Egypt’s Military Is Under Pressure to Loosen Its Grip on Economy

Egyptian President Abdel Fattah al-Sisi (R) and Austrian President Alexander Van der Bellen review an honour guard during a welcoming ceremony in Vienna, on December 17, 2018. (Photo by ROLAND SCHLAGER / APA / AFP) / Austria OUT
Egyptian President Abdel Fattah al-Sisi (R) and Austrian President Alexander Van der Bellen review an honour guard during a welcoming ceremony in Vienna, on December 17, 2018. (Photo by ROLAND SCHLAGER / APA / AFP) / Austria OUT

Summary

Egyptian President Sisi is showing few signs of dismantling the military’s business interests, despite pressure from the IMF and Persian Gulf backers

CAIRO—Outside the historic Ramses Railway Station, one of Cairo’s busiest intersections, more than a dozen food stalls and convenience stores sell a variety of goods, like croissants, peanuts, fresh fruit and meat.

Behind this strip of business: the Egyptian military.

Under Egyptian President Abdel Fattah Al Sisi, a former general, the armed forces’ role in the private sector has vastly expanded since he took power nearly a decade ago, partly to maintain political control but also because he views it as the most efficient way to build his vision of a modern Egypt.

Today, the military owns hundreds of entities and agencies that touch the daily life of millions of Egyptians, including gas stations, popular fast-food chains, even fish farms. There are military-owned cement plants and entities overseeing construction. Figures from a post to Facebook by the Egyptian military show the army manages about 1,500 mom-and-pop type stalls, such as the ones outside Ramses Station, some bearing military banners.

But now, the military’s oversize role in the economy is squeezing out the private sector in many industries, adding to a slow-burn economic crisis and, economists say, alarming Egypt’s biggest financial backers, the International Monetary Fund and Persian Gulf oil monarchies, who are pressuring Mr. Sisi to level the playing field.

The IMF is pushing his government to reduce the military’s economic footprint and detail tax breaks extended to army-owned businesses as part of a $3 billion bailout to stop the country from defaulting on a mountain of debt taken out to pay for a yearslong construction boom.

Mr. Sisi’s regional patrons in Saudi Arabia and the United Arab Emirates, meanwhile, are nudging him to provide more space for private companies, people familiar with the situation say. They are holding back on their own investments in Egypt until a clearer picture emerges, the people say.

Mr. Sisi, though, has shown few signs of backing down, betting that foreign creditors will keep supporting Egypt because they see the most populous Arab country as too big to fail, analysts say. None of them want to see a replay of the 2011 Egyptian revolution and the Arab Spring street protests that spread throughout the Middle East. So far, the Egyptian government has offered to sell stakes in 32 government-controlled companies. Just two are owned by the military.

Yezid Sayigh, an analyst at the Carnegie Middle East Center, says it is unlikely Mr. Sisi will reduce the military’s economic influence because the president believes that only a central-level system of command can deliver public works speedily.

“Sisi is convinced that the military is the best thing for him, bringing him to the forefront in a way no other leader has," Mr. Sayigh said.

The presidential office and the Egyptian Ministry of Defense didn’t respond to requests for comment.

Mr. Sisi told IMF Managing Director Kristalina Georgieva in February that Egypt was looking to introduce reforms to maximize the role of the private sector in the economy. The IMF has pushed Egyptian authorities to reform the economy since it began lending to the country under Mr. Sisi in 2016. But Egypt spiraled into a full-fledged economic crisis after the Covid-19 pandemic hit its tourism industry and the war in Ukraine pushed up commodity prices. As investors soured on the economy and pulled out of Egyptian assets, the Egyptian pound plummeted against the U.S. dollar, leaving the country struggling to pay for imports of items such as wheat, electronics and cars.

The IMF declined to comment about the discussions with Egypt. The governments of the U.A.E. and Saudi Arabia didn’t respond to requests for comment.

Egypt’s economic woes are in part due to the military crowding out the private sector, which has now been in decline for over two years, according to the S&P Global Egypt Purchasing Managers’ Index that surveys 450 firms outside the oil industry in manufacturing, construction, retail and services.

Since launching in 2015, the National Company for Fish Aquaculture of the armed forces has invested hundreds of millions of U.S. dollars in ponds for fish and shrimp, including one of the largest facilities in the Middle East located near the Mediterranean Coast. Around the same time, authorities eliminated crucial subsidies for private farms and hatcheries to run their businesses, making it difficult for them to compete.

In cement, private factories have in recent years faced bankruptcy and appealed to the government for help after the military’s Arish Cement Company launched the largest cement plant in the country in 2018, causing an oversupply.

Egyptian Prime Minister Mostafa Madbouly promised last year to sell off stakes in Wataniya Petroleum, a gas-station chain, as well as the National Company for Producing and Bottling Water, which sells drinking water and olive oil. Authorities made similar promises more than two years ago, with no sale coming to fruition, however.

A person familiar with the plans to sell Wataniya’s assets said that the military ran the business with virtually none of the necessary government paperwork, including land- ownership permissions and licenses to do with environment, traffic and safety. Due diligence by potential buyers is only just starting because the firm finally got its books together, the person said.

By centralizing control of the economy under the military, Mr. Sisi ensures his ability to direct Egypt’s money flows, giving it a major role in the country’s construction-fueled makeover, enabling it to create highways, bridges and new cities, including a flashy new capital in eastern Cairo.

In more recent years, the military has begun moving into retail spaces. Along Egypt’s vast stretches of new highways, gleaming red and blue signs beckon motorists to “Chill Out" stations offering cheap gasoline as well as coffee, doughnuts and other snacks, much like the 7/11 franchise. The branches often contain McDonald’s, Dunkin’ Donuts and Circle K, and are so numerous that two sometimes sit across the road from each other.

Analysts say the military is now deeply entrenched in the economy. It operates through an extensive network of companies run by former officers as well as joint ventures with private companies and other entities that it controls off paper. The military’s main business-making arm, called the National Service Projects Organization, was established back in the 1970s and isn’t required to disclose all its activities in detail.

The IMF has even struggled to see where the military’s economic role begins and ends, interacting mostly with the central bank and prime minister rather than the generals, economists say, despite being one of Egypt’s largest creditors.

Carnegie’s Mr. Sayigh estimates that only around 80 companies through which the Egyptian military runs its businesses are formally registered. Several hundred officers’ clubs and resorts as well as branches for public works aren’t, with the latter bringing in the most revenue, he added.

Among army-run projects kicking off this year are a fertilizer complex along the Red Sea coast, dairy and biscuit factories in northern Egypt and a waste treatment and recycling plant in southern Egypt, according to disclosures by the presidency.

The military hasn’t been immune to the economic crisis. Collaborations between the military and private contractors have stalled as the value of the Egyptian pound has almost halved in the past year and authorities imposed import restrictions to try to preserve foreign currency, say private business owners.

Still, the military businesses have the advantage of skirting taxes and customs, and receiving land free via presidential decree. In construction, the military can carry out Mr. Sisi’s vision quickly in large part because it can override government ministries and cut through red tape.

It has also moved to control everything from production to retail in some sectors. At its “Sun Mall" branded grocery and department stores, now numbering in the dozens, the military sells its own bottled water, frozen shrimp, beef and fish, as well as its own sugar and macaroni pasta.

Even if Mr. Sisi wanted to reduce the power of the military, he could face significant resistance from within the institution, say political analysts. Egyptian businessmen say families of high-ranking military officers have amassed great wealth through their advantages in the business world, adding that they would be loath to give that up.

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