Egypt Needs Democracy to Fix Its Economy

For decades, the political influence of the officers’ republic, the military-sponsored political system that has ruled Egypt since 1952, has been unshakably stable. The officers’ political sway has survived the test of time because of their ability to operate in the political shadows of the state for decades. The defeat of Egypt’s 2011 revolution has given the officers an opportunity to assume a more visible role in governing the country and exercising power.

Quite ironically, the rule of Egyptian President Abdel Fattah al-Sisi—himself a military man—is becoming the most pressing threat to the 70-year rule of the officers. He is undermining the social contract that the officers forged in 1952 and that has arguably been the cornerstone of political stability in the country.

That social contract instituted an unwritten understanding in which large segments of society tolerated the regime’s transgressions against political rights in return for state-sponsored economic and social benefits. On a different front, Sisi is also excluding the old civilian bureaucrats, thereby undermining their commitment to the political status quo. And he has done a lot more.

Sisi and his allies have presided over repression of a magnitude unseen since the 1960s, slowly turning Egypt into a country where the only voice in the political arena is that of the president. His rule has been marked by thousands of political prisoners, hundreds of torture victims, and countless deaths inside prisons. This is in addition to an economic crisis in which Sisi’s economic vision is being tested existentially.

The president undermined the secular opposition by co-opting some of their elements and encapsulating them inside political organizations controlled by security agencies. Political activists who tried to operate outside these organizations’ confines were imprisoned. In spite of recent presidential pardons that have come in response to international pressure, many such activists remain behind bars.

In addition to his control over the judiciary and the opposition, Sisi and the security sector have extended their control over the once-independent media.

Sisi has sidelined everyone who has attempted to present themselves as an alternative to his rule; the business community has suffered too.

The breadth of Sisi’s repression has been enormous. He has sidelined everyone who has attempted to present themselves as an alternative to his rule through imprisonment and other politically motivated retaliations.

The business community has also suffered from Sisi’s ire. Businesspeople have been pressured into donating to the Tahya Misr Fund, which is widely viewed as a tool for the regime to blackmail business interests to finance Sisi’s political projects.

Companies owned by the army and its proxies have crowded out the private sector in countless fields, especially in real estate and heavy industries such as iron, steel, and cement. The military’s increasing involvement in the economy has been disastrous for Egypt’s economic situation. Sisi and his allies have been preoccupied with catering to the military economy and its big megaprojects, and the lack of accountability and participatory policies has led to poor economic decisions.

The country’s economic reform program that began with its 2016 agreement with the International Monetary Fund (IMF) was arguably necessary. That said, the sizable surplus in the general budget that was generated by subsidy cuts was not put toward education or health—both of which are woefully underfunded. Instead, the surplus was used for debt servicing. Sisi took out substantial loans to fund his high-profile projects and new cities with skyscrapers that have not yielded any economic benefits and may well end up as ghost towns.

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Although the IMF and the World Bank have repeatedly called on Egypt not to waste foreign currency reserves on megaprojects, Sisi has refused to listen. He has gone ahead with projects such as the building of a new capital and the Cairo Monorail, turning a blind eye to the dwindling dollar reserves.

The outcome of these policies has been disastrous, as evidenced by the balance of trade, payments deficits, and the large financial gap that will require more borrowing.

Sisi had been depending on “hot money” from high-yield Egyptian treasury bonds as well as international debt markets to keep the Egyptian pound’s exchange rate artificially stable. This practice proved to be unsustainable. The onset of the COVID-19 pandemic and Russia’s invasion of Ukraine pushed $22 billion of foreign-owned treasury bills out of the country within six months in 2022, thereby exacerbating an already precarious economic situation. In response, the government devalued the currency by about 50 percent in an attempt to prevent a repeat of Lebanon’s economic crisis.

But the specter of the Lebanese situation still looms on the horizon. The difference is that Egypt is a country with a much larger population. Millions of people are suffocating under the poverty line while also living under severe and often violent political oppression. This rapidly deteriorating situation is unsustainable. A Lebanese-style financial meltdown in Egypt would result in political unrest across the entire Middle East.

