Military’s role in economy muddies Egypt’s debt plan

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• Egypt unlikely to meet IMF goals
• Public debt quadruples to $165bn
• Military projects reduce tax revenue

The military’s role in the Egyptian economy makes it unlikely the country will meet International Monetary Fund targets to increase tax revenue as a proportion of GDP, which could spell trouble for the hugely indebted nation.

Egypt’s public external debt – money borrowed in foreign currencies – was $165 billion in September 2023, having more than quadrupled over the preceding decade. This follows an infrastructure spending splurge by President Abdel Fattah El Sisi, a former army field marshal.

The country’s interest payments will equate to 66 percent of government revenue in 2024, according to AGBI calculations based on S&P Global data.

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To help ease its finances, Egypt sealed multibillion-dollar agreements with the European Union, IMF and the UAE in March that included additional borrowing.

The IMF programme, provisionally agreed in December 2022, aims to increase Egypt’s tax-to-GDP ratio “by around 2 percentage points over the medium term”.

“That’s nowhere near enough,” says Timothy Kaldas, deputy director of The Tahrir Institute for Middle East Policy.

“The government has a revenue problem on top of its debt problem. That exacerbates the debt problem in terms of servicing and increases the risk it will need to borrow further.

“If the government doesn't generate enough revenue, it either has to impose punishing austerity that is damaging to the economy and the population, or it must borrow more. Or more likely some combination of the two.”

Egypt's tax-to-GDP ratio

Egypt’s tax-to-GDP ratio was 14.1 percent in 2021, below the average of 15.6 percent among 33 African countries in an OECD study. Tunisia’s figure was 33 percent and Morocco’s was 27 percent.

From 2010 to 21, Egypt’s tax-to-GDP ratio fell 1.4 percentage points. The African average rose 1.5 percentage points over the same period.

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“Egypt must take serious steps to address this,” says Kaldas. “Part of the challenge is that there are all these untaxable entities.”

The military is a significant player in sectors including construction, cement, transport, healthcare, communications, media, engineering, pharmaceuticals, fertilisers, tourism and metallurgy, Yezid Sayigh of Beirut’s Carnegie Middle East Center wrote in a May 2023 report.

“They don't pay corporate income tax or customs or often labour costs because it’s often army conscripts doing the work and the state is paying their salaries,” says Kaldas.

The military does not disclose its accounts, while serving and former officers’ informal economic activities are impossible to quantify, so estimating its share of Egypt’s economy is guesswork.

“If a military company is profitable, the military keeps the money,” says Kaldas. “The state has no claim to its assets nor to its profits, nor does the government have the right to audit military companies.”

In the initial 2022 IMF agreement, the government pledged to place military companies under the same regulatory framework as the wider public sector, Sayigh wrote.

Yet there is “an irreconcilable gap between its declared goal of levelling the economic playing field with the private sector and the reality of the military’s economic role and business activities,” he wrote. Government proposals leave “significant loopholes” that allow the military “to retain substantial ownership in the economy”, according to Sayigh.

Making it through, month by month

“Egypt’s strategy is not so much to make a sustainable national budget but to make it through month by month, quarter to quarter, introducing incremental reforms that don't spark a second Arab Spring yet also attract much-needed hard currency,” says Ryan Bohl, senior Middle East and North Africa analyst at consultancy the RANE Network.

“The IMF wants Egypt to reduce interest payments as a proportion of its national budget, but Cairo has neither the ability nor the willingness to do so quickly.”

Last June, assistant prime minister Osama El Gohary said the government would sell stakes in 250 companies as part of a privatisation programme. These included a deal to offload minority shareholdings in three oil and petrochemical companies to Abu Dhabi fund ADQ for $800 million.

“It’s a mistake to even call it privatisation,” says Kaldas. “All it does is further complicate the web of politically connected businesses that makes Egypt's market so difficult for truly independent companies to compete effectively.”