Sisi cannot ignore the Egyptian military’s economic role forever

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The writer is a senior fellow at the Malcolm H Kerr Carnegie Middle East Center in Beirut

At first glance, the new loan agreement between the IMF and Egypt, announced on January 10, is as broad and ambitious as it is welcome.

In addition to measures addressing the country’s worsening currency crisis and deepening debt, the government in Cairo promises a major restructuring of the shares of the public and private sectors in the economy. It still envisages retaining — and actually increasing — the state’s majority footprint in sectors that currently receive the lion’s share of investment, including real estate and transport.

Nevertheless, were the government to make good on its promises, the effect would be greater than that of the privatisation process launched in 1991. Indeed, it could unleash the most significant transformation in Egypt since the “socialist decrees” that nationalised nearly the entire economy in 1961.

The commitments made to the IMF draw on a new state ownership policy drawn up by the government last year. The document promises that the state will wholly exit up to 79 economic sectors and partially exit some 45 others within three years, and increase private sector participation in public investments from 30 to 65 per cent.

Remarkably, a policy that could have far-reaching implications for the Egyptian economy apparently emerged from a mere three months of closed consultation between a limited number of government officials, members of parliament and private sector business leaders.

Moreover, while the proposed changes promise real gains, they also pose a threat to powerful institutional actors and interest groups. Yet neither the government nor Egypt’s president, Abdel Fattah al-Sisi, have publicly prepared the ground to defuse the inevitable pushback or win over key constituencies.

The fact Sisi has approved the new state ownership policy formally does not alter matters. His immediate purpose was clearly to clinch the agreement with the IMF in the hope that this would unlock an additional $14bn in credit from other international sources.

But the president’s public pronouncements and formal decrees over the past few years reveal a fundamentally different purpose: to capitalise state-owned enterprises and assets such as infrastructure with injections of private funds, while leaving them in state hands. New legislation authorises state-owned providers of services and utilities to “monetise and trade their future revenues for sale to investors”, and allows the private sector to manage government-funded projects and public works.

At the same time, the president is moving a growing list of state assets from government hands to the control of an expanding number of newly established bodies that answer directly to him. One of these is the sovereign wealth fund, which has emerged as Sisi’s preferred vehicle for attracting private capital, rather than floating state companies freely on the stock exchange. His endorsement of the state ownership policy is a misdirection, therefore, which he may nonetheless use to disguise his actual strategy.

The discrepancy between promise and reality will become most apparent in relation to the large share of public goods and services provided by military companies and agencies. The Egyptian government has told the IMF it will subject these to the same regulatory framework as their civilian public sector counterparts.

However, not only is the military in the midst of a multiyear expansion that shows no sign of abating, it has in fact continued expanding in sectors the state is supposed to be leaving.

All this may seem to put the policy framework agreed with the IMF in doubt, but the fact is that both sides need an agreement that looks good even though neither has the will nor capacity to enforce it. That significant leakages will occur is virtually written in. And foremost among these will be the non-enforcement of provisions concerning the military.

The military may not have to fight hard to preserve its economic stake this time: if the past is any guide, the government will prevaricate on its commitments to the IMF in any case. Whether other foreign partners, notably in the Gulf states, will be as forgiving is not as certain, however.

For now, Sisi will not allow a serious rift with the military, in the hope that the government can be made to bear the burden of dealing with an increasingly unhappy Egyptian public and of pleading with foreign donors. But he cannot put off confronting them indefinitely.