In this piece, Lewis Sage-Passant and Christopher McNulty (pen name) discuss how Egypt’s precarious economic and political situation is likely to be exacerbated by the Gaza conflict, and what this might mean for broader global stability. They discuss the difficult economic choices that Egypt – traditionally a mediator between Israel and Palestine – now faces, and how Cairo will attempt to balance this with the country’s own considerations.
General Abdel Fattah al-Sisi came to power in 2013 during a military coup attached to the second Egyptian revolution, propelled by mass discontent with President Muhammad Morsi over the country’s economic situation. Al-Sisi is running for another term as President. On the campaign trail, his tone has underscored the dire economic situation Egypt finds itself in, stating, “If the price of the nation’s progress and prosperity is hunger and thirst, then let us not eat or drink”, and that those short of cash should consider selling blood at donation centres. These are naturally not the words of a candidate-of-hope.
Egypt’s economy is being pulled in multiple directions. On one hand, government spending is far too high, with massive subsidies and huge infrastructure spending. On the other, these subsidies are necessary to avoid prompting another round of Arab Spring style unrest. To highlight this dilemma, we can look at the staple of Egyptian food: bread. Egyptian bread is heavily subsidised, costing the government $2.9bn in the last year, or around 2.6% of the budget. Compounding the challenge is that Cairo is a major wheat importer, with only 4% of its territory being sufficiently irrigated for agriculture. This means that 50% of its wheat needs come from abroad. As such, the Egyptian population (of which 70% of people receive subsidised bread) finds itself directly exposed to a combination of geopolitical events, including supply reductions as a result of Russia’s invasion of Ukraine and the collapse of the Black Sea Grain initiative. Changing global weather patterns and subsequently-diminished harvests make this a structural issue, as well as a pressing crisis. While Egypt recently purchased around half a million tons of wheat from Russia, accounting for around 4% of its annual consumption, this deal is believed to have been delayed due to price haggling that Cairo can ill-afford. The mounting pressure of this crisis is evident, as Egypt has been forced to cut the costs of several basic food items by 15-25%. Taken together, Egypt’s economic situation demonstrates an uncomfortable problem; as Egypt’s currency collapses, as with all things, the cost of wheat imports skyrocket, driving up the cost of bread. As such, food inflation now sits at around 70% year-on-year as of last month; a recipe for discontent with an election looming in December.
Inflation in general has reached severe levels, with data in September noting that consumer price inflation soared to 38%; a record high value. Egypt has devalued its currency three times in the last 18 months, losing almost half of the Egyptian Pound’s value against the dollar. Before this, it was already on a downward trend, from 7 EGP per USD in 2013, to almost 31 EGP per USD now. The IMF has underscored that the country will “bleed” cash reserves unless it does so again, and that by delaying further devaluations it is exacerbating the problem. As the above bread problem demonstrates, however, devaluation introduces further problems for government finances (not to mention the President’s ballot-box popularity).
While the IMF is negotiating a rescue package with the government, a reluctance to enact the necessary reforms has hampered this. Egypt’s long-term debt rating has been subsequently downgraded by Moody’s to Caa1 from B3, which is seven levels beyond the threshold necessary to be considered “junk”. Egypt’s bond yields average around 18.5%, underscoring their affiliated risk assessments.
One necessary reform that the IMF and economists have demanded is the selling off of economic assets owned by the military. Al-Sisi, however, requires the backing of the military to maintain control. Given that al-Sisi himself came to power in a military coup set against the backdrop of mass popular unrest, he will naturally be reluctant to wrestle wealth from his military leaders as the country faces renewed urban civil unrest. Undermining the military elite’s ability to make money is a well-tested recipe for a putsch, as we discussed with Professor Rory Cormac in our “How to get on a Watchlist” podcast last year. Despite the risks, in January, the government pledged to reduce the military’s outsize role in the economy in order to unlock a $3bn IMF bailout. In principal, military-owned businesses reduce the competitiveness of the economy by crowding out private companies, and scaring off foreign investors who fear cronyism and undue pressure from regulators with military connections. This reduction in military economic influence is uncomfortable for al-Sisi, who used the armed forces to help rebuild the country after the 2013 coup. In essence, such reforms not only risk damaging the entrenched interests of military leaders, but will also undo al-Sisi’s own policies. As such, it appears that he is dragging his feet on this particular reform, with the military still retaining massive economic influence.
