February 6, 2023

IntelBrief: Egypt Received Critical Assistance in its Struggle Against Economic Headwinds

Mandel Ngan/Pool via AP

Bottom Line Up Front

  • Egypt is a pivotal U.S. partner in promoting stability and peace in the Middle East and an ally against Islamist extremist groups operating in the region.
  • Russia’s war against Ukraine has compounded the underlying and longstanding structural difficulties and mismanagement plaguing Egypt’s economy.
  • Considering Egypt’s economic challenges, U.S. officials have downplayed conditioning U.S. aid on improving the government’s human rights practices, while continuing to urge an end to political repression.
  • The Arab monarchies of the Persian Gulf are major financial donors to Egypt, but their aid is often episodic and less predictable than that provided by the United States or financial institutions such as the International Monetary Fund.

Egypt remains a pivotal partner in U.S. conflict prevention and resolution efforts in the Middle East region. Cairo remains a key actor in ongoing campaigns to unify the political structure of Libya and foster a transition to democracy in Sudan. Egypt has also been part of the Saudi-led coalition fighting against the Iran-backed Houthi movement in Yemen. Egypt’s seminal 1979 peace treaty with Israel has survived four turbulent decades, and Egypt remains central to any Israeli-Palestinian settlement. Cairo has also played a key role in the prevention of further conflict between Israel and the Gaza-based Palestinian Islamist group Hamas. Following a January 30 meeting with Egypt’s Foreign Minister, Sameh Shoukry, U.S. Secretary of State Antony Blinken stated: “Throughout its history, Egypt has spearheaded efforts to address some of the world’s most complex challenges and promoted a more peaceful, a more secure, and a more prosperous region.” In his public comments, Secretary Blinken criticized Egypt’s human rights record and stressed the need for political and human rights reform. The government of President Abdel Fattah el-Sisi is widely cited by international and U.S. human rights observers for extensive repression including imprisonment, torture, and disappearance of political opponents and critics as well as media censorship – criticism that is particularly vocal within the U.S. Congress. At other points, Cairo has blindly followed Riyadh and Abu Dhabi in implementing disastrous policies in the region.

U.S. officials acknowledge that the war in Ukraine has compounded Egypt’s constant and often faltering struggle to grow its economy, raise living standards, reduce poverty, and maintain price stability. Egypt is dependent on food imports; it is the largest importer of wheat in the world, and up to 85 percent of its supplies have traditionally come from Russia and Ukraine. The disruption of agricultural imports has caused food prices to soar, in many cases beyond the means of poorer Egyptians. The costs of industrial equipment have also escalated sharply. The war has deprived the tourism sector of billions of dollars in revenues; Russians and Ukrainians have constituted more than 30 percent of annual tourist arrivals in recent years. The Egyptian pound has lost substantial value against the U.S. dollar, and Egypt has had to depreciate its national currency twice since February 2022. To prevent economic hardship from translating into political unrest, President Sisi has sought to deflect blame, telling the Egyptian public on January 6: "We did not enter wars or squander the wealth of our country…Egypt did not cause these conditions." His statement omitted any possibility that economic mismanagement and corruption might be fueling the economic crisis. In addition, Sisi’s government has sought to demonstrate its concern for the plight of its citizens by opening dozens of outlets where food is sold at a discount. It also increased food subsidies for tens of millions of people registered in the national food rationing system, even though many economists recommend that reducing subsidies is crucial to achieving structural economic reform.

Egypt’s offshore natural gas fields in the Eastern Mediterranean are undergoing rapid development, bringing the country over $8 billion in revenues in 2022. However, large import bills in 2022 outstripped the benefits from this relatively new revenue source and dampened Egypt’s enthusiasm that natural gas exports will produce sustained rapid economic growth by themselves.

Egypt’s economic woes have prompted regional and global debate about institutional and bilateral arrangements that might help Egypt cope. In mid-December, Egypt concluded an agreement with the International Monetary Fund (IMF) crucial to stabilizing its economy and enabling vital reforms. Under the pact, the IMF will lend Egypt approximately $3 billion. Yet, some in the Arab monarchy states of the Persian Gulf argue that Gulf leaders should do more to help Egypt financially – to avoid Cairo’s dependence on Western countries or Western-dominated institutions such as the IMF. Gulf state leaders rebut the criticism, asserting they have been Cairo’s main benefactors. In March 2022, Saudi Arabia extended Cairo $5 billion in additional credit to help it manage the economic fallout caused by Russia’s invasion of Ukraine – an amount that adds to the tens of billions of dollars the Gulf states have donated or loaned to Egypt over the past decade. On the other hand, Gulf aid to Egypt is often episodic and conditioned on Egypt’s cooperation with Gulf leaders on such core issues as combatting the Houthis in Yemen, targeting Islamist movements in the region, and working against Iran and its allies.

Another major source of economic support for a cash-strapped Egypt is the United States – a major donor since the 1979 Israel-Egypt peace treaty. American assistance to Egypt is more predictable than that provided by the Gulf states, largely adhering to a proportional formula for U.S. aid to both Egypt and Israel that was established after the Israel-Egypt peace treaty. In recent years, however, the U.S. Congress has increasingly sought to condition Egypt's aid on an improvement of the government’s human rights record. In September, U.S. officials withheld $130 million in military aid to Egypt (10 percent of its total annual allocated) over its failure to meet specific human rights conditions stipulated in U.S. law. Reflecting U.S. reliance on Egypt to promote regional stability, the deduction did not affect most military aid or counterterrorism funding and totaled half the withholding urged by human rights activists.

In an apparent nod to Egypt’s current economic difficulty, Secretary Blinken downplayed any further threat to link U.S. economic aid to Egypt to human rights issues during his visit to Egypt in late January. A State Department factsheet distributed before the Blinken trip detailed several significant new U.S. initiatives to help Egypt manage its economic crisis. Most notable was a new $50 million U.S. investment to help support Egyptian farmers, which builds on the more than $1.4 billion the United States has provided to the Egyptian agricultural sector over recent decades. U.S. officials have also noted that the two countries have agreed to establish a Joint Economic Commission to further enhance cooperation on all economic and commercial issues. Although Egypt clearly has no shortage of international donors and lenders, what remains unclear is whether President Sisi’s government is willing to undertake the fundamental economic reforms that will enable the country to attract additional private sector investment or to fully benefit from the additional revenues provided by the development of Egypt’s natural gas reserves.