President Sisi’s regime follows a consistent policy of entrenching itself in the global financial system to align its own stability with the economic interests of international organizations, Western states, and private companies.
Even though the regime markets itself internationally as a bulwark against terrorism and illegal migration flows, this narrative often overshadows an underlying economic strategy. It is a policy of heavy borrowing that implicates international actors in regime repression and increased social deprivation of the lower and middle classes, effectively fuelling instability and violent extremism—not only in Egypt, but also possibly across the region.
The government’s policy of ensconcing itself in the global financial system has three components. First, there is increased reliance on external loans to finance government operations and mega infrastructure projects. This includes an upsurge of short-term government bonds and T-bills, or “hot money.” Second, the increase in arms deals since 2014 has made the regime the third largest global arms importer between 2015 and 2019. Finally, the elevated level of foreign direct investment (FDI) in Egypt’s oil and gas sector has tied long-term Western investment to the stability of the regime. These factors provide a basis for international reliance on the regime due to financial interests. They also provide direct incentives for international complicity in repression and create hurdles to democratization. Ultimately, this economic strategy exacerbates long-term challenges with detrimentally destabilizing effects. When international capital flows are used to finance the military’s dominance of the Egyptian economy, they allow the security apparatus to tighten its grip on the state.
Egypt heavily relies on debt to create financial dependencies between the regime and international actors. The regime has embarked on a borrowing spree that increased external debt as a percentage of debt GDP from 14.67 percent in 2012 to 31.7 percent by the first quarter of 2020, reaching $111.3 billion. This explosion in debt was also accompanied by exponential growth in the level of foreign holdings of short-term Egyptian treasury instruments, which increased from $60 million in mid-2016 to $20 billion in October 2019. The regime was able to attract this influx of short-term capital by offering one of the highest interest rates in emerging markets, with a rate of return hovering around 13 percent as of July 2020. This earned Egypt the reputation of the “darling of emerging markets,” and was reflected in the level of investor demand for a $5 billion Eurobond issuance. The largest in Egyptian history, the bond was 4.4 times oversubscribed, signalling investor confidence in the regime’s stability.
Heavy borrowing has a number of grievous consequences for Egypt and the international community. First, it entrenches the regime in the global financial system, as its ability to pay back its debt depends on the regime’s survival. This insulates the regime from international pressure to moderate its repression. Unrest in Egypt will directly affect government revenues as the regime’s ability to collect taxes diminishes, in addition to its ability to roll-over its debt—increasing the chances of default. Second, it implicates the regime’s international creditors in its appropriation of public funds for the enrichment of military elites through mega infrastructure projects. These projects are both directly and indirectly bankrolled by international financial funders (including regional allies and international organizations like the IMF).
The regime’s arms spending spree, beginning in 2014, plays a critical role in cementing its international safety net. Arms imports tripled between 2014 and 2018 when compared to the 2009 to 2013 period. This is an increase of 206 percent. The glut of arms purchases shows no signs of abating—as recently as June 2020, the regime was in talks with Italy for a major arms deal worth $9.8 billion. The Western arms industry acts as the main source of supply—France, Russia, and the United States are the top suppliers. France alone met 35 percent of the regime’s arms demand between 2015 and 2019.
While arms transfers include conventional weaponry, they also include the purchase of surveillance equipment and crowd control equipment, used in the direct repression of protests. The funding sources of these arms deals are difficult to confirm—they are not reflected in the official defense budget figures. However, there is some evidence that external loans are being partially used for this purpose. For example, in 2015 a €5.2 billion arms deal—which included twenty-four Rafael fighter jets—between Egypt and France was partially financed by a €3.2 billion French government loan. This means French taxpayers loaned the Egyptian regime €3.2 billion to purchase arms, for which the Egyptian taxpayers will pay back with interest. This reflects the process of appropriating Egyptian public funds for the profits of the French arms industry. These arms deals have made the regime one of the top customers for Western arms manufacturers, effectively intertwining Western defense industries with the regime’s survival.
The transformation of the regime into a major arms importer has two main consequences. First, it implicates Western states and the defense industry—the primary supplier of surveillance and crowd control equipment—in the repression of popular dissent. Second, it inhibits Western states’ willingness to condemn and act against human right violations. For example, Italy has continued to supply the regime with arms even after five members of the Egyptian security apparatus were named in December 2018 as suspects in the 2016 torture and killing of an Italian student, Giulio Regeni. Furthermore, Italian arms sales to Egypt tripled in 2019, and plans for a series of arms deals for 2020 total €11 billion. The continued flow of arms from Italy has caused Human Rights Watch to call for a halt in Italian arms transfers, citing concerns that Italian arms are facilitating despotism. States like Italy enable the regime’s heavy repression in a manner that will only increase political polarization, inhibit the prospect of democratization, and centralize state power in the hands of the security apparatus.
The increased level of foreign direct investment (FDI) in Egypt’s oil and gas sector is another element. The regime is currently the top African destination for FDI, with investments topping $9 billion in 2019. Most investment is directed to the oil and gas sector, which was boosted by the discovery of the Zhor gas field in 2015, the largest in Egypt and the Mediterranean. To continue attracting FDI to the sector, in 2019 the regime introduced new oil and gas exploration contracts with favorable terms to the investor. These new terms allow the investor to control their share of production, rather than compelling them to sell it to the government. The Zhor field, part of the Shorouk concession, is jointly owned by Eni—the state-owned Italian oil company—British Petroleum, and Rosneft. Eni holds a 50 percent stake. While the accumulated FDI in the sector is valued in the billions, Eni’s total investment in the sector from 2015 to 2018 reached $13 billion. The surge of foreign investment in the Egyptian oil and gas sector is a deliberate state policy. On August 31, President Sisi voiced his support for the expansion of Eni’s investment in the country. These investments increase international energy companies’ interest in the regime, tying billions of dollars’ worth of investments with its immortality.
In addition to the implications for security and stability, these policies render the regime the main beneficiary of the transfer of wealth from the middle and lower classes to the military elites. The regime accumulates profits through interest on loans, arms deals, and oil and gas revenues—all financed by the Egyptian taxpayer. It also guarantees that any emerging demands for democratization would clash with international interests, essentially ensuring the survival of the regime far longer than it would have without such lavish support.