Another issue includes the country’s “white elephant” infrastructure investments, which have helped drive Cairo’s international debt overdraft to $163bn, or around 93% of GDP. These include a new capital in the desert, which has cost $45bn so far, a summer capital on the coast, a nuclear power plant (which is not needed given the nation’s excess production capacities), and a new leg of the Suez canal. These add to al-Sisi’s discomfort, signalling fiscal frivolity to would-be financiers, while also risking leaving highly visible signs of abandoned projects should he drop them as part of necessary reforms. Al-Sisi does not want a landscape littered with unfinished “white sphinxes”; the projects of a long-gone government that appear to be more in the service of vanity than practical utility. Such reservations by foreign financiers can already be felt, with funding from Saudi Arabia becoming more stringent, and Riyadh insisting that greater fiscal responsibility are now a term of any financial support.
Structurally, the country faces significant demographic challenges. 19.7% of 20-24 year olds are unemployed; close to the rates seen across the Arab world on the eve of the Arab Spring. During recent protests against the prospect of an al-Sisi re-election, the Arab Spring slogan, “The people want the fall of the regime,” was heard. Despite this, al-Sisi is well placed to win December’s election. In 2014 and 2018 – the latter of which saw his most serious competition arrested – he took 97% of the vote; a figure that would make Putin blush. A 2019 referendum granted him the right to run for a third, extended term, which will end in 2030. This latest round has been marred by accusations of intimidation of opposition groups. As such, the country is fragile and frustrated, and may not take a significant escalation of these challenges to lurch into mass unrest.
All of the above predates this weekend’s catastrophic developments in Israel and Gaza, which will now almost certainly see a violent war waged along Egypt’s border. 2.3 million residents of Gaza now find themselves caught between Hamas and the Israeli Defence Forces, and with few places to flee to. Gaza is extremely urbanised, and the violence is likely to cover much of the 365km2 coastal enclave. At present, the Rafah border crossing, which separates Gaza and Egypt’s Sinai Peninsula, is strictly controlled, with few allowed to cross, and has been hit three times already by Israeli air strikes. On Monday, only 800 people left Gaza through the crossing.
While the US is reportedly discussing the establishment of humanitarian corridors with Egypt, and Cairo has long acted as a mediator between Israel and Palestine, state-run media has already floated concerns that this is part of what it views as a long-standing Israeli plot to displace Gaza refugees into the Sinai. As such, al-Sisi stated earlier this week that he would not allow Palestinians to seek refuge in Egypt.
The Sinai region, bordering Gaza, is fragile. 33.6% of South Sinai residents are unemployed. No reliable data can be found for North Sinai, but lacking the tourism draw of the south’s Sharm el Sheikh, it is likely worse off, with some estimates suggesting it is around 50%. The region has seen little investment in infrastructure and public services, and much of the region’s Bedouin population is considered marginalised. These factors contribute to the limited control Egypt has over this region. Egypt has waged a long and bloody war against Islamist militants in the Sinai over the last decade, and likely worries that an influx of Palestinian refugees (and potentially Hamas and Palestinian Islamic Jihad operatives) would reinvigorate this still-simmering challenge. Concerns over such an influx is also not without basis. In 2008, Hamas destroyed a portion of the border wall with Gaza, following which hundreds of thousands of Palestinians – up to half of Gaza’s population according to UN estimates – crossed into Sinai in search of food and supplies.
The conflict has already resulted in spill-over violence into Egypt; the day after the Hamas attacks in southern Israel, an Egyptian policeman is reported to have shot dead two Israelis in the coastal city of Alexandria. Al-Sisi will now be questioning whether the crisis risks spreading more violence into an already-fragile Egypt. With an election looming – even if not a free one – hard line responses are a strong possibility. Concurrently, Al-Sisi will look to play the traditional Egyptian role of mediating between its warring neighbours. Reports have suggested that Gihaz El Mukhabarat El ‘Amma – the Egyptian intelligence service – may have tried to warn Israel of the looming Hamas attack, underscoring the cooperation between the two states. At the same time, much of Egypt’s population is deeply sympathetic to the Palestinian cause. As such, al-Sisi faces an impossible balancing act of providing economic, security, and diplomatic challenges at a time when the economy is in free-fall, war has returned to the border, and Israel – reeling for the worst attack on Jewish people since the Holocaust, and reports of unspeakable acts of violence – may not be in the mood for diplomacy. Al-Sisi, therefore, will face blowback no matter how he proceeds.
