How Hamas Saved Egypt

The Oct. 7 attacks pumped badly needed economic and political capital into a failed state

by Judith Miller | Tablet  |   May 14, 2024

Last fall, Egypt was on the brink of economic collapse. A decade of debt-fueled spending on a pharaonic-scale had emptied its Central Bank coffers. By February, Cairo’s public debt was 89% of its gross domestic product. External debt had soared to 46% of GDP. The pound, its currency, was one of the world’s worst performing. Unable to import supplies and repatriate profits, foreign companies were leaving, or threatening to leave Egypt in droves. Annual inflation was over 35%, and double that for some food staples. Egypt seemed on the verge of a sovereign default—its first ever.

Then came Oct. 7.

Officials, businessmen, and financial analysts say that however horrific the war has been for Israelis and for Palestinians in Gaza, Oct. 7 has helped save Egypt from economic ruin and growing political unrest. To be sure, Egypt is paying heavily for the ongoing Israel-Hamas war on its border. Its three main sources of revenue—hard currency from the Suez Canal, tourism, and remittances from Egyptian workers abroad—have plummeted by between 30% and 40%. But without Hamas’ horrific massacre, which killed 1,200 people and took another 240 hostage, and Israel’s much criticized retaliation in Gaza, Egypt would probably not have gotten the international financial lifeline that has rescued it yet again from economic ruin, just in time.

“Just after the attack, the government began strategizing, successfully it’s turned out, about how to use the crisis to secure a bailout,” said Ahmed Aboudouh, an Egyptian expert at Chatham House, a London-based think tank. “Oct. 7 helped save Egypt’s economy, at least temporarily.”

Last February, the Abu Dhabi Developmental Holding Company (ADQ), Abu Dhabi’s sovereign wealth fund, unveiled plans to develop a city by the sea on part of the 65-square-mile peninsula of Ras el-Hekma, one of the few undeveloped areas on the Mediterranean coast, part of a sale worth $35 billion in investment and debt relief, the largest foreign direct investment deal in Egyptian history. Egypt will retain a 35% stake in the project. Since Sheikh Tahnoun bin Zayed al-Nahyan, the chairman of ADQ, is Emirati President Mohammed bin Zayed al-Nahyan’s brother and the UAE’s national security adviser, the Ras el-Hekma purchase was far more than a financial transaction. It was part of an Egyptian bailout.

Then in March, Cairo secured a critical $8 billion loan from the International Monetary Fund, with strong American support. The IMF infusion, in turn, opened other foreign faucets. The European Union promptly agreed to provide another $8 billion in grants and loans, ostensibly to help Egypt’s economy, but in reality, to assure Egypt’s help in preventing Arab and African migrants from reaching European shores. In total, the IMF, Europe, and the Gulf have now poured well over $50 billion of foreign currency into Egypt’s cash-strapped coffers. “The U.S., Europe, and the Gulf clearly agreed that the Sissi government could not be permitted to fail,” said Steven Cook, an expert on Egypt at the New York-based Council on Foreign Relations. “Geopolitics has taken over.”

Only months before, the IMF had not completed the review of Egypt’s loan agreement approved in December 2022, thereby withholding a tranche of the $3 billion rescue package, as the government had failed to deliver on agreed benchmarks. While the fund attributed its about-face in March to the increasing damage being done to Egypt’s economy by the Israel-Hamas war—or what it euphemistically called a “more challenging external environment”—absent American pressure on the fund and on Egypt to agree belatedly to financial reforms it had previously rejected, the IMF loan and even the Ras el-Hekma deal would not have gone through. Since Washington is the fund’s largest shareholder with a 16.5% stake, it holds sway over its key lending decisions.

The Biden administration, too, was obviously unwilling to risk the economic collapse and political destabilization of the Arab Middle East’s largest country and the first Arab state to make peace with neighboring Israel in the midst of one of the region’s deadliest wars in modern history and with other conflicts around it still raging—especially since Egyptian mediation with Hamas was crucial to White House policy. “Egypt has proven, yet again,” said Aboudouh, “that it is, as its elite believes, too big to fail.”

Arriving shortly after the IMF bailout, I found the mood in Cairo decidedly bullish. The weather was mild; the air relatively sand-free; and Egyptians were busy shopping and preparing for Ramadan, the Muslim month of dusk-to-dawn fasting and evening “iftars,” a seemingly endless series of parties celebrating the breaking of the daily fast.