All Egyptian institutions, movements, and political parties should remind Sisi of the commitment he accepted when he took power: to represent and lead a large coalition of national stakeholders, including independent institutions such as the judiciary, which he later undermined; the civil democratic parties; religious leaders; and the business elite.

This large coalition, as well as his popularity at the time of his inauguration and the war against terrorism in the Sinai Peninsula, led many Egyptians to turn a blind eye to Sisi’s oppression for much of the past decade. Now, after the army has declared a victorious end to its operations on the peninsula, these pretenses can no longer be used to legitimize Sisi’s political repression and imprudent economic policies.

The dire economic situation is fueling public anger and discontent in Egypt, where the average monthly wage is about $150. There is an urgent need for both economic and political reform. One cannot occur without the other.

The recent IMF recommendations offer a place to start. Strengthening governance and transparency is something to build on for the future. Other important steps include unifying government budgeting and spending to increase transparency and eliminating spending outside the state’s general budget. In addition, military institutions must focus exclusively on national defense and cease involvement in civilian economic sectors. The military holds a monopoly over the distribution of land. Military companies are involved in heavy industries as well as in agrarian and food production sectors. Estimates of the share of the military’s involvement in Egypt’s economy vary significantly because of a lack of data, ranging from 5 percent to 40 percent of GDP.

Military-owned companies and assets in such sectors should be sold to the private sector or be listed in the stock market. The IMF has also recommended rationalizing government spending and stopping all new, ambitious megaprojects amid the country’s current foreign reserve shortage.

Increasing the role of the private sector could help make way for much needed foreign direct investments, which serve as a sound alternative to extensive foreign borrowing to bridge the shortage in dollar reserves and to prevent the local currency from sinking even more. For this to happen, systematic and legal reforms should be made to guarantee the rule of the law–without which confidence in the Egyptian economy will remain low.

The Sisi regime’s refusal to carry out any fundamental economic and political reforms, while still receiving international funding , will only ever yield the veneer of stability.

International institutions such as the IMF, World Bank, and the European Bank for Reconstruction and Development as well as allied governments in the United States, European Union, United Arab Emirates, Saudi Arabia, and other Gulf states should advise Sisi to carry out political and economic reforms and hold constructive discussions with clear benchmarks about the reforms necessary to facilitate the military’s exit from economic activities. It is important to keep up the pressure when it comes to human rights matters in the country. Allowing meaningful and inclusive public deliberation and dialogue about social and economic public policies is critical.

The Sisi regime’s refusal to carry out any fundamental economic and political reforms, while still receiving international funding from debt markets and allied countries and institutions, will only ever yield, at best, the veneer of stability. The crisis will reappear again and again if its roots are not addressed, and it will be far harder to fix these conditions years, or even decades, later.

Political reforms need to be a priority, as well. Political dialogue should be open to parties and movements that have suffered a great deal under the repressive crackdown of the past decade. Experienced technocratic civil servants should be given the chance to hold leadership positions to help draft the political and economic road map in the upcoming period.

The presidential election scheduled for next year could be a fresh start for Egypt to slowly move toward a democratic transition. Sisi’s allies, including the Gulf states, the U.S. administration, and the EU, must urge him not to run again in the upcoming election and to adopt necessary political and economic reforms.

Urging Sisi not to run could allow for a more credible and accountable democratically elected leadership to emerge. This would require a political opening in the public space, based on releasing political prisoners, ceasing repressive campaigns, and ending the security sector’s interference in media outlets and the affairs of political parties.

Sisi and his remaining allies among the army commanders have to think about the Egypt, and the region, they are going to leave behind if the Egyptian economy collapses catastrophically. They should also consider the legacy they will leave behind should they decide to allow a truly democratic transition and fair elections, which would open the door to genuine political and economic stability in the country and the region.

A slow-paced economic and political transition, with the endorsement of the army and the state alongside international and regional guarantees, could be the start of a stable and just political and economic future for Egypt. Its example could even pave the way for greater democratic change and stability in the region at large, helping to push other Arab states beyond the violence and unrest that have prevailed in recent decades.