Helping Egypt, the Arab world’s most populous country weather the food security crisis and economic headwinds boosts regional stability
Russia’s invasion of ukraine has had a drastic effect on Egypt’s food security with the warring countries previously accounting for 80 per cent of its wheat imports.
On top of that, the Arab world’s most populous country is suffering from rising import costs and energy prices, decreasing foreign currency reserves and a hit to tourism inflows.
Overall, a stable Egypt equates to a stable region
Ashraf Naguib, chief executive of Global Trade Matters
Gulf countries including Qatar, Saudi Arabia and the UAE have come to Egypt’s rescue with up to $22 billion in the form of central bank deposits and investments.
“It’s very much needed and it’s a very natural course — we’ve seen it over the last decade or so that the Arab Gulf states support Egypt,” said Ashraf Naguib, chief executive of Cairo-based think tank Global Trade Matters.
“Overall, a stable Egypt equates to a stable region.”
As one of the Middle East’s most indebted nations with about half of its population living near or below the World Bank’s poverty line, Egypt was already in a precarious position that has been shaken further by the war in Ukraine. Egypt’s annual urban inflation rate rose to 8.8 per cent in February, the highest in nearly three years due to surging food prices.
Gulf financial support ensures regional stability and shows Arab solidarity, while also providing lucrative investment returns and the basis for further cooperation, analysts say.
Saudi Arabia pledged $15bn, including $5bn to Egypt’s central bank and $10bn in potential investment in the country’s healthcare, education, agriculture and financial sectors.
The Qatar Investment Authority, the country’s sovereign wealth fund, said it would pump $5bn into investments in Egypt.
Abu Dhabi wealth fund ADQ last month made approximately a $2bn deal to buy Egyptian state-held stakes in publicly-listed companies.
To mitigate the economic shocks caused by supply chain disruptions and shore up foreign currency reserves, Egypt recently introduced a 130bn Egyptian pound ($7.1bn) relief package, raised interest rates, let its currency weaken sharply and asked for support from the International Monetary Fund.
The central bank raised interest rates for the first time since 2017 and allowed the pound — which had been stable against the dollar for about two years — to weaken by more than 15 per cent. The currency closed at 18.19 pounds to the dollar on Monday.
Unlocking IMF support
Egypt has started discussions with the IMF on new support that may include a loan. The country has turned to the Washington-based lender three times in the past six years, borrowing $12bn in 2016-2019 under an economic reform package and a further $8bn in 2020 during the pandemic.
“We welcome Egypt’s response to head off the balance of payments shock and impact of rising prices,” Gerry Rice, director of communications at IMF, said on Friday.
“IMF staff are working closely with the Egyptian authorities to prepare for programme discussions with a view to supporting these shared goals of economic stability and sustainable job-rich growth and inclusive medium-term growth for Egypt.”
The backing of Gulf countries could help unlock IMF support by covering part of the expected funding gap, as it is typically a requirement that the recipient line up funds from other sources.
In addition to rocketing commodity prices, Egypt is facing $3bn to $4bn of lost revenue from fewer Russian and Ukrainian tourists, said Allen Sandeep, director of research at investment bank Naeem Holding in Cairo.
“All in all, Egypt is facing a funding gap of roughly $15bn in the next 12 months,” Mr Sandeep said.
“The $5bn deposit from KSA will add a lot of confidence in terms of exchange-rate stability, in terms of liquidity,” he added. “We’re still waiting to see what form the rest of the money will be in. This will take a longer time to filter down into the economy.”
Political stability
Egypt’s food subsidy bill, which was budgeted at 88bn pounds ($4.8bn) before Ukraine war, is likely to increase because of higher prices of commodities in general. The country’s subsidised programme includes providing cheap bread for 70 million people and increasing the price is a highly charged prospect.
The interrelation between food security and political stability is a key motivation for the financial support of Gulf Arab states.
“They’re hyper aware that 11 years ago, food prices were part of the reason that the Arab Spring happened,” said Ryan Bohl, Mena analyst at the Rane Network’s geopolitical platform Stratfor.
Egypt’s January 2011 revolution led to the removal of then-president Hosni Mubarak from power and the election of Islamist president Mohammed Morsi in 2013.
The ousting of Morsi in mid-2013 was led by Abdel Fattah El Sisi, then-army chief and now president. In an apparent sign of approval, Kuwait, Saudi Arabia and the UAE sent $23bn in grants, cash deposits and fuel shipments in the 18 months following the rebellion against Morsi.
READ ALSO: Poverty-stricken UK Muslims struggle to feed families during Ramadan
While at the time this was tied to the perceived threat of the Muslim Brotherhood to security and stability in Egypt, similar incentives remain.
“The Arab world and mainly the Gulf world got the lesson of 2011 and beyond,” said Mohamed Farahat, director of Al Ahram Centre for Political and Strategic Studies. “The main lesson is that a strong economy and a strong state in Egypt is very important for stability in general in the region.”
In 2016, when Egypt devalued the pound by half, Saudi Arabia deposited about $3bn and the UAE $1bn in the central bank prior to the IMF agreement, UAE state news agency WAM reported.
Economic incentives
More than a decade later, the dynamic is slightly different in that the financial support is coming more in the form of investment.
“It’s the perfect balance between supporting the Egyptian people for stability and at the same time to make viable investments in a country that is growing and will give you a return,” said Mr Naguib of Global Trade Matters.
In Qatar’s case, it is also a signal of improved relations after the two countries ended a years-long feud in early 2021. Bahrain, Egypt, Saudi Arabia and the UAE froze relations and cut ties with Qatar in 2017 over accusations that it supported extremists.
“This is Qatar’s way of reintegrating into the Arab diplomatic fabric,” Mr Bohl said.
The $5bn in investments were announced after Egyptian foreign minister Sameh Shoukry met his Qatari counterpart last week. One of the points of discussion was reportedly reopening the Al Jazeera network bureau in Cairo after almost a decade of closure.
While investments and financial support are not explicitly tied to a quid pro quo, they often help. For example, in 2017 President El Sisi ratified an agreement ceding sovereignty over the two uninhabited Red Sea islands of Tiran and Sanafir to Saudi Arabia, despite widespread public criticism of the deal.
“This is true for any government around the world that loans or provides aid to another country; there are usually some kind of strings attached, in one way or another,” said Amy Hawthorne, deputy director for research at the Project for Middle East Democracy.
The issue is how sustainable this model is for Egypt, which continues to rely heavily on foreign funding to keep its economy afloat.
“Once again, it’s on the precipice of crisis. Once again, it’s going back to the IMF and having to fill the gap with support from Gulf countries … it’s the same cycle of problems that seems to be repeating itself,” Ms Hawthorne said. “These are just short-term fixes.”
