Still in Business

The International Monetary Fund (IMF) agreed on October 27 to lend Egypt $3 billion under a 46-month Extended Fund Facility arrangement, taking the country’s total borrowing from the IMF since 2016 to $23.1 billion. Just over a year earlier, in July 2021, the IMF referred for the first time ever to the involvement of military companies in the Egyptian economy, intimating they should come under the same broad reform framework it proposed for the civilian public sector and state-owned enterprises. To discuss this issue further, in early November Diwan interviewed Carnegie senior fellow Yezid Sayigh, who has closely followed the topic of the military’s involvement in the Egyptian economy.

Michael Young: The latest agreement between the International Monetary Fund (IMF) and Egypt’s government did not mention the military’s role in the economy. Did the IMF miss an opportunity to compel the government to act on the issue?

Yezid Sayigh: The IMF’s explicit reference to the military companies in its July 2021 report was unprecedented. Until then, it had refrained from saying anything about their role, despite their increasingly significant impacts on public finances and on the economy in general. This followed a report released by the IMF’s fellow institution, the World Bank, in December 2020, which noted the military’s share in the production of capital goods; consumer durables and apparel; materials; food, beverages, and tobacco; automobiles and components; retailing; media and entertainment; semiconductors and intelligent transportation system equipment; and technology hardware and equipment. Human Rights Watch and two other organizations had also brought this issue to the attention of the IMF Executive Board in an official letter that cited my own comprehensive 2019 report on Egypt’s military economy.

The fact that the IMF included military companies in its assessment of public sector companies as a whole in July 2021 suggested strongly that they should also be encompassed in its recommendation for the Egyptian government to “centraliz[e] state ownership in a single entity.” The clear implication was that military companies should be transferred to what is known in Egypt as the public business sector, and be brought under standard government regulations for procurement, financial reporting, and submission of revenue.

There is no evidence that the IMF addressed military companies, specifically, in its latest negotiations with the Egyptian government. Defenders of the new loan agreement argue that the negotiations’ scope was limited and so the IMF’s demands were correspondingly narrower than previously. Indeed, the new agreement is minimalist across the board when compared to the broad reforms sought repeatedly since 2016. This time around, the foremost aim was to provide balance of payments and budget support in the face of Egypt’s desperate need to generate foreign currency inflows to help pay off $28 billion in maturing debt and interest and fund its current-account deficit by the end of 2023, besides another $20 billion in 2024. According to the well-informed Mada Masr site, the IMF refused to extend a higher value loan when its demands for progress on ending or reducing the state’s presence in select economic sectors and on minimizing subsidies were refused. The nod in its official statement to pushing “forward deep structural and governance reforms to promote private sector-led growth and job creation” was mere lip-service, therefore.

In other words, the IMF did not pursue its own longstanding recommendations for Egypt, let alone use its leverage to place the military companies on the agenda. The two issues are linked in more than one way: the IMF has argued for the state to exit various economic sectors and pressed for a unified public procurement law to improve efficiency and transparency in spending, both of which are vital if the IMF’s core goal of promoting “private sector-led growth” is to be achieved, but which would also directly affect the environment within which the military companies operate. Recognition of this linkage is why, contrary to the hopes of its signatories, the agreement has prompted a depreciation of Egyptian government bonds and a sharp rise in the cost of insuring Egyptian debt (as well as an agreed upon devaluation of the Egyptian pound), rather than spurring market interest.

These initial market reactions are worrying. The IMF approved the smallest loan possible. Even though the new agreement is expected to unlock another $1 billion in Resilience and Sustainability Facility funding from the IMF and prompt an additional $5 billion in loans from international sources, total new lending will still fall well short of the $12 billion that the Egyptian government had hoped to raise. Furthermore, it is likely that the $5 billion is expected to come in partial fulfillment of—rather than in addition to—pledges made by Gulf governments in May to provide Egypt with $22 billion in assistance.

Chief emerging markets economist for Bloomberg Economics, Ziad Daoud, has argued that the Egyptian government needs to reduce the military’s involvement in the economy as this deters foreign investors who “can’t compete with [its] built-in privileges, forcing Egypt to plug its funding hole with hot money,” and diminishes incentives “to grow exports to increase profitability.” But for now, the IMF is kicking the can down the road.

MY: Egyptian officials have repeatedly announced the intention to offer shares in military companies to private investors, but this has not happened so far. Why?

YS: Egyptian President Abdel-Fattah al-Sisi first publicly floated the idea of selling shares in military companies on the Egyptian stock exchange in August 2018, later claiming it had been in the works since 2016. This may have been prompted by the realization that the military’s massive new cement factory in Beni Suef, built at a cost of $1.1 billion, was operating at a mere 40 percent of capacity—despite huge demand generated by government-funded public housing and infrastructure projects managed by the military. Increasing the capitalization of military companies by attracting private investors and generating fresh cash flows into state coffers was almost certainly another motivation—and possibly the most important one—reflecting the same approach that the government has taken to reviving civilian state-owned enterprises since 2018.

