict in Sudan, between the military, and the RSF, the paramilitary forces, will accelerate the European desire to support Egypt because Egypt will insert itself as a way to keep people on the continent as they've done in the past. Egypt could also pose a significant migration threat with millions of people trying to migrate if the economy collapses. The IMF has delayed its review of Egypt for two months now, which seems to imply that they don't really know how to give Egypt its second tranche of financing because Egypt hasn't stuck to any of the conditions it initially proposed.

In January, the IMF was pretty clear that Egypt had to stick to these conditions. Beyond that, we're still talking about 17, 18 billion dollars that they assumed would come from the Gulf States. The American government’s position on this is also unclear, because we've had an incoherent policy from Washington towards Egypt and the wider region. This is creating a real sense of insecurity that there is not a unified international community on this issue and its solution; the only consensus seems to be that the IMF should resolve this issue.

Of course, on a wider geopolitical map, there are issues between the Gulf States and the United States and Europe versus the Great Power competition. This competition between the United States, Russia, and China are creating a sense that the United States isn't very present.

Jon Alterman: Deep in your gut, do you think that Egypt is going to be able to muddle through this, or do you think we are likely headed to some sort of moment of inflection, positive or negative, that shifts the nature of the Egyptian economy and changes the way the world relates to Egypt?

Hafsa Halawa: Let me put it this way. If there is no acknowledgment that we have already reached that inflection point, and we need massive course correction economically, I am really scared about what comes next. I don't necessarily mean, the big macro question of whether Egypt will default; Egypt doesn't have to default on its debt to really spiral towards economic collapse. My fear is that this regime is not taking the situation very seriously or does not feel that it needs to.

This is the foreign policy position that was taken by this leadership vis-a-vis its relationships across the region and around the neighborhood. Now, it is becoming part of the domestic economic and political calculations, which is very dangerous. I worry about what is to come, because it's going to be a cataclysmic shock.

My biggest fear is that the international community continues to give Egypt a lot of rope to refinance its debt and meet its payments. That's really dangerous because it simply continues to kick the can down the road on a macro level whilst forcing Egyptians to absorb absolutely astronomical inflation. The government is now subsidizing fuel at a rate, some would argue more than it was before the first IMF deal in 2016, which would cause mass hyperinflation, as in Turkey, should the subsidies be removed.

We are in a position where there are major domestic investors reconsidering their portfolios inside the country. The Gulf States are snubbing the offerings that are being provided by the Egyptians, primarily because there isn’t real state divestment and these are sectors that do not interest them. The regime is accelerating its domestic infrastructure program to the point of ridiculousness in terms of the highways and roads across and around Cairo and other major urban centers. Sisi is increasing domestic expenditure to legitimatize his presidential win next year, which seems incredibly divorced from reality on the ground.

At the moment, everything seems to be moving in parallel toward a really hard, horrible inflection point. This is all interconnected and the regime really has to act. The unfortunate position for Egyptians and Egypt's allies who want to see it succeed is that this decision is in the hands of Egypt’s leader who have made no real material and meaningful sign that they understand the gravity of this situation and are willing to really respond to it.

Jon Alterman: Hafsa Halawa, thank you very much for joining us on Babel.

Hafsa Halawa: Thank you so much, Jon. It was a pleasure.