[Salon] The Sick Man of the Middle East - Arab Digest.org guest post

The Sick Man of the Middle East Summary: a summer energy crisis with rolling power cuts, the continuing Gaza war and an ever-deepening reliance on costly foreign borrowing further underline the multiple vulnerabilities of the Egyptian economy. We thank our regular contributor Maged Mandour for today’s newsletter. Maged is a political analyst who also contributes to Middle East Eye and Open Democracy. He is a writer for Sada, the Carnegie Endowment online journal. Maged is the author of the recently published Egypt under El-Sisi (I.B.Tauris) which examines social and political developments since the coup of 2013. You can find Maged’s most recent AD podcast here. More than a decade after the coup that ended Egypt's democratic experiment, the Sisi regime that emerged from it is facing an unprecedented reckoning. Plagued by a series of interconnected challenges and self-inflicted wounds, a government whose ideological legitimacy is anchored in chauvinistic nationalism is steadily losing the ability to formulate its own policies. Arguably, Egypt has now become the “sick man of the Middle East,” a parasitic burden to its allies and an ineffective regional player, unable to influence developments in neighbouring Gaza or across the Red Sea in Yemen. Nor is it able to avert the risk of a wide regional war that, should it come about, will have devastating impacts on the Egyptian economy. On top of this, the economy is so fragile that it now heavily relies on regional backers, and more worryingly, international capital flows to stave off a complete financial collapse while steadily losing the ability to formulate its own monetary policy, a sure sign of the peripheralisation of the Egyptian economy and the concomitant loss of sovereignty. The vulnerability of the economy to the whims of international investors became apparent in August with a sudden drop in the value of the pound to reach 49.5 EGP to the dollar, a historic low. The rapid drop was caused by the departure of what Prime Minister Madbouly said was “7-8%” of the total value of international capital invested in short-term Egyptian debt instruments, so-called “hot money”, as foreign investors sought safer assets. Hot money had rushed into the country after news of the mammoth Ras El Hekma deal, valued at US$ 35 billion of Emirati investments and the increase in the value of the IMF loan from US$3 to 8 billion. The total stock of hot money reached US$ 32.7 billion by the end of March, a historic high and an increase of 180% from the beginning of the year. Such a heavy dependence places the regime at the mercy of international investors who can heavily influence a key aspect of monetary policy, namely interest rates. This was reflected in the 19 August increase in interest rates offered on 3 month debt instruments, which exceeded 29%, jumping from 28.3% the week earlier and an average of between 26.75% and 27% over the past several months. This simply means that international investors can apply enormous pressure on government finances by demanding higher interest rates with the regime having limited bargaining power thus adding further pressure to an already bleak financial picture, with debt servicing consuming 91% of the tax revenues for the new fiscal year. A further rise in rates has the potential to create a truly catastrophic collapse of the economy. The regime increasingly finds itself hostage to international developments, regional tensions and the decisions of the Fed and the ECB, in effect steadily losing its ability to control monetary policy and transforming the Central Bank of Egypt into an appendage to Western central banks. One only needs to keep in mind that the debt crisis was triggered in 2022 by the exodus of US$ 20 billion of hot money because of the Russian invasion of Ukraine. A lesson that remains unheeded. Egypt has experiencced a summer energy crisis with rolling power cuts [photo credit: @FastNews77] Deeply connected to the fragility of the Egyptian economy is the rise in regional tensions, the genocidal war on Gaza and the Huthi attacks in the Red Sea, all working to apply pressure on the regime, which it seems unable to stop. The most notable example are the Huthi attacks which caused a drop in the revenue of the Suez Canal from US$ 9.4 billion in 2022/23 to US$ 7.2 billion in 2023/24. Egyptian vulnerabilities were also exposed in June when nationwide power cuts were imposed by the government due to a shortage of natural gas supplies, worsened by a dip in the supply of Israeli gas, which in 2023 had reached 8.6 billion cubic meters. The dip was caused by routine maintenance of the Tamar oil field, shutting production for 10 days. This extreme energy dependence raises questions of a possible energy crisis that might erupt in the case of a wider regional war and possible attacks on Israeli natural gas production facilities. It is worth noting that in order to end the power cuts for the summer months, Egypt had to import US$ 1.8 billion of natural gas and mazut fuel oil. The regime was seeking a deal with a deferred payment for 6 months, a policy that only served to narrow the list of bidders and increase the prices it had to pay. Hence, on top of the economic losses it will incur from another energy crisis, securing additional sources of natural gas will prove costly for a government that is already in dire financial straits. Adding to the plethora of threats that the regime is facing is the possibility that a wider regional war could spook investors, causing another exodus of hot money and triggering another major crisis or alternatively adding pressure to hike up interest rates due to the additional perceived risks of a broader war. In essence, the continuation of the war in Gaza does not only pose the threat of a mass exodus of Palestinians out of the Strip into Egyptian territory but it is also a serious economic threat that could prove deeply destabilising for the regime. In the face of this tidal wave, the Sisi regime has almost no cards to play, outside of soliciting support from its regional and international backers. At the time of writing Egypt is still unable to exert any meaningful pressure on Israel nor is it able to lobby the United States to take a stronger stance against Israeli atrocities. This is a direct result of a long-held policy of a very close alliance with Israel at the expense of following a more balanced and independent approach which could have increased Sisi's room for manoeuvre at a time of crisis. On the economic front, the regime is now labouring under the weight of a decade of a deeply flawed economic policy with no sign of structural reform forthcoming. The latest manifestation of the crisis is the resignation of the CEO of the Egyptian Wealth Fund, Ayman Soliman, due to the deliberate obstruction of efforts to list military owned companies. Indeed, the regime is stuck in a swamp of its own follies with no real answers to regional challenges or the debt crisis outside of deepening austerity. A steady process of accelerated decline is well under way, destabilising for Egypt and for the region as a whole.