Private investors should have been keen to acquire shares in military companies, which are active in cultivation and agribusiness, livestock, fish farming, and general supply and contracting, in addition to manufacturing and construction, as I noted earlier. The military’s powerful political position, which assures it of a continuous and large-scale flow of public contracts, and its privileged access to factors of production such as land and to foreign currency at favorable exchange rates, moreover offer private investors the lure of assured dividends even for non-performing companies. But flotation on the stock exchange never took place. Sisi was evasive in 2019 about the reasons for the delay, saying simply “listing in the stock exchange has many requirements that I don’t want to talk about.” Technical problems and policy challenges relating to financial disclosure, profitability, unfair competition, and legal ambiguity were probably paramount.

It was probably to sidestep these requirements that Sisi turned to Egypt’s new sovereign wealth fund, which was established in late 2018 to manage and monetize state assets that the president transfers to it. This offers ways around the more challenging legal and financial requirements of listing military companies on the Egyptian Stock Exchange, allowing the state to obscure financial books at least partially, and retain overall control, if not ownership. In February 2020, the Egypt Fund committed to prepare up to ten military companies for promotion and investment.

Progress since then has again been slow, however. The Egypt Fund’s chief executive, Ayman Soliman, said a year later that the military’s Wataniya Petroleum chain of petrol stations and Safi mineral water bottling company would be opened to private investors by June 2021, but the government was still promising in September 2022 that the offering would take place by the end of the year. It also indicated that the recently-established Silo Foods and two other military companies were being added to the list for imminent sale. However, the size of the stake that private investors may buy in military companies remained unclear, with the figure in official statements ranging from 10 to 100 percent, as did the number of additional military companies—out of a total of over 72—that might be slated for sale through the Egypt Fund. Adding to the ambiguity, the military-owned El-Arish Cement Factory and Suez Steel Company, which Sisi originally proposed for flotation in 2018, have not been mentioned since. In a final twist, Soliman announced on October 30 that sale of shares in Wataniya and Safi through the stock exchange was “not appropriate this year,” citing the need to find a “strategic operator.”

MY: In the absence of pressure from the IMF or other external sources, what are the prospects of the government addressing the military’s role in the economy?

YS: There is little to no prospect of the Egyptian government having either the political will or the ability to roll back the military’s involvement in the economy. It cannot even slow military business acquisitions and expansion, which have been on an upward curve since Sisi came to power. Nor, having endorsed this trend politically and enabled it legally, does Sisi show any sign of recognizing a need to alter course. Genuinely opening military companies to private investment through the stock exchange or the Egypt Fund could transform the picture. However, military reluctance to provide the level of financial disclosure needed or to allow shareholders any meaningful say in how companies are run or how their investment and profit-sharing is determined appear to be blocking the interest even of so-called “strategic” investors in the United Arab Emirates (UAE) and Saudi Arabia.

Meanwhile, growing military appetite is evident in increased predatory behavior by active service officers and retirees beyond the formally-registered military companies. This extends to forcibly acquiring equity or membership on boards of directors of civilian start-ups, in addition to their longstanding engagement in real estate speculation thanks to insider information they gain from the military’s formal control over the licensing of state land for civilian use—private or public.

This behavior has chilling effects on the private sector. International investment managers confirm privately that they avoid sectors in which the military is heavily involved so as not to be exposed to its pressures. Anecdotal evidence from domestic investors moreover reveals that some are registering their start-ups in the UAE so as to avoid being forced to donate to Sisi’s pet Tahya Misr development fund, which has appointed military officers as financial managers. As a consequence of these factors and the state’s continued economic dominance, non-oil businesses contracted for the 23rd straight month in October 2022 according to S&P Global Purchasing Managers’ Index. If the sale of stock in military companies does finally go through and is successful, which is probable, this will only increase the military’s appetite for private capital.

The “overheating” of this tentacular military economy has gone beyond risk to become a reality, and has contributed materially to Egypt’s present financial crisis. Far from pushing their Egyptian counterparts consistently to tackle this challenge, the IMF and governments in the Gulf, the United States, and Europe have displayed a continuing willingness to inject funds into Egypt. This further delays the moment when Sisi’s economic model becomes completely untenable and he is forced to reverse course on his state-led investment strategy, which the military spearheads.

In fairness, it is highly doubtful that any of these actors—including the president himself—can dislodge the powerful and entrenched military, even if they really wished to. After all, the military has on more than one occasion derailed major investments, even from the UAE, which is one of Sisi’s closest political allies, and resisted six years of lobbying by the president to open up its companies to private investors. With little hope of reining in the military, Egypt may be on course for an economic train wreck that its foreign partners are not doing enough to prevent.