Globally, the conflict (and the risk it spills over into Egypt) carries significant implications. The economic impacts of disruption to Egypt’s Suez canal were highlighted in 2021 during the infamous “Ever Given” incident. $10bn in daily trade was bottled up during the obstruction. Ripples of fear around a return of disruption have already been felt in the markets. Oil prices have risen by about 5% as traders price in uncertainty over the implications of a war in the eastern Mediterranean, and potentially – if Iranian involvement in Saturday’s attack is confirmed – in the Persian Gulf. While this is a relatively small rise, consider that it comes against the backdrop of a gloomy market, which is pressuring prices downwards. Should Iran join the conflict – or be dragged in by one of its regional proxies – sanctions or military strikes could further degrade the country’s energy export capabilities, driving demand towards other sources, and the Suez bottleneck could be replicated at the Strait of Hormuz. Despite overall gloom in the market, there is limited elasticity in global energy supplies due to the war in Ukraine and Russian gas cut-off, and further supply degradation will cause challenges as Europe goes into winter.
While comparisons have already been made to the 1973 Gulf oil embargo on nations which supported Israel during (what we might now call) the first Yom Kippur war, Saudi Arabia and Israel are increasingly aligned on their perceptions of Iran as a threat. While Riyadh may rhetorically support Palestine, it has also now endorsed a two-state solution. As such, Saudi oil is likely to keep flowing, at least as long as the Strait of Hormuz and Suez canal remains open. At the same time, however, Saudi-Israeli normalisation efforts will likely be put on hold. Should Israel’s retaliatory deployment into Gaza turn particularly vicious, normalisation may be scuppered entirely, and US support for Israel may drive more uncomfortable energy market moves by Saudi Arabia and its OPEC allies. All of this has a negative feedback effect on Egypt, which is sensitive to fuel prices. As prices rise, the economic pressures on the population increase, as does their dissent with the government, which has been drawing down fuel subsidies in recent years.
The global implications of this crisis should be watched carefully. Last year we anticipated that economic pressure linked to the war in Ukraine would drive civil unrest and political upheaval in many of the world’s most fragile states. With economic, social, and security challenges on several fronts, Egypt looks particularly fragile. Another war will bring another round of economic pressure on both Cairo, and the wider world. Egypt cannot support a mass exodus from the Gaza Strip, or else it risks a refugee and security crisis. At the same time, Egypt cannot do nothing, or else its citizens will direct more anger toward the government. Egypt, in all of its domains, must walk a tightrope that is increasingly fraying. While the “Everywhere Spring” that we forecast last year has not happened, it may soon be possible to walk from the Pacific ocean in Russia, through Azerbaijan, Armenia, across the Levant, into Africa through Egypt, Libya, and down into the “Coup belt“, and through Nigeria to the Atlantic ocean; all without leaving nations caught up in a war.
Suggested books for in-depth reading on this topic:
- Egypt under El-Sisi: A Nation on the Edge (Maged Mandour)
- Arab Fall: How the Muslim Brotherhood Won and Lost Egypt in 891 days (Eric Trager)
- Gaza: A History (Jean-Pierre Filiu)
- Jerusalem: The Biography (Simon Sebag Montefiore)
- Rise and Kill First: The Secret History of Israel’s Targeted Assassinations (Ronen Bergman)
Additional geopolitical reading suggestions can be found on our 2023 reading list
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Dr Lewis Sage-Passant is a researcher in the field of intelligence and espionage, and a former Military Intelligence Officer. Lewis is an adjunct professor in intelligence at Sciences Po Paris, and has extensive experience working and living in the Middle East and Asia Pacific regions in a variety of geopolitical analysis and intelligence roles, supporting the energy industry, the financial sector, leading technology firms, and the pharmaceuticals sector.
Christopher McNulty is a pen name used by multiple anonymous contributors to Encyclopedia Geopolitica, including an American security analyst based in Afghanistan, a British insurgency analyst focusing on the Northern Ireland Troubles and the subsequent peace process, and an intelligence analyst focusing on Levant affairs.
Photo: Boris Niehaus, damage during the 2014 Hamas-Israel conflict
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