Members of the business community were particularly chipper. “The IMF loan and direct foreign investment will get Egypt through the next three years,” said Hisham Ezz al-Arab, chairman of the Commercial International Bank, Egypt’s largest commercial bank and a former adviser to the country’s Central Bank. The IMF loan and investments from the United Arab Emirates and other Gulf states were a “massive shot in the arm,” said Mohamed Younes, a businessman who heads Concord International Investments Group. “Now Egypt will boom.” Amr Moussa, a former minister of foreign affairs, said that Egypt had “turned a corner.” Egypt’s leaders now understood that the country needed to “recreate” its economy and open up. Before the international cash infusion, “there was a question mark about Egypt. Now there is an exclamation point!”

Not everyone shares their optimism. President Abdel Fattah el-Sissi has blamed the country’s economic woes on factors beyond his control—the COVID-19 pandemic and Russia’s invasion of Ukraine, which temporarily caused the price of flour and hence, bread, an essential and heavily subsidized staple—to soar. But financial analysts say that although these events undoubtedly caused economic disruptions, Sissi himself is largely to blame for his country’s economic malaise. Without major structural changes in the way the economy is being managed, or mismanaged, they warn, Egypt will soon be back begging for more loans.

To secure the IMF bailout, Egypt agreed to adopt what for Cairo are radical measures to restore the country’s economic credibility. These include, among others, liberalizing the currency’s exchange rate, tightening monetary policy, reforming public financing, and reducing public spending on social support and infrastructure.

First, after years of refusing to float its currency to reflect its true value, the government shifted gears. As of last fall, while the official rate of the Egyptian pound, which is pegged to the U.S. dollar, was 31 Egyptian pounds to the dollar, the black-market rate was 75.

Although Egypt had devalued the pound three times since 2022, Sissi had refused to float the currency, saying he was unwilling to make the public suffer. But on March 6, as the IMF was finalizing its essential loan, he did just that. Egypt’s currency instantly lost about half its value, much to the shock of middle-class Egyptians, many of whom are paid in pounds, but must pay for services like Netflix, private-school tuitions, magazine subscriptions, and hotels and travel abroad in dollars. Once the pound reflected more or less its true value, however, the black market largely evaporated, at least temporarily.

To ease the financial blow and prevent the middle class from continuing to be hollowed out by rising inflation and a devalued currency, (the pound that officially was 31 to the dollar in late 2023 was 7 to the dollar when Sissi came to power a decade earlier), Cairo lifted its regulation barring Egyptians from getting more than $250 in foreign currency on their credit cards and no more than $5,000 from their bank accounts. At the same time, Egypt’s Central Bank loosened import restrictions and raised interest rates—another IMF condition—by an unprecedented 6%. The hike prompted foreign investors to buy almost half of the $2 billion in short-term local currency debt that Cairo sold the next day. And Egyptians abroad, who had been wary of sending their earnings back home to an unstable banking system, flocked to do so. The Central Bank reported in late March that Egyptians working abroad sent $4 billion in remittances back home in three days after the IMF loan and the floating of Egypt’s currency.

Other IMF conditions for the loan may be far tougher for Cairo to implement, however, especially those which require President Sissi to change the way he has run Egypt since taking over in 2013.

While most Egyptians are preoccupied by the daily struggle to survive and their own country’s financial woes, Egypt faces severe foreign policy challenges, most stemming from its unfortunate neighbors. Foreign Minister Sameh Shoukry described Egypt’s daunting foreign policy landscape in an interview in his office in the new $58 billion administrative capital. To its south, a civil war between two rival factions of the military in Sudan has killed at least 13,000, internally displaced over 6.5 million, and prompted over 2 million others to flee the country as refugees, many of them—just how many is in dispute—to Egypt. Since the ouster and subsequent death of former leader Muammar al-Qaddafi in 2011, Libya, another wealthy but problematic neighbor, has struggled to rebuild state institutions due to the spread of the Islamic State and other militant armed groups throughout the country and the outbreak of yet another ongoing civil war. To the east, ships in the Red Sea on Egypt’s border have been repeatedly targeted by Iranian-backed Houthi fighters in Yemen.

Another dire, longer-run challenge is Ethiopia’s construction of a dam on the Nile, which Egypt relies upon for over 95% of its drinking and irrigation water. Last year, Ethiopia began filling its upstream dam whose reservoir could hold back more than 80% of the Nile’s annual flow. But negotiations between Egypt and Ethiopia to assure Egypt the water it needs—especially for Sissi’s new cities—have failed to achieve a breakthrough.

“Egypt is quite safe,” Minister Shoukry said. “But there are threats and instability all around us